TaxTMI 
TaxTMI 
2010 (10) TMI 583
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....s. 1331, 1332, 1333, 1334, 1335 & 1336 (Del) of 2008 for assessment years 1999-00 to 2004-05 were also heard. The issues involved in the appeals are common and both assessees and Revenue have requested that the arguments and submissions for all the appeals should be considered together. 3. Microsoft Corporation (MS Corp) in its return filed for AY 1996-97 offered its income from licensing of software to Original Equipment Manufacturers (OEM) to tax and did not offer to tax its income from sale of Microsoft software products to Indian Distributors. The assessing officer, however, taxed the payments received from Indian Distributors as 'royalty' under section 9(1)(vi) of Income Tax Act, 1961 and Indo-US DTAA. Against the said order MS Corp filed appeal before CIT(A) and while passing an order CIT(A) also confirmed the addition made to the income of MS Corp. Against this order assessee is in appeal before this Tribunal. 4. For AY 1999-00 to 2001-02 in case of MRSC, the payments received from Indian distributors on sale of Microsoft software products were not offered to tax as royalty. However, the assessing officer assessed the entire payments in the hands of MRSC as royalty income ....
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....ining to India was only USD 22,668,737 during the subject Assessment Year; 2. Erred in holding that revenue earned and received from sale of software by a group company of the Appellant - Microsoft Regional Sales Corporation, USA ("MRSC"), a distributor of Microsoft products to Indian distributors amounting to USD 58,764,099 is taxable in India in the hands of the Appellant under the provisions of the Income-tax Act, 1961 ("the Act") and the double taxation avoidance agreement between India and US ("India-US tax treaty"); 3. Erred in observing that the Appellant has granted license to end users in India to use the Microsoft software in respect of which it earns royalty income. The ld. CIT (A) has completely ignored the fact that the Appellant only earns 'royalty' income from MO for grant of manufacturing and distribution rights in Microsoft products (which are exercised in Singapore) and which is not taxable in India under the Act or India-US tax treaty as the same is not sourced in India; Without prejudice to the above grounds that the Appellant has not earned income from licensing of software to end-users in India, the Appellant submits the following grounds of....
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....fic knowledge, invention, secret formula, process and scientific work' developed by the Appellant and hence the same is taxable as royalty under the Act; (d) That the sale of software to Indian distributors under Volume Purchase Product ("VPP") model is akin to licensing of copyright in computer software to Original Equipment Manufactures. Accordingly, consideration received from sale of software under VPP model is taxable as royalty; (e) That the consideration received from sale of software under Full Packaged Product ("FPP") model is taxable as royalty since the same involves granting of limited right to end users to copy the software on the hard drive of the computer. 9. Erred on the facts and circumstances of the case and in law in holding the draft report issued by High Powered Committee ("HPC") as India's position on e-commerce transaction thereby ignoring that the said report has not been accepted by the Government of India and accordingly does not have any bearing in characterization of the transaction of sale of software by the Appellant; 10. Erred in holding that the rationale laid down by the Hon'ble Supreme Court in the decision of Tata Consultancy Se....
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....tation related materials provided by MS Corp. Subsidiary also agreed not to make any copies of the master copies except as provided in the agreement and agreed to return to MS Corp. the master copies and any other materials supplied by MS Corp. immediately upon termination of the agreement. All the licenses were granted in exchange for issuance of 20 shares of subsidiary common stocks with par value of $0.01; provided that subsidiary may issue additional stock subsequent to the effective date of this agreement in exchange for any license granted under the agreement with respect of MS retail software products including updates designated by MS Corp after such date. The agreement further provided that subsidiary shall owe no other royalty or payment for any license granted under the agreement. (ii) Gracemac in turn, entered into a license agreement with Microsoft Operations Pte Ltd ("MO"), Singapore, under which MO, was granted non-exclusive license to manufacture (reproduce) Microsoft software in Singapore; non exclusive license to distribute the software products so manufactured to retailers or to MS Corp or to subsidiaries of MS Corp and non-exclusive right to license or sub....
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....noted that on 1/01/1999 Microsoft Corporation granted M/s. Gracemac Corporation, the assessee, a hundred per cent subsidiary of Microsoft Corporation, licence to manufacture and distribute all MS retail software products. Subsequently on the same date the assessee entered into another licence agreement with Microsoft Operations, a Corporation created under the laws of Singapore to manufacture and distribute Microsoft softwares in various countries including India. As per the terms of agreement the royalty was to be paid on the basis of number of copies distributed/licenced in various countries including India. Before the assessing officer there was no dispute between the Department and the assessee that the payment was covered under the term 'royalty' both as per Income-tax Act as well as Indo-US DTAA. The only objection which the assessee could raise was that income was not taxable in India as per Indo-US treaty. Further the assessing officer noted that Microsoft Operations Pte Ltd. entered into service agreement with Microsoft Sales Regional Corporation, a company registered in US an another subsidiary of Microsoft Corporation. The assessing officer noted that as per the agreemen....
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....nsing of computer software to independent distributors in India amounting to US $ 1,06,11,033. The assessee accepted income from licensing of computer software to OEM as taxable, but the taxability of its income derived from licensing of software was denied. The main contention of the assessee was that what was being used in India was copyrighted article and not copyright. This contention of the assessee was rejected on the ground that software is licenced and not sold. The assessing officer referring to the Copyright Act, 1957 observed that in the case of computer programme the Copyright Act recognizes as doing or authorizing the doing of any of the acts in respect of a work or any substantial part thereof i.e. to sell or give on commercial rental or offer for sale or for commercial rental any copy of computer programme. Therefore, the assessing officer concluded that the assessee has authorized to use the copyright to Indian distributors in India. During the course of assessment the assessee placed reliance on OECD commentary. Since the assessing officer was of the view that the assessee had right over the Intellectual Property Rights [IPRs] of the software which was licenced for....
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....(v) of Explanation 2 to section 9(1)(vi) of the Income Tax Act, 1961 defines the royalty as the transfer of all or any rights (including the granting of a license) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films. It has been contended that the expressions "copyright, literary, artistic or scientific work including films ......" have neither been defined under the Income Tax Act, 1961 nor the applicability of Copyright Act, 1957 has been excluded in the Income Tax Act. He has, therefore, submitted that the word "copyright" should be followed by word "of". Thus the expressions "copyright, literary, artistic or scientific work including films ......etc." should be read as "copyright of literary, artistic or scientific work including films......etc.". Without adding the expression "of", after the expression 'copyright', the subsequent expressions, appearing after the expression 'copyright' viz 'literary, artistic or scientific work including films ....
