TaxTMI 
TaxTMI 
2010 (10) TMI 583
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of Gracemac Corporation in I.T. Appeal Nos. 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 pa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n rights to Microsoft Operations Pte Ltd. ("MO") pertaining 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-us....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Indian distributors for sale of computer software is towards use of 'scientific 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 rat....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ry shall at all times remain the sole property of MS Corp as shall the packaging and documentation 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 r....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... (EULA)' with the end users in India. 10.1 During the course of assessment proceedings the assessing officer 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 regis....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s from licensing of computer software to Original Equipment Manufacture (OEM) amounting to US $ 27,16,592 and licensing 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 vi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....der the definition of royalty. 12. Before us Sh. N Venkataraman, the Ld counsel for the assessee has submitted that clause (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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....2004] 271 ITR 401 has brought out very clearly that a software programme may consist of various commands which enable the computer 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....roduce copies of software and accordingly, it is Revenue's case that the end user is granted right in copyright in software and therefore the consideration is liable to be taxed as 'royalty'. The Ld Commissioner in the order for Gracemac 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 exploita....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the performance of enumerated activities under section 52(1)(aa) of the Copyright Act do not result in "infringement of a copyright" and results only in the acquisition of "copyrighted articles". In view of the above, it has been submitted 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 fr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n Avoidance Agreements with countries including Kyrgyz Republic entered during the period from 2001 to 2003, the term software/computer software programme has been employed in the definition of royalty. In other words, both under the Income 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)....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d owner of the copyright in the software, does not deal or sell copyrighted products outside the US and supply chain dealing with the copyrighted articles has nothing to do with the rights available to the owner of copyright in the software. 24. 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 unde....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d not under any other category of intellectual property right laws. The consideration received from end users/distributors is for sale of Microsoft products being copyrighted articles and no right in copyright has been granted to the end user and accordingly, 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....oyalty. In view of ld. CIT (A) MO and MRSC being sham entities should be disregarded. Accordingly, it is a clear case of double taxation of same income as CIT(A) has on one hand has said that the Gracemac is taxable in respect of the entire payments made by end 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cemac, only if "royalty" is payable either in respect of a right used by MO for the purposes of a business carried on by MO in India or for the purposes of making or earning any income from any source in India. It has been further submitted that the royalty received 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 Gracem....
X X X X Extracts X X X X
X X X X Extracts X X X X
....gatram Ahuja v. CIT [2000] 246 ITR 609 for the proposition that the interpretation in one statute cannot be made applicable to another statute. Paragraph 2 of Article 3 of DTAA between USA and India, to which reference was made by the Ld. Counsel assessee also stipulates the 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. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... is clearly suggestive of the fact that computer software is not the same as an article, whether copyrighted or not. The argument of the learned counsel for the assessee that 'computer software' was added in Section 10A to include IT enabled services is misconceived because if that were the 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 transf....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the treaty. However, this aspect has been discussed in detail in the order of the ITAT in the case of Asia Satellite Communications Ltd and the nature of the use given in the present case squarely falls within the scope so defined. There is yet another alternative contention. If the computer software 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....strued harmoniously with the main enactment. There is another aspect of the matter. Not only the second Proviso to Section 9(1)(vi) but Section 115(1A) also refers to royalty from computer software. No rate of tax could be provided in Section 115A unless computer software gives rise to royalty income. 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 p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e definitions appearing in Model conventions (OECD, UN, US etc), the respective commentaries and the Judicial pronouncements in their countries and elsewhere. In Indian scenario, the word "computer software" has been added at the insistence of the other parties to the negotiation, which is evident from the 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mb CD, but from the grant of license in the absence of which licensee cannot reproduce copy the programme and use the same. The license has directly flowed from the assessee to the end-user in India. The consideration paid is for getting the license to copy and use the programme. Thus income from royalty arises 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 incom....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... for reason that the consideration flows from the end users for the transfer of rights to them under the agreement and the gross basis of taxation cannot be converted into net basis creating intermediate entities and reducing expenses incurred or the profits earned by them. He, therefore, enhanced the income. The 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 t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... in either case remains the same. 51. The rights provided for in Section 14 (which protects the rights of the author) cannot be limited by the provisions of Section 52 (which protects the rights of the consumer). On the other hand, Section 52 only reinforces the view that the right of reproduction even for personal 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 propert....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ents in the light of provisions of section 90 of the I.T. Act. On the one hand, the Ld. counsel for the assessee seeks to argue that computer software does not give rise to royalty income as there is no transfer of rights in a copyright, while on the other he suggests India intended to tax royalty from computer software only 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d rights to the licensees. (c) Effect of second proviso to section 9(1)(vi) and of section 115A. (d) Effect of distinction between 'article' and 'computer software' maintained under the IT Act. (e) India's reservations on the OECD Commentary. 55. The decision in the case of Tata Consultancy Services Ltd. (supra) was rendered 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 Custo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r a 'copyrighted article'. The final conclusion is reached in Para 104 to hold that the software supplied was a copyrighted article and not a copyright right. After analyzing the agreement, the Hon'ble Bench observes on page 426 that the "cellular operator has been denied the right to make copies of the software except for archival 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 t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eliance has been placed by ITAT on the decision in the case of Tata Consultancy Services Ltd. (supra) & Motorola Inc. case (supra). The Bench has also placed reliance on OECD commentary in Para 25, which is not warranted in the present case in the light of India's reservations. 58. In the case of Samsung Electronics Co. Ltd. (supra) ITAT has placed reliance 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 I....
