AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2012 (2) TMI 258
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....are. Under the agreement, Ingram was appointed as a non-exclusive distributor of the products of the applicant in India. Some of the key products distributed under the agreement are Citrix XenApp, Citrix Access Gatway and Citrix Netscaler. According to the applicant, under the agreement, the software products are purchased by the distributor from the applicant and sold by the distributor. With respect to the hardware products, the applicant shifted the products directly to the distributor which in turn supplied these products to re-sellers and end-user customers. But, for the software product, Citrix XenApp, while sale and collection is made through the distributor, no physical delivery of the product is made to the distributor. On the basis of the demand of the customers for Citrix XenApp, the distributor places orders of purchase with the applicant and makes payments for the same to the applicant. The applicant then directly transmits a "key" to the end-user customer who is required to download the XenApp software. On receipt of the key, the end-user customer downloads the software from the server of the applicant. The distributor Ingram owns the responsibility for collection of ....
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....cant from the Distributor for the Citrix Subscription Advantage Program is in the nature of "fees for technical services" within the meaning of the term in Explanation 2 to clause (vii) of Section 9(1) of the Act? 5. Whether the payment received by the applicant from the Distributor for the Citrix Subscription Advantage Program, is in the nature of „royalty‟ within the meaning of the term in Article 12 of the India-Australia Tax Treaty? 6. Based on answers to questions (1) to (5) above, and in view of the facts as stated in Annexure 1, and also in the light of the declaration provided by the applicant that it does not have a permanent establishment in India in terms of Article 5 of the India-Australia Tax Treaty, whether the payment received by the applicant will be chargeable to tax in India. 7. Based on the answers to question (6) above, would the receipts by the applicant from the Distributor suffer withholding tax under section 195 of the Income-tax Act, 1961 and if yes, at what rate?" 4. Hearing under section 245R(4) was elaborate and more than once. Various statements in opposition were filed on behalf of the Revenue and replied to by the applicant. Detailed a....
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....licable product. 8. The Distributor is to pay the purchase price to the applicant as per the price list, less their applicable discount set forth in the letter of Authorisation. The Distributor is obviously to collect what is payable by the end-users. The applicant retained the sole and exclusive right to bring an action for infringement of copyright against third parties. The Distributor is to cooperate in that action. 9. Thus, on the terms of the agreement, the end-user is given the right to use the software over which the applicant has a copyright, for a subscription. That right is conferred directly on the end-user by supplying him with a key to down load the software on to his computer and to use the programme and to use the programme over which the applicant has a copyright. The end-user gets the right to use the software. What is involved in that