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.... to perform a designated task. The copyright in the 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. Therefore the consideration received by MRSC / MS Corp from Indian distributors is towards sale of Microsoft software products, being copyrighted articles. The end users have not been granted any right in copyright in such software and therefore, such consideration is not taxable as royalty under section 9(1)(vi) of the Act. 15. He has further submitted that the Special Bench in the case of Motorola Inc. v. Dy. CIT, [2005] 95 ITD 269 (Delhi) had also recognized the distinction between a "copyright" and a "copyrighted article". It has been observed by the Special Bench that if the payment is for copyright, it should be classified as royalty both under the Income Tax Act and under the DTAA and it would be taxable in the hands of the assessee on that basis. On the other hand if the payment is for a copyrighted article, then it only represents the purchase price of the article and therefore cannot be royalty either under the Act or under the DTAA. He placed reliance on the deci....
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....emac has noted that the Copyright Act, 1957 defines the term "copyright" to include inter-alia, the right to reproduce the work in any material form including the storing of it in any medium {section 14(a)(i)} and/ or to sell or give on commercial rental a copy of the computer programme {section 14(b)(ii)}. Ld counsel for the assessee to counter the contention of ld CIT(A) submitted that the assessee have not given any right to end users under the Copyright Act, 1957. As regards the conclusion of the ld. CIT(A) that the end user, has been granted right to reproduce a copy of software resulting in grant of the "right" covered under section 14(a)(i) of the Copyright Act, 1957 it has been submitted that making copies for back up purposes under FPP model and making copies for internal use in VPP model, would not result in exercise of the "right to reproduce" as envisaged under section 14(a)(i) of the Copyright Act, 1957 since no right of commercial exploitation has been given to the end user. In the case of FPP, the EULA permits the right to install, use and make back-up copies. A copyright is a negative right which protects the owner/ author of copyright against commercial exploitatio....
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....tted that assessee has only sold "copyrighted article" and has not granted any right in copyright in software to the end users. 18. Ld CIT(A) further observed that the expression "computer software" is independently covered in Explanation 2 to section 9(1)(vi) which is based on a conjoint reading of second proviso to section 9(1)(vi) of the Act, CBDT Circular No 588 and section 115A of the Act. According to him these provisions are a pointer to the legislative "intent" of first bringing software under "royalty provision" and then granting "conditional exemption" wherever necessary. Ld Commissioner (Appeals) has further held that the assessee had not sold software but has only licensed the software to the customers in India to use the same in a particular way in lieu of a consideration being licensee fee. The Ld CIT(A) has also observed that even after obtaining a copy of software, in lieu of license fee the end user further requires a permission from the assessee, to activate software on a specified machine to use the same. In view of the activation requirement, the CIT(A) had concluded that the payment made by end user is towards license to use copyright in software and not for s....
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....Tax Act 1961 and in the Double Taxation Agreements entered into with various States, whenever felt appropriate the Parliament/Government has chosen to incorporate the expression "computer software" specifically. When the same is conspicuous by its absence under Explanation 2 to section 9(1)(vi) of the Income Tax Act, 1961 and under Article 12(3) of the Indo - US DTAA, the same cannot be read into them by implication. 21. The provisions contained under section 115 A of the Act cannot provide any aid to interpret computer software independent of 'copyright'. As section 115A is a machinery provision it cannot create charge and expression 'copyright' used in the sub-section 1(A) of section 115A is necessarily to be read with the term 'computer software'. Further, the opening phrase of sub section (1A) of section115A refers back to sub section (1) of section 115A and therefore by default, one has to fall back on Explanation (c) of section 115A (1) which again refers back to Section 9(1)(vi) read with explanation 2 to section 9(1)(vi) of the Act. It is only where a transaction is held liable to be taxable as royalty one can proceed to prescribe the rates of taxes and where the transacti....
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....Under EULA, the end user has perpetual possession and only in case of violation of the terms of the agreement, software needs to be destroyed/returned back to MS Corp and cause 6 of the EULA makes it abundantly clear which provides that "Pursuant to this clause, the end user has a perpetual possession of the Microsoft software product which it has legally acquired and only in a situation of violation of the terms that the end user is contractually required to destroy the product". EULA entered between MS Corp and End users, which is more like a legal agreement/notice enlisting the terms of the usage of the software programme by the End user upon sale. 25. To conclude that since EULA states that product is licensed and not sold and there is restriction of activation of the software before the user can copy and start using the software, consideration has been received for grant of right of copyright in the software is misplaced. To understand the terms of EULA, reference can be made to notice given by a copyright owner in a book published. In case of a book, copyright owner makes a declaration that copyright in respect of the book is with the author and no part of the book to be rep....
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....gly, the consideration received is in the nature of sales giving rise to 'business income' and not 'royalty' under section 9(1)(vi) of the Income Tax Act or Article 12 of Indo-US DTAA. Further, the business income is not taxable as the assessees are non-residents and do not have Permanent Establishment in India. Ld counsel for the assessee placed reliance on the decision of Bangalore Bench in the case of Sonata Software Ltd. (supra) for the proposition that since computer programme has been defined under the Copyright Act, 1957, it is incorrect to say that computer programme can also be considered as 'patent' / 'invention' / 'process'. 28. Coming to the provisions of India US DTAA, it has been submitted by ld AR of the assessee that the definition of royalty given under Article 12 should also be interpreted with reference to domestic tax laws. This is also clear from the provisions of Article 3(2) of India US DTAA which provides that for those expressions not defined under the treaty, resort can be made to the domestic laws. Further, every judicial precedent dealing with the issue involved in the present appeals has also placed reliance upon the copyright Act, 1957 to interpret th....
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.... user in respect of grant of license to copy of software programme since (MRSC) is a sham entity and there is arbitrary allocation of payments made by these entities involved in the transaction. Whereas on the other hand MRSC has also been taxed for the years under appeal (i.e. A.Ys. 1999-00 to 2001-02) considering the same to be a separate independent legal entity. 31. As regards the supplies made through the supply chain ld. Counsel for the assessee has submitted that MO, Singapore, acquired the right to manufacture software products (otherwise called as 'copyrighted articles') which are sold within Singapore to MRSC and MRSC, in turn, sells them to the Indian Distributors and the Indian Distributors, in turn, sell them to the end users in India. It is also clear from the agreement that the sale by MRSC to the Indian Distributor is ex-warehouse, Singapore and the title to the property passes at Singapore. The Appellants have submitted the tax resident certificate of MRSC and MO, Singapore and a statement issued by the Ministry of trade and industry, Republic of Singapore granting certain statutory exemptions to MO. Gracemac has received 35%/40% of the payments received by MRSC, ....
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....d from MO is not taxable in India under section 9(1)(vi)(c) of the Act for the following reasons: (a) The issue of 'source' becomes academic or insignificant if the principal issue i.e. whether sale of software gives rise to royalty is decided in favour of the assessee. If the transactions are not liable to royalty, the question of source of taxation would not arise at all. (b) The counsel for the assessee sought to argue that source of income can be at a place where either the sale takes place or the business is conducted or any income generating activity is undertaken. In the present case, since none of these activities have taken place in India, income cannot be taxed. As in case of MO sales take place outside India the title to the products passes to MRSC outside India and MO's business of manufacturing and distribution activities are being carried out in Singapore, the payments made by MO to Gracemac are not in respect of a right used for the purposes of making or earning any income from any 'source' in India. Accordingly, the provisions of section 9(1)(vi)(c) of the Act are not attracted in this case and hence, the assessee is not taxable in India under the Act. ....