X X X X Extracts X X X X
X X X X Extracts X X X X
....' has been granted protection under Copyright Act since 1984 and it was never intended to be covered under other IPRs. Therefore, it is incorrect on the part of the Revenue to say that the computer programme was not granted protection under Copyright Act on or before 1994. Accordingly the contention of the Revenue that computer software is independently covered in 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 t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tion agreement MRSC holding a non-exclusive right to sell the products to Indian distributors for which no separate consideration has been paid to MRSC. Non-existent of both or any of the ingredients renders the provisions inapplicable to the transactions. He further submitted that Microsoft Operations is producing software copies in Singapore and are distributed through 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 co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n 2 of section 9(1)(vi) of the income tax Act, 1961 as " copyright of literary, artistic or scientific work...........", by applying the principle of casus omissus. 69. It is a golden rule of interpretation that the language of the statute should be read as it is. The intention of the Legislature is primarily to be gathered from the language used, which means that the attention 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y'; and that too by omitting the punctuation mark coma (,) after word 'copyright'. 70. Further the definition of term 'royalty' appearing in clause (v) of Explanation 2 is inclusive. Deletion of punctuation mark coma (,) and addition of word "of" between words 'copyright' and 'literary' would limit the scope royalty only to copyright work relating to 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. 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 om....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r fees for included services do not arise in one of the Contracting States, and the royalties relate to the use of, or the right to use, the right or property, or the fees for included services relate to services performed, in one of the Contracting States, the royalties or fees for included services shall be deemed to arise in that Contracting State." The language of clause (b) of Article 12(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 secti....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e aggregating to amounts specified in clause (b) of section 115-A(1) of the Act. Therefore, for the purposes of computation of tax payable by the non-resident it has to be first determined that the payment is in nature of royalty in respect of transfer of all or any rights (including the granting of a licence) in respect of copyright in any book or computer software. Unless the nature of the payment 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... "copyrighted article" is nowhere used even under the IT Act or Indo-US DTAA. The expression 'copyrighted article' finds its origin in U.S. regulations and then found its way in the OECD commentary. In the case of Motorola Inc. (supra) the Special Bench has differentiated between 'copyright' and 'copyrighted article' by placing reliance on U.S. regulations and the OECD commentary. 77. In the case of CIT 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, therefor....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ven the Copyright Act, 1957. Respectfully following the decision of Hon'ble Supreme Court in the case of P.V.A.L. Kulandagan Chettiar (supra) it is held that for the purposes of interpretation of term 'royalty' in respect of computer software reliance cannot be placed on difference made in OECD Commentary or in the US Regulations between expressions "the transfer of a copyright right" and "the transfer of a copyrighted 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 iss....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f Hon'ble Supreme Court in the case of Tata Consultancy Services Ltd. (supra) cannot be applied to the facts of the assessee's case. It is a settled law as held by Hon'ble Supreme Court in the case of Sun Engineering Works (P.) Ltd. (supra) wherein it has been held that "it is neither desirable nor permissible to pick out a word or a sentence from the judgment of this court, divorced from the context of the question under 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....liamentary history, parliamentary proceedings, state of law as it existed when the law was passed, the mischief sought to be suppressed and the remedy sought to be advanced by the Act. There is no ambiguity in the definition of term "royalty" as appearing in Explanation 2 to section 9(1)(vi) of the Act or article 12(3) of Indo-US DTAA and therefore, there is no need for importing the expression " Copyrighted Article" from OECD 