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.... limited reference to other enactments i.e. where the terms used in the DTAA are not defined in the agreement, help can be sought from other domestic enactments. 35. He has further submitted that the term "copyrighted article" is nowhere used either in the IT Act, 1961 or the Copyright Act. The term finds its origin in U.S. Regulations and then found its way later in the OECD commentary. As recognized in the Income Tax Act as also under the Copyright Act, there are basic differences between a book or music CD and a computer programme. There is a definite rationale for keeping such a distinction. The differences can be summarized; (i) One major attribute of a literary work is that it can be received by mind through audiovisual senses. Software, though classified as a literary work, cannot be read being in machine language. Software has to be integrated with hardware before it can be put to any use. (ii) Book need not be copied before being used. Software cannot be put to use unless it is copied on the hard disk. (iii) Book does not act as a process to achieve some results whereas software does primarily act as a process. (iv) After acquiring a book, no furth....
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.... reason the word "article" or "thing" could have been defined to include IT enabled services. If computer software were to be regarded as articles or things which essentially mean goods or merchandise, there was no need to enact a separate Section 80HHE for granting export benefits to computer software. The deduction would have been available under Section 8OHHC itself. 38. Ld. counsel for the Revenue has also submitted that the word "copyrighted" has been defined under Law Lexicon which states that a copyright when registered becomes copyrighted. Hence, whether a computer programme is registered under the Copyright Act or not, it remains a copyright and cannot be given any other character by the mere change of noun into adjective. 39. The other limb of the assessee's argument is that it is a sale of goods. In this regard ld. Counsel for the Revenue has submitted that sale postulates transfer of ownership. When only the use or the right to use a property is given under a license there cannot be any element of sale in the transaction. EULA clearly states that product is licensed and not sold. There are limitations on the rights granted to licensees as the programme are to be retur....
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....are is regarded as a tangible property as contended by the assessee though Revenue is not making any such assertion, the software would still fall within the meaning of "Equipment" as appearing in sub-clause (iva) of Explanation 2 and license to use the same would still attract royalty with effect from A. Y 2002-03. He placed reliance on the decision of ITAT in the case of Frontline Software Ltd. v. Dy. CIT [IT Appeal Nos. 1080 to 1082 (Hyd.) of 2003, dated 3-8-2007] and West Asia Maritime Ltd. v. ITO [2008] 111 ITD 155 (Chennai). Therefore, it has been submitted whether we consider it under the domestic law or under the treaty, the license fee paid by the customers in India for the transfer of rights in copyright of software or for the use of the computer programmes being patent/invention/process/equipment would fall within the definition of Royalty and would be liable to tax in India 42. He further submits that the term 'royalty' has been defined in the Explanation 2 to section 9(1)(vi) and means to include the consideration for transfer of either one or more of intellectual property rights mentioned therein. The argument of ld counsel for the assessee that sale of computer soft....
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..... 43. Explanation 2 defines intellectual properties in broad terms. There is nothing to suggest that if a property falls into one sub-clause, it would not fall into the other. To illustrate, an invention when registered under the Patents Act becomes a patent or else it remains only an invention. A process, when patented, becomes a patent (Process Patent), so is the case with design. Hence a property may be patent as also an invention. In the case of the assessee, the terms of the agreement clearly stipulate that the software is protected both by copyright and patent laws. The argument of the learned counsel that since computer software is specifically covered under the Copyright Act, it would not fall in any other category is fallacious. Neither the Income Tax Act nor the Copyright Act stipulates any such compartmentalization. Besides, how the rights of the authors or inventors are protected under IP protection laws is wholly irrelevant for the purposes of deciding the issue under the IT Act. Hence, the argument of the Ld. Counsel for the assessee that Parliament has categorized 'computer software' as a literary work is of no consequence because such categorization is for IPR prot....
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.... treaties entered into with other countries. A number of such examples were cited at the time of hearing by the ld. Counsel for the assessee. In his rejoinder, the Ld. Counsel for the appellant referred to certain treaties which Russia has entered into with other countries where computer software is not included. That position is not disputed. Some Russian treaties were cited by the Revenue only as examples to show that words in the treaty may be employed at the insistence of one or the other party and such differences should not be taken to mean change in the official position of either state by reference to what was negotiated with a third state. The treaties where Russia or any other country chose not to include computer software cannot be a guide to decide what transpired between Russia and India. The omission by Russia could be at the insistence of the third party. 46. It has further been submitted that one provision of the Act should be construed with reference to other provisions in the same Act so as to make a consistent enactment of the whole statute. The inconsistency or repugnancy either within a section or between two different sections or provisions of the same statut....
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....s in India. 48. The EULA being in the name of Microsoft is a consequence of agreement between Microsoft and the assessee. They have agreed not to change the format of the license agreement (EULA) or the name in which it is to be signed. The right to grant license to the customers is given to the assessee under clause 2.1(b) of the said agreement. As stated in earlier paragraphs, the CD distributed to the customers in India is a dumb CD. It gets activated by a centralized activation system. Unless activated, it does not open. Even when the CD is activated, a license agreement has to be entered into by which the licencee gets the right to copy the programme on his hard disk and to use it. The consideration paid by the licencee is not for the medium through which the programme reaches him but for the right to have access to the programme and to use it. Thus the source of income is in India where the licence agreement is entered into. The property is being used in India to derive income from licences in India. It would, thus, squarely fall within section 9(1)(vi) of the Act and Article 12(7) of Indo-US DTAA. 49. Replying to the arguments advanced by the ld. Counsel for the assessee t....
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....AO assessed royalty income under section 9(1)(vi)(c) being the payment made by one non-resident to another non-resident while the CIT(A) has upheld and enhanced the income from royalty by invoking section 9(1)(vi)(b) the payment being from resident Indian end users. The entire consideration flows from a person who is a resident of India hence the conditions stipulated in clause (b) of Sec. 9(1)(vi) is clearly applicable The exception clause contained in Section 9(1)(vi)(b) is obviously not relevant. Without prejudice, the payment of 40% royalty made by MO to the assessee is also covered under clause-(c) of Sec. 9(1)(vi) and the necessary condition that the payer of such royalty should utilize the right or property for earning income from sources in India also stands fulfilled. Thus, looked from any perspective, the income from royalty is liable to tax in India both under the Income Tax Act and also the DTAA. Article 12(7) grants the rights of taxation to the source country when the payer is a resident of that country or where the right or property is used in that country. 50. The assessee is dealing in two kinds of products i.e. FPP and VPP. The volume Purchase Product (VPP) entai....
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.... use is a copyright' or else there was no need to carve out an exception to protect the consumer. Therefore, the reference to the Copyright Act has to be made for the limited purpose for getting the meaning of the word "copyright". Reference to other sections of the Copyright Act are wholly unnecessary and beyond the scope since the issue to be decided is not when the copyright would get violated. In the present case, the end users have neither violated the copyright nor are there any occasion for invoking the protection given under Section 52. In fact, the end-users have been granted license, as contemplated under Section 30 of the Indian Copyright Act, by an agreement to make copies. If the contentions of the assessee were correct, the agreement granting such rights was wholly unnecessary or redundant. Neither the tax laws nor the laws protecting intellectual property envisage the manner or the purpose for which these rights are to be used/ exploited. The provisions in the Income tax Act talk of transfer of rights or the use of the property but not nature of use to which the property may be put to. The use of any right in intellectual property for captive use is nonetheless a bus....
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....nly in respect of countries where the treaty specifically stated so. Treaties are meant to grant relief from domestic taxation. If Income from a certain source is not liable to tax under domestic laws, it cannot be brought to tax by the terms of treaty. He has therefore submitted that computer software is covered under the definition of 'royalty' both under the domestic law as also the DTAA under the broad categories of IPRs like copyright, patent, invention, process or equipment. Specific items of intellectual property do not find mention either under Explanation 2 of the Act or under the definition given in Indo-US DTAA. It is submitted that when the language employed in Indo-US DTAA is not ambiguous, any reference to other treaties is wholly unnecessary. In any case, an interpretative inference by reference to comparative analysis of two different agreements is wholly unwarranted in regard to negotiated agreements. In any case, the outcome of negotiation with one country cannot lead to the presumption that similar issue was under negotiation with the other country and a contrary view has finally emerged. Such an approach would not be valid for interpreting a negotiated bilateral....
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....ed under the A.P. General Sales Tax Act relying upon very broad definitions of "goods" and "sale" appearing in the said enactment. Reference to Article 366 of the Constitution of India is also made in the same context as the Article 366 defines various terms used in the Constitution and sub- Article (12) thereof defines "goods" to "include all materials, commodities and articles". It was in the backdrop of these definitions that the Hon'ble Supreme Court held that the software, though it may contain intellectual property, would still be regarded as goods for the purposes of the said enactment. Reference made to the decision of Associated Cement Companies Ltd. v. Commissioner of Customs [2001] 4 SCC 593 was also in the same backdrop as the Customs Act also defined "goods" to include all kinds of movable property. Legislative Schemes of Sales Tax law or the Customs Act and the Income Tax Act are different. Software may be regarded as goods for the former enactments but it cannot and would not suggest that licensing of software would not give rise to income from royalty under the later enactment if transfer of rights in or use of intellectual properties is indicated. The basic differe....
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....ival back up purposes". However in the present case, the licensee has been given the right to make copies not only for archival purposes but also for installation of the programme on the hard disk. Para 161 records the finding that the "software is actually a part of the hardware and it has no use or value independent of it". This is the vital factual distinction. In the present case, the software (computer programme) itself is licensed with the right of reproduction though for limited use. The reference to the OECD commentary in Para 165 and to IRS regulations in paras 166 to 171 will no longer be relevant in view of India's clear reservations on the OECD commentary. Even some member Countries of the OECD have also expressed their reservations on such views in the commentary. Hon'ble Bench goes on to hold, by analysis and case laws referred to in Paras 175 to 180, that the price paid for cannot be split between that for the hardware and for the software. The material facts in the present case do not call for such determination. There being no supply of hardware, the entire consideration is for the software which is an intellectual property. He, therefore submitted that the decisio....
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....nce on the decision of TCS. It has been held that what was being transferred was a copyrighted article whereas the copyright remained with the owner. Hence, the decision is not applicable to the facts of the present case, as discussed in respect of Motorola. 59. In the case of Infrasoft Ltd. (supra), the ITAT has placed reliance on the decision in the case of Motorola Inc. (supra) and in the case of Samsung Electronics Co. Ltd. (supra). No other reasons have been given in this case by the ITAT to arrive at the finding. Hence, the decision is not applicable in the present case. 60. In the case of Sonata Information Technology Ltd. (supra) the admitted position was that the issue was covered by the earlier decision of the ITAT. This is not so in the present case. The Bench has critically observed that the agreement with the Indian distributor did not grant any right of reproduction or distribution to the distributor. M/s. MRSC had given distribution right to the distributor was "in consequence of the exercise of the right u/s 14(b)(ii) and not a transfer of right u/s 14(b)(ii)". He has further submitted that the decision in the case of Sonata Information Technology Ltd. (supra) is ....
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....the definition of royalty deserves to be rejected. 63. As regards the contention of the Revenue that computer programme is distinct from goods or article the ld. counsel for the assessee submitted that the Parliament has employed expression "computer software" in various places vide sections 10A and 80HHC of the Act whenever it was found necessary to incorporate it specifically and not with the intention to make distinction between "computer software" and "goods" or "article". Therefore, the contention of the Revenue that expression computer software in section 10-A was never part of expressions "article" or "things" is completely misplaced and incorrect as prior to Amendment by the Finance Act, 1993 Explanation to section 10A defined produce as including word computer programme. He also submitted that the clauses of treaty should be interpreted on the plain language used and not based on what to be the intention. If the intention was to tax supply of computer software as royalty this could be done through amending Explanation 2 to section 9(1)(vi). He also submitted that the OECD Model commentary and UN model also demarcate between a "copyright" and a "copyrighted article". He pl....
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....ough MRSC. Keeping in a wider perspective if all the agreements and supply chain obtain a right to sell i.e. MRSC, the distributors and resellers there is no price or such right to sell and the consideration flowing from the end users to MRSC are purely for supply of copy of software. MRSC has neither given any exclusive right in the software programme nor consideration received from Indian distributors towards grant of right to sell software. 64. The Revenue has distinguished decision in the case of Sonata Information Technology Ltd. (supra) on the ground that the judgment was given under section 195, but since the nature of payment and taxability remains the same the decision of Bangalore Bench could not be distinguished. As regards activation code it has been submitted that activation code cannot be interpreted controlling the ownership in the copy of software sold to end users. As soon as CD containing software programme is sold to end user, such end user on payment or purchase price becomes entitled for activation and no further consideration is charged for the updates. 65. It has further been submitted the assessee has relied upon the judgment of Hon'ble Supreme Court in th....
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....on should be paid to what has been said as also to what has not been said. As a consequence a construction which requires for its support addition or substitution of words or which results in rejection of words as meaningless has to be avoided. Hon'ble Supreme Court in Director General, Telecommunication v. T.N. Peethambaram [1986] 4 SCC 348, p. 349 has observed that it is contrary to all rules of construction to read words into an Act unless it is absolutely necessary to do so. Similarly as has been held in Union of India v. Deoki Nandan Aggarwal AIR 1992 SC 96, p. 101 that the Court cannot reframe the legislation for the very good reason that it has no power to legislate. Hon'ble Supreme Court in the case of Padmasundara Rao (supra) has held that under the first principle a casus omissus cannot be supplied by the Court except in the case of clear necessity and when reason for it is found in the four corners of the statute itself but at the same time a casus omissus should not be readily inferred and for that purpose all the parts of a statute or section must be construed together and every clause of a section should be construed with reference to the context and other clauses the....