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) o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hts are indeterminate in duration and residuary in character as held by Hon'ble Supreme Court in the case of Swadeshi Ranjan Sinha v. Hardeb Banerjee AIR 1992 SC 1590. When rights in respect of a property are transferred and not the rights in the property, there is no transfer of the rights in rem which may be good against the world but not against the transferor. In that case the transferee does not have the rights which are indeterminate in duration and 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....al 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 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....issue of royalty is to be decided as provisions of Income tax Act and Indo-US DTAA. We can only refer to the provisions of the Copyright Act for limited purposes of definition of term "copyright". 89. Section 2(ffc) of the Copyright Act defines the expression "Computer programme" as a set of instructions expressed in words, codes, schemes or in any other form, including a machine readable medium, capable of causing a computer to perform a particular task or achieve a particular result. 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ty as contained in Explanation 2 to section 9(1)(vi) and Article 12(3) of Indo-US DTAA it is evident that the definition takes into its ambit both the industrial as well as copyright royalties. When provisions of section 9(1)(vi) of Income Tax Act and Indo-US DTAA are applicable in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property, any copyright, literary, artistic or scientific work etc. and relief under Indo-US DTAA has been provided 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ess' has to be interpreted as an intellectual property right rather than as being interpreted in the ordinary sense. Reliance is placed on the following judicial precedents: • M.V. Philips v. CIT [1988] 172 ITR 521 (Cal.); • DCM Ltd v. ITO [1989] 29 ITD 123 (Delhi); and • Modern Threads (I) Ltd v. Dy. CIT [1999] 69 ITD 115 (JP.)(TM)). He has further submitted that the expression "process" appearing in Explanation 2(ii) to section 9(1)(vi) of the Act cannot be invoked as consideration paid 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 t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ging the frequency in the foot-print area including India. It was held that the TV channels in entire cycle of relaying the programmes in India were using the process provided by the assessee and, therefore, it was liable to be taxed as royalty income. In MV Philips (supra) the assessee received the amount for providing specialize knowledge of manufacturing particular commodity which included working methods, manufacturing processes including indications, instructions, specifications, standards and formulae, method of analysis and 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....are. EULA refers that the product is protected by copyright and other intellectual property rights. Even though as per section 3(k) of the Patent Act, 1970 a computer programme per se other than its technical application to industry or a combination with hardware, is not invention to be patented but the fact remains that Microsoft programmes being patented are inventions. In section 9(1)(vi) a patent and an invention are two different items. Under section 2(m) of the Patent Act, 1970 defines a patent to mean a patent for any invention granted 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 e....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... warning "important - read carefully" which is reproduced as below: "This End User Licence Agreement (EULA) is a legal agreement between you (either an individual or a single entity) and Microsoft Corporation for the Microsoft software product identified above, which includes computer software and may include associated media, printed materials, and "on line" or (electronic documentation) "product". An amendment or addendum to this EULA may accompany the product. You agree to be bound by the terms of this EULA by installing, copying, or otherwise 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 t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....and Disposed on 28/7/2009 2. CS (OS) 993/2009 [Disposed off] Order(s) Judgment Microsoft Corporation & Anr. v. Mr.S.C.Aggarwal Advocate: Anand & Anand Court No. 24 Disposed on 8/06/2009 3. CS (OS) 992/2009 [Disposed off] Order(s) Judgment Microsoft Corporation v. Mr. Vinod Kashyap Advocate: Anand & Anand Disposed on 12/06/2009 4. CS (OS) 968/2009 [Disposed off] Order(s) Judgment Microsoft Corporation & Anr. v. Mr. Pawan Jain Advocate: Saikrishna & Associates Disposed on 2/09/2009 5. CS (OS) 947/2009 [Disposed off] Order(s) Judgment Microsoft Corporation & 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: Saikris....