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....c work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting. The term "copyright" is wide enough to include other works such as dramatic or musical work as included in section 14(a); computer programme in section 14(b); cinematograph film in section 14(d); and a sound recording in section14(e). The acceptance of the contention of the assessee would mean that copyright in respect of above works would go out of ambit of clause (v) of Explanation 2 of section 9(1)(vi). The Legislature in its wisdom has used word "copyright" independent of subsequent words 'literary, artistic or scientific work......' by separating them by use of punctuation mark coma (,) appearing in the said clause which cannot be interpreted that there has been an omission of word 'of' on the part of the Parliament while enacting the law. It is a settled law that the need for interpretation arises when words used in the statute are, on their own terms, ambivalent and do not manifest the intention of the Legislature. It is a settled law that where the statutory word is plain and unambiguous, it is not for the judges to invent fancied ambiguities a....
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....2(7) is plain, clear and unambiguous. It is not conveying two meanings. For the reasons stated in earlier paragraph this contention of the assessee deserves to be rejected. 72. Another contention of the ld. AR of the assessee is that the ld. CIT (Appeals) is wrong in concluding that the provisions of section 115A of the Act characterizes the sale of software products as royalty. It has been submitted that provisions of section 115A of the Act cannot provide any aid to interpret computer software independent of copyright. He further submitted that section 115A is a machinery provision. It cannot create charge. The expression "copyright" used in section 115A (1A) is necessarily to be read with term "computer software". He has further submitted that opening phrase of sub-section (1A) of section 115A refers back to sub-section (1) of section 115A and, therefore, by default, one has to fall back on Explanation (c) of section 115A(1) which again refers back to Explanation (2) to section 9(1)(vi) of the Act. It is only where a transaction is held liable to be taxed as royalty one can proceed to prescribe the rate of taxes and where the transaction itself is being questioned as to whether....
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....is determined as per provisions of section 9(1)(vi), the provisions of section 115A(1A) for the purposes of levy of income tax cannot be pressed into operation. To this extent we agree with ld. counsel for the assessee that unless nature of the payment is decided provisions of section 115A(1A) cannot be applied. 75. The next contention of the ld counsel for the assessee is that there is a difference between "copyright" and "copyrighted article" and in the context of computer software the Constitutional Bench of the Hon'ble Supreme Court in the case of Tata Consultancy Services Ltd. (supra) has held that the copyright in the computer 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. Therefore, contention of the assessee is that the consideration received by MRSC / MS Corp/Gracemac from Indian distributors is towards sale of Microsoft software products, being a 'copyrighted article'. The end users have not been granted any right in copyright in such softwares and therefore, the consideration received therefore is not taxable as royalty under section 9(1)(vi) of the Act. To su....
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.... v P.V.A.L. Kulandagan Chettiar [2004] 137 Taxman 460 (SC) the respondent-firm was resident of India and owning some immovable properties at Malaysia. During the course of the assessment year, the assessee earned income from rubber estates in Malaysia. The respondent also sold some property there and earned short-term capital gains. The ITO held that both the incomes were assessable in India and brought the same to tax. On appeal, the Commissioner (Appeals) held that under article 7(1) of the Agreement of Avoidance of Double Taxation entered into between Government of India and Government of Malaysia, unless the respondent had a permanent establishment of the business in India, such business income in Malaysia could not be included in the total income of the assessee and, therefore, no part of the capital gains arising to the respondent in the Malaysia could be taxed in India. On appeal, the Tribunal confirmed the order of the Commissioner (Appeals). Before Hon'ble Madras High Court, the Revenue tried to justify the levy tax by assessing officer relying on OECD commentary. While confirming the order of ITAT, Hon'ble Madras High Court rejected the application of commentaries on the ....
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....righted article". The meaning of royalty in respect of computer software has to be decided on the basis of provisions of the Income Tax Act and Indo-US DTAA. 80. Further, Hon'ble Supreme Court in the case of Tata Consultancy Service Ltd. (supra) observed that in case of a computer software programme which consists of various commands in order to enable the computer to perform a legitimistic task. The copyright in the programme remains with the originator. The moment copies are made and marketed, it becomes goods which are susceptible to Sales-tax. This decision was rendered by Hon'ble Supreme Court under Sales Tax Act. The ld. AR of the assessee had fairly conceded that the decision is not applicable to Income-tax proceedings but it will be relevant while deciding the issue of royalty in respect of computer software programmes as Hon'ble Supreme Court has made distinction between 'copyright' and 'copyrighted article'. In this connection we would like to say that the copies made from master copies of computer programme cannot be used by the users without obtaining activation code which is given on signing of agreement known as EULA. Therefore, it cannot be said that the considerati....
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....nder consideration and treat it to be the complete "law" declared by this court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before this court. A decision of this court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, the courts must carefully try to ascertain the true principle laid down by the decision of this court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this court, to support their reasonings.". In the case of Tata Consultancy Services Ltd. (supra) Hon'ble Supreme Court has decided the issue in the context of sales tax. Passing off the right to use intellectual property as such has not been regarded as a taxable event by Hon'ble Supreme Court. 81. Hon'ble Supreme Court in the case of R.G. Anand v. Deluxe Films AIR 1978 SC 1613 at page 1617 observed as under :- "There can be no copyright in an idea, subject-matter, themes, plots, or historical or legendary facts, and violation of the copyright in such cases is confined t....
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....D Commentary or US guidelines for the purposes interpretation of term "royalty" Hence for the purposes of income tax a copyrighted article cannot be treated as product. 83. U/s 9(1)(vi) of Income tax Act,1961 income by way of royalty shall be deemed accrue or arise in India: (i) royalty payable by the Central Government or any State Government; (ii) royalty payable by a resident, except where the payment is relatable to a business or profession carried on by him outside India or to any other source of his income outside India; and (iii) royalty payable by a non-resident if the payment is relatable to a business or profession carried on by him in India or to any other source of his income in India. 84. Explanation 2 to clause (vi) of section 9(1) which defines the term "royalty" is wide enough to cover both industrial royalties as well as copyright royalties. It reads as under: "Explanation 2.-For the purposes of this clause, "royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for- (i) the transfer of all or any rights (including....
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....nd residuary in character. Lump sum consideration is not decisive of the matter. That sum may be agreed for the transfer of one right, two rights and so on all the rights but not the ownership. Thus, the definition of term royalty in respect of the copyright, literary, artistic or scientific work, patent, invention, process etc. does not extend to the outright purchase of the right to use an asset. In case of royalty the ownership on the property or right remains with owner and the transferee is permitted to use the right in respect of such property. A payment for the absolute assignment and ownership of rights transferred is not a payment for the use of something belonging to another party and, therefore, not royalty. In an outright transfer to be treated as sale of property as opposed to licence, alienation of all rights in the property is necessary. 86. In View of above discussion we have to now examine the true nature of the transaction involved in these appeals. In brief the contentions of the ld. counsel for the assessee are that since computer programme is protected under the Copyright Act, the reliance should be placed on Copyright Act only and not on other Intellectual Pr....
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.... 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 specified in relation to the work in sub-clauses (i) to (vi); (b) in the case of a computer programme, - (i) to do any of the acts specified in clause (a); (ii) to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer programme; Provided that such commercial rental does not apply in respect of computer programmes where the programme itself is not the essential object of the rental." 88. Under section 14 (a) of the Copyright Act, 1957 the owner of the copyright in a literary, dramatic or musical work has the "exclusive right" to do the acts such as to reproduce the work in any material form including the storing of it in any medium by electronic means; to issue copies of the work to the public; to perform the work in public, or communicate it to the public; to make any cinematograph film or sound recording in respect of the work; to make any translation of the work; to make any adaptation of the work etc. Any perso....
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....t. Software is usually developed in three stages. First, a System Analyst or Designer prepares a specification, which normally includes data flow setting out the basic logic of programme. Then a source code programme is written in either a higher level computer language (e.g. oracle, or visual basic) for the ease of development or lower level language (e.g. C, C+, C++ or visual C) or power explicit control output. However, in either case, the source code cannot be read directly by a computer. The source code is converted by an assembler or complier programme into object code. Object code is essentially a form of source code which can be read or acted upon by micro-processor or central processor unit (CPU) of computer. Object code is an expression in binary notation consisting of the series of ones and zeros, (reflecting electrically, 'on' and off states) which are understood by a particular computer. The object code, therefore, is a replication of source code in a different form. An object code is the version of a programme in which the source code language is converted or translated into the machine language of the computer with which it is to be used. The object code is adaptatio....
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....ded in respect of income chargeable to tax under Income tax Act, it will not be appropriate to restrict the scope of definition of term royalty under Income tax law only on the ground that since computer programme has been provided protection under copyright Act, the provisions of other IPR laws will not be applicable. We, therefore, are not in agreement with the arguments ld. Counsel for the assessee that other IPR laws with reference to the definition of term "royalty" will not be applicable to the case of the assessee. 91. There is no dispute that the Microsoft products are patented in USA which is evident from Clause 4.1 of the Parent Subsidiary agreement between MS Corp and Gracemac stating that the software is protected both by copyright and patent laws. EULA also refers that the product is protected by copyright and other intellectual property rights. There can be overlap between copyright and patent. Both are mutually exclusive. Indian Patent Act, 1970 differentiates patentable and non-patentable inventions. Under section 2(m) of the Patent Act, 1970 defines a patent to mean a patent for any invention granted under the Act. Clause (iii) of Explanation 2 of section 9(1)(vi)....
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....d by the end user is towards the product and not towards the working of a process. It has been submitted that the decision given by the Delhi bench of ITAT in case of Asia Satellite Telecommunications Co. Ltd. (supra) was on entirely different facts where payments were made towards use of transponder capacity and not towards purchase of any product. He placed reliance on the decision of the Bangalore Bench in the case of Sonata Software Ltd. (supra) wherein it has been held that "computer programme" being specifically covered under copyright, it cannot be again said to be covered under the "process". 94. We have considered the arguments advanced by both the parties. As per Wikipedia dictionary in computing, a process is instance of a computer programme that is being executed. It contains the programme code and its current activity. Depending on the operating system (OS), a process may be made up of multiple threads of execution that execute instructions concurrently. Thus computer programme is a passive collection of instructions; a process is the actual execution of those instructions. Several processes may be associated with the same programme; for example, opening up several in....
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.... quality control. It was held that the payment for the user of such specialized knowledge, though not protected by a patent, was assessable as royalty. This decision supports the cause of Revenue and the assessee. Similarly in the case of DCM Ltd. (supra) the issue related to transfer of comprehensive technical information, know-how and supply of equipment. It was held that the collaboration agreement dealing with the dispatch of one or more of its engineers, technologists to visit the factory site of the assessee, train the factory personnel and to commission the specified processes, would not create a permanent establishment. Therefore, it was held that the payments were not in the nature of royalty. The facts of the case before us are entirely different and, therefore, distinguishable on facts and the assessee cannot derive any benefit from the decision of this case. In the case of Modern Threads (I) Ltd. (supra) it was held that the payments were made in instalments to Italian company for supply of technical know-how and also for supply of basic process engineering documentation for designing, construction and operation of plant subject to their liability on account of rectifyi....
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....ranted under the Act. Hence we are in agreement with the arguments of ld. counsel for the Revenue that Microsoft computer programmes are inventions and the payment made for the use or the right to use the same would amount to royalty. 98. Another contention of Ld Counsel for the Revenue is that when the computer software embedded in CD is considered as tangible property then transaction should be examined under explanation 2(iva) for "the use or right to use any industrial, commercial or scientific equipment.." and reliance was placed on the decision of Chennai Bench of ITAT in the case of West Asia Maritime Ltd. (supra) wherein it was held that equipment would include every kind of fixed assets and ship whether or not specifically mentioned under Explanation 2 to section 9(1)(vi) of the Act will be covered by the expression "equipment". Ld counsel for the assessee on the other hand had submitted that the expression "equipment" used in the Explanation 2 to section 9(1)(vi) of the Act cannot be interpreted to be wide enough to cover within its ambit even a computer software . The decision of Chennai Bench of ITAT in case of West Asia Maritime Ltd. (supra) is not applicable to the p....
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....herwise using the product. If you do not agree, do not install or use the product; you may return it to your place of purchase for a full refund." From the plain reading of the above it is clear that Microsoft products have not been sold, but licenced. In case of sale the purchaser becomes the owner and question of further agreement for the use of the property will not arise. Apart from the above warning there are other terms and conditions attached to End User Licence Agreement. Clause (1) of the agreement deals with grant of licence and species under what circumstances the upgrades and additional software will be available. Clause (6) of the agreement deals with termination. It states "that without prejudice to any other rights, Microsoft may cancel this EULA, if you do not abide by the terms and conditions of this EULA, in which case you must destroy all copies of the product and all of its component parts". This conditions of End User Licence Agreement itself proves that the software is licenced and not sold. This fact is further buttressed by the wordings of clause 19 of EULA which states that "the product is protected by copyright and other intellectual property laws and tre....
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....rporation & Ors. v. Mr. P. H. Hussain Kunnel Advocate: Saikrishna & Associates Last date : 12/05/2010 6. CS (OS) 946/2009 [Disposed off] Order(s) Judgment Microsoft Corporation & Ors. v. Mr. Pranav Dalal & Anr. Advocate: Anand & Anand Disposed on 23/09/2009 7. CS (OS) 945/2009 [Disposed off] Order(s) Judgment Microsoft Corporation & Anr. v. Mr. Sudhir Bajaj Advocate: Saikrishna & Associates Disposed on 12/06/2009 8. CS (OS) 899/2009 [Disposed off] Order(s) Judgment Microsoft Corporation & Ors. v. Mr. Mahesh B. Advocate: Saikrishna & Associates Disposed on 4/08/2009 101. A copy of decision of Hon'ble Delhi High Court granting injunction on a plaint filed by Microsoft Corporation & Another against Pawan Jain & Others for infringement of copyrights in the softwares is on records. The ld. counsel for the assessee has filed comments. The plaint has been admitted by Hon'ble Delhi High Court and the request of the plaintiff i.e. Microsoft Corporation & Another for investigation of the matter has been granted and order has been passed on May 25th, 2009 [CS (OS) No.968/2009] appointing the Commissioner to investigate the matter with reference to the plaint. Sinc....