X X X X Extracts X X X X
X X X X Extracts X X X X
....fessional, 9 licences of window server with 660 Client Access License (CAL), 250 windows terminals servers and 75 microsoft windows of updates. It has been stated in the plaint that when an entity has a large number of computer systems it normally opts for multiple licences rather than individual packs as volume purchases of individual packs are not feasible from a cost point of view and the plaintiff has a record of all multiple licences held by every customer. The plaintiffs have contended that the fact that the defendants have 350 computer systems and the number of licences held by the defendants does not match with their usage indicates 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the Policy on Computer Software Exports, Software Development and Training, 1986 of Government of India. According to ld counsel for the assessee second proviso to section 9(1)(vi) cannot create charge so as to bring the computer software under the provisions of royalty. According to him an amendment to section 9(1)(vi) is necessary without which royalty from computer software cannot be taxed. It cannot be read into it by implication. He has also stressed that even in Indo-US DTAA entered on 20.12.1990 computer programme has not been incorporated though it got protection in the Copyright Act as literary work long back in 1984. On the other 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....unicipal authority and may pass such orders therein as the Government may consider fit and reasonable. (2) Any municipal appeal from orders made in appeal by an officer or authority other than Municipal authority, pending at the commencement of this Act, shall be transferred to the Government and be disposed of in accordance with the proviso to sub-section (1)." 107. Hon'ble Rajasthan High Court expressed the view that the Government had no jurisdiction to interfere under the proviso to section 4 with any order passed in appeal by the Municipality. That view was negatived by the Supreme Court by observing (page 1300): "The primary purpose of the 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 th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....urer along with a computer or computer-based equipment under any scheme approved under the Policy on Computer Software Export, Software Export, Software Development and Training, 1986 of the Government of India. It cannot stand on its own legs and hence cannot be held as a substantive provision. It would, therefore, mean that section 9(1)(vi) from very inception included computer software for the purposes of royalty. If is not so, then how anything can be taken out from a bundle of things which do not include the same. If royalty income from the use or the right to use or transfer of all or any right (including the granting of the licence) in respect of copyright in computer 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. Interpretatio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....een defined under IT Act, 1961. Therefore, any reference to Indian Copyright Act 1957 has to be made for the limited purpose of finding out the meaning of the word 'copyright' and that too for the reason that the term 'copyright' is not defined in the Income tax Act or the DTAA. Our view is supported by the decision of Hon'ble Supreme Court in the case of Jagatram Ahuja (supra) wherein it has been held that the interpretation in one statute cannot be made applicable to another statute. 114. From the above discussion it is clear that copyright subsists in computer programme. It is a literary as also scientific work. The computer programme is also a patent, invention or process. 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.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ect of the grant of licence in copyrights in computer programmes and are in nature of royalty. Hence, by virtue of amendment made by inserting Explanation to section 9(1)(vi) royalty income will be taxable in India. Therefore the contention of assessee that in the absence of any business connection or PE in India the payments received by non-resident assessees cannot be taxed India, is rejected. 118. Section 90 of the Income-tax Act provides relief from double taxation and reads as under: "90 (1) The Central Government may enter into an agreement with the Government of any country outside India- (a) for the granting of relief in respect of- (i) income on which have been paid both 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 c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ement may be resorted to for negativing or reducing it. In case of difference between the provisions of the Act and of an agreement under section 90, the provisions of the agreement shall prevail over the provisions of the Act and can be enforced by an appellate authority or the court. However, as provided by sub-section (2) the provisions of this Act will apply to assessee in the event they are more beneficial to him. Where there is no specific provision in the agreement, it is the basic law i.e. the Income-tax Act which will govern the taxation of income. 120. Another contention of the ld. AR of the assessee is that Article 12(7) of Indo-US DTAA deals with source rule for taxation of royalty which provides for the 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, Si....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r included services; and (b) in the case of royalties referred to in sub-paragraph (b) of paragraph 3 and fees for included services as defined in this Article that are ancillary and subsidiary to the enjoyment of the property for which payment is received under paragraph 3(b) of this Article, 10 per cent of the gross amount of the royalties or fees for included services. 3. The term "royalties" as used in this Article means: (a) payments of any kind received as a consideration for the use of, or the right to use, any copyright or a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition 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 payme....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of the Convention." 122. The definitions of term "royalty" as appearing in Explanation 2 to section 9(1)(vi) and paragraph 3 of Article 12 of Indo-US DTAA are identical. Paragraph 1 of Article 12 says that royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. However as paragraph 2, such royalties also be taxed in the Contracting State in which they arise and according to the laws of that State; but if the beneficial owner of the royalties is a resident of the other Contracting State, the tax so charged shall 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 resid....