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....ates that the defendants were indulging in multiple unlicenced use of licences of Microsoft Corporation. After hearing the Hon'ble Delhi High Court has appointed local commissioners to visit various premises of defendants located in Delhi, Bangalore & Secandrabad simultaneously without prior notice to defendants and prepare inventories of all unlicenced / pirated softwares of plaintiffs in the computer system / hard disc or in the impact discs / DVDs or any other storage media of defendants at their premises and seize only such storage medias in the central processing unit or outside the central processing unit having unlicenced / pirated softwares of the plaintiffs. They were required to submit reports within two weeks after executing the commission. 102. From the above, it is clear that the computer programmes whether in FPP or VPP contain copyright in them. At one hand the assessee is contending that the Microsoft products sold to the end users are copyrighted articles are products and do not contain copyright. On the other hand, under Copyright Act they are enforcing their rights stating that the use of unlicenced/pirated copy of software products involves infringement of copy....
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....hand the contention of Revenue is that since a proviso carves out an exception from main section the royalty from computer programme was inbuilt in section 9(1)(vi) of the Act since its inception. 104. We have heard both the parties and gone through their submissions carefully. As per section 9(1)(vi) of the Act the income by way of royalty payable by the Government; or a resident ;or a non-resident shall be deemed to accrue or arise in India. The term royalty has been defined in Explanation 2 to section 9(1)(vi) of the Act. In Keshavji Ravji & Co. v. CIT [1990] 183 ITR 1 (SC), the Supreme Court said that an Explanation, generally speaking, is intended to explain the meaning of certain phrases and expressions contained in the statutory provisions. There is no general theory as to the effect and intendment of an Explanation except that the purpose and intendment are determined by its own words. An Explanation depending upon its own language might supply or take away something from the contents of a provision. It is also true that an Explanation may be introduced by way of abundant caution in order to clear any mental cob-webs surrounding the meaning of the statutory provision spun ....
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.... proviso now under consideration is, it is apparent, to provide a substitute or an alternative remedy to that which is prohibited by the main part of section 4(1). There is, therefore, no question of the proviso carrying out any portion out of the area covered by the main part and leaving the other part unaffected. What we have stated earlier should suffice to establish that the proviso now before us is really not a proviso in the accepted sense but an independent legislative provision by which, to a remedy which is prohibited by the main part of the section, an alternative is provided. It is further obvious to us that the proviso is not co-extensive with but covers a field wider than the main part of section 4(1)". 108. In UP State Road Transport Corpn. v. Mohd. Ismail AIR 1991 SC 1099, Hon'ble Supreme Court while interpreting the proviso to regulation 17(3) of the UP State Road Transport Corporation has held that sometimes a proviso in effect becomes a substantive provision. Regulation 17(3) of the UP State Road Transport Corporation reads as follows: "17(3) The service of a person who fails to pass the fitness test, referred to in sub-regulation (2), may be dispensed with; Pro....
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....omputer programme was not taxable u/s 9(1)(vi) of the Act, the Parliament would not have prescribed special rate of income tax in respect of royalty income in respect of any computer software u/s 115A(1A). It cannot be presumed that the Parliament was not aware of provisions of section 9(1)(vi) of the Act while enacting section 115A(1A). The most basic rule of interpretation is embodied in the Latin maxim ex visceribus actus. Put it simply, this means a statute has to be read as a whole and not piecemeal. Interpretation must not only be close to the statutory language but should also not lead to conflict with the other provisions of the statute. The intention of the Legislature must be found by a reading of the statute as a whole and in its context which is derived from the contextual scheme. Hon'ble Supreme Court in Unique Butyle Tube Industries (P.) Ltd. v. UP Financial Corpn. [2003] 2 SCC 455 held that every part of a section should be interpreted in terms of its own context and in relation to other part of the section and ultimately the interpretation placed in a particular provision should result in the whole statute remaining a consistent enactment. Similarly in Poppatlal Sha....
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....ess. As discussed above that Explanation 2 to section 9(1)(vi) deals with the royalty of two types i.e. industrial royalties which arises on transfer or any rights (including the granting of a licence) in respect of a patent, invention or use of any patent, invention or process. Therefore, if the end-users have made payment for transfer of rights (including the granting of a licence) in respect of copyright, patent, invention, process, literary or scientific work, such payment would be in the nature of royalty. Clause (v) of section 9(1)(vi) deals with transfer of all or any rights (including the granting of licence) in respect of any copyright, literary, artistic or scientific work. The payment will be in the nature of royalty. 115. The Finance Act, 2007 inserted the following Explanation to section 9 with retrospective effect from 1/06/1976, which reads as under:- "Explanation.-For the removal of doubts, it is hereby declared that for the purposes of this section, where income is deemed to accrue or arise in India under clauses (v), (vi) and (vii) of sub-section (1), such income shall be included in the total income of the non-resident, whether or not the non-resident has a res....
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....th income-tax under this Act and income-tax in that country; or (ii) income-tax chargeable under this Act and under the corresponding law in force in that country to promote mutual economic relations, trade and investment, or] (b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country, or (c) for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that country, or investigation of cases of such evasion or avoidance, or (d) for recovery of income-tax under this Act and under the corresponding law in force in that country, and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement. (2) Where the Central Government has entered into an agreement with the Government of any country outside India under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that asse....
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....he situation under which a royalty can be considered as arising in India under Article 2(2). He has further submitted that there is no use of copyright in India by the end-user and the transaction is in the nature of sale of copyrighted article effected by Microsoft Operation in Singapore and, therefore, copyright was not used in India. He further submitted that the Revenue can invoke Article 12(7)(b) of Indo-US DTAA for imposition of tax only if Microsoft Operation, Singapore instead of manufacturing and distributing products in Singapore chooses to do from India, in which case by virtue of expression 'use in India' would get the domain power to tax. But in assessee's case the use of copyright is the right to copy the master copy sub-licensed by the assessee to Microsoft Operations and this right to copy the master copy was exercised. Accordingly, Article 12(7)(b) is not attracted. On the other hand the ld. counsel for the Revenue has submitted that the contention with regard to the sale being in the source country or the business being conducted in the source country may be valid arguments for income under the head 'business or profession'. Therefore, the contention of the assess....
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....e 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 thereof ; 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 payments derived by an enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of Article 8. ** ** ** 6. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for included services, being a resident of a Contracting State, carries on business in the other Contracting State, in which the royalties or fees for included services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the royalties or fees for included services are attributable to such permanent establishment or fixed base. In such case the provisions of Arti....
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....ll not exceed the amount specified therein. Rate at which tax is payable is specified in the paragraph 2 of Article 12 of Indo-US DTAA. In the case of assessee we have held that payments made by end users is chargeable to tax as royalty u/s 9(1)(vi) of the Act. As per paragraph 7(a) royalties shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority, or a resident of that State. If the person paying royalty has a permanent establishment or a fixed base there in connection with which the liability to pay the royalties is incurred and the liability is borne by such establishment or base the royalty is deemed to arise in state in which the permanent establishment or fixed base is situated. As per Paragraph 7(b) the royalties relate to the use of, or the right to use, the right or property, in one of the Contracting States, the royalties shall be deemed to arise in that Contracting State. We have already held in paragraphs 75 to 82 of our order that a "copyrighted article" is one in which copyright subsists. We have also held that the considerations received by the non-resident assessee are for the use of, or the ri....
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....provision, the scope and effect of the legislation cannot be curtailed by the reference to the agreement. The agreement is entered into pursuant to the power conferred upon the Government by section 90. Subsequent legislation cannot be controlled by the agreement. In the instant case Indo-US DTAA was entered on 20/12/1990. By an Amendment to section 9(1) by insertion of Explanation with effect from 1/06/1976 the royalties will deem to accrue or arise in India whether or not the non-resident has a residence or place of business or business connection in India. Therefore, by this amendment the income by way of royalty will deem to accrue or arise irrespective of contrary provision in Indo-US DTAA. Hon'ble Supreme Court in the case of Gramophone Co. of India Ltd. v. Birendra Bahadur Pandey AIR 1984 SC 667 held as under:- "National courts cannot say "Yes" if the Parliament has said no to a principle of international law. National courts will endorse international law but not if it conflicts with national law. National courts being organs of the National State and not organs of International law must perforce apply national law, if international conflicts with it. But the Courts are un....
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.... has clear reservations on OECD Commentary. We may also like to state here that there was cleavage of opinion amongst the group of technical advisors on the issue as to whether a copyrighted article has copyright in it. The majority view was that it does not have copyright in it and is a product. However, the minority view was that the copy of a computer programme has copyright in it. We would also like to observe that we are not deciding the issues relating to International law in relation to various treaties to which India is a signatory. Whenever, a treaty is signed by India, the Government makes necessary provisions in relevant law and rules. So far as income tax matters are concerned the policy of the Government of India towards taxation of a particular income is incorporated in Double Taxation Avoidance Agreement which becomes part of Income-tax Act by virtue of section 90(2) of the Act. The Double Taxation Avoidance Agreements are negotiations between the two countries and the policy of contracting States with regard to assessment of different incomes is incorporated in the treaties. Therefore, the matter has to be decided as per the provisions of Income-tax Act and the term....
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....rights to MRSC, which is evident from the definition of "Select Product" in Exhibit A to Schedule-B to the Enrollment Agreement extracted as below: "Select Product" shall mean the licences and CD-ROM's which comprise a Select Software Product. Select Software Product shall mean the MO software as designated from time to time by MO which may be reproduced pursuant to an Enrollment Agreement." Further Microsoft Operation vide agreement dated 3.5.1999 replaced article 3.2 of agreement dated 4.1.1999 with the following: "3.2 Marketing Program Manufacturing and Distribution : MO shall provide Distributor with the master copy (whether through diskettes or other media) for the Marketing Programs and the camera ready or other materials for the packaging and documentation. Such materials shall be provided to Distributor at prices set forth on Schedule A. Distributor shall then have the right to copy the Marketing Program(s) in object code form from the master copy provided by MO onto either diskettes or such other media as MO approves, prepare the product documentation and packaging based on the materials provided and approved by MO provided that all documentation remains complete and ac....
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....uce certain computer programmes. The End User Licence Agreement was to be in the standard format of Microsoft Corporation. Article 3.2 also provides that the marketing programme released by the distributor will be approximately equivalent in quality of the software product manufactured by MS Corp. The Microsoft Operation also provided up-dated master copies of marketing programmes as and when the same were up-dated by MS Corp. Since the Microsoft Corporation has granted the right to reproduce and distribute Microsoft Products in lieu of Shares to Gracemac and no further royalty is payable by Gracemac and also the End User Licence Agreement is to be in the standard format of Microsoft Corporation, the Microsoft Corp. is under obligation to sign EULA on behalf of Gracemac. Thus it has to be logically concluded that Microsoft Corporation has signed the EULA on behalf of Gracemac to whom exclusive rights to manufacture and distribute Microsoft products have been granted otherwise the products would have been rendered useless and no revenue could have been earned by anyone in the supply chain. Microsoft Corporation has devised a scheme under which EULA has to be signed by Microsoft Corp....
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....es all income from whatever source derived which - (a) is received or is deemed to be received in India in any such year by or on behalf of such person; or (b) accrues or arises or is deem to accrue or arise to him in India during such year. In the case before us we have arrived at a conclusion that the payments made by end users for the granting of licence in respect of copyright in computer softwares is in the nature of royalty. The payments have been made by residents and, therefore, the same is assessable to tax under clause (b) of section 9(1)(vi). The assessing officer has assessed the income under clause (c) whereas the ld. CIT (A) has directed the assessing officer to assess under clause (b) of section 9(1)(vi) of the Act. The assessment made by the assessing officer by applying a wrong clause cannot be a basis for deletion of addition. The commissioner of Income tax (appeals) under section 250 has co-terminus power with that of the assessing officer as held by Hon'ble Supreme Court in the case of CIT v. Kanpur Coal Syndicate [1964] 53 ITR 225. The ld. CIT (A) can do what the Income-tax Officer do and can also direct him to do what he has failed to do. The ld. CIT (A) exerc....
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....titioner. Hence facts of the cases before us are distinguishable with that of the case of Motorola. Similarly, in the decision of Lotus Development Asia Pacific Ltd. Corpn. (supra) the Bench has placed reliance on the decision of Tata Consultancy Service Ltd. (supra) and Motorola Inc. (supra). As held above, the decision of Hon'ble Supreme Court in the case of Tata Consultancy Services Ltd. (supra) is not applicable to the Income-tax proceedings and same is the position with the decision of Special Bench in Motorola, hence reliance on the decision of the ITAT in the case of Lotus Development Asia Pacific Ltd. Corpn. (supra) is of no help to assessees. Similarly, in the case of Samsung Electronics Co. Ltd. (supra) the ITAT had placed reliance on the decision of Tata Consultancy Services Ltd. (supra) In the case of Infrasoft Ltd. (supra) ITAT placed reliance on the decision in the case of Motorola Inc. (supra) and in the case of Samsung Electronics Co. Ltd. (supra). Likewise, in the case of Sonata Information Technology Ltd. (supra) reliance has been placed on decision of Hon'ble Supreme Court in Tata Consultancy Services Ltd. (supra) and other decisions. When a decision is held to b....