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... a moment for sake of argument it is presumed that such a difference exists, in that situation under section 90 the provisions of the agreement shall prevail over the provisions of the Act. We would like to deal with such a hypothetical situation. The binding nature of the treaty is not without exceptions. The later domestic tax legislation may over-ride tax treaty provisions whenever there is an irreconcilable conflict. Sovereign power of the Parliament extends not only to the making but also breaking a treaty. Unilateral cancellation of tax treaty through an amendment to the internal law subsequent to conclusion of the treaty is a recognized sovereign power. If after the agreement has come into force, an Act of Parliament is passed which contains contrary 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 d....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s absent in the case of Indo-US DTAA. He has also mentioned several conventions to which India is also a signatory. In this regard we would like to mention that OECD Commentary contains the views of the authors. The commentary cannot be equated with the decision of the apex court or the law enacted by the Parliament. Therefore, while interpreting the provisions of the Income-tax Act and Indo-US DTAA, reliance cannot be placed on OECD Commentary. Though the developed countries are following OECD model convention, but a large number of them had reservation in following the OECD commentary. Therefore, in all humility we decline to agree with the proposition of the ld. counsel for the assessee to rely on the OECD Commentary, particularly in view of the fact that India 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....itle, copyright, and other intellectual property rights in the product". When Microsoft Corp. and its supplier own copyrights and other intellectual rights in the products, it is immaterial as to have to sign the EULA. It is also a fact that Microsoft Corp has granted exclusive rights in lieu of all the shares of Gracemac Corporation and no further royalty is being paid by Gracemac for exclusive rights granted to it by Microsoft Corp. The reason is obvious. Whatever will be the resultant profits after meeting the expenses it will belong to Microsoft Corp. being holding company. 127. There is another aspect of matter. Though it has been argued that MRSC has been granted distribution rights by MO vide agreement dated 4.1.1999. However, MO has also granted reproduction 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 O....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... by MRSC. MRSC vide agreement dated 3rd May, 1999 was authorized to copy the marketing programmes in object code form from the master copy provided by Microsoft Operations (MO) on to either diskettes or such approved media and prepare the product documentation and packaging based on the material provided and approved by MO. We would like to mention here that source code and object code have copyright. Therefore, MRSC also got right to use copyright in computer products from sub-licencee (MO). Each product package would include a pre-approved diskettes label attached to the diskettes and MS Corp. standard End User Licence Agreement for the territory. From the above it is evident that MRSC is not simply a distributor appointed by Microsoft Operations, but was authorized to reproduce 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....and of the assessing officer has held that income will be assessable under section 9(1)(vi)(b) which is applicable in the case of payment of royalty by a resident to a non-resident. Provisions of section 9(1)(vi)(b) are applicable where royalty is paid by a resident and that of section 9(1)(vi)(c) by non-resident in respect of any right, property or information used or services utilized for the purpose of business or profession carried on by such person in India or for the purpose of making or earning any income from any source in India. Section 4 of Income-tax Act is charging section and section 5 defines the scope of total income. Under section 5(2), subject to the provisions of Income-tax Act, 1961, the total income of any previous year of a person who is a non-resident includes 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 i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r of the Government and section 90 of the Income-tax Act enables the Government to formulate its policy through treaties entered into by it and even such treaty treats the fiscal domicile in one State or the other and thus prevails over the other provisions of the Income-tax Act, it would be unnecessary to refer to the terms addressed in OECD commentary or in any of the decisions of foreign jurisdiction or in any other agreements. Moreover in the case of assessees before us Microsoft Corporation has been filing petitions every year before Hon'ble Delhi High Court contending that use of computer programme embedded on CD/ electronic media (copyrighted article) without licence is infringement of copyright and Hon'ble Delhi High court has granted injunction and other remedies to the petitioner. 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tion in India and the portion of income earned by MRSC perhaps could have been chargeable to tax as business income under section 9(1)(i) of the Act. But since the assessing officer as well as the ld. CIT (Appeals) has chosen to assess the entire receipts under the head 'royalty' in the hands of MRSC also, in our considered opinion, MRSC cannot be taxed again on the same income by way of royalty for exploitation of same rights which had been assessed in the hands of Gracemac, otherwise it would result in double taxation. Therefore, we delete the addition in the hands of MRSC for all the three years. 133. The last issue for consideration relates to levy of interest under section 234-A, B and C of the Act. Since the issue is now covered by the decision of Hon'ble Supreme Court in the case of CIT v. Anjum M.H. Ghaswala [2001] 252 ITR 1 wherein it has been held that charging of interest under sections 234-A, B and C is mandatory in nature, the same has to be charged. We, therefore, upheld the levy of interest under sections 234-A, B and C of the Act. 134. Before parting with the issue we would like to mention that the case was fixed for clarification on the ground that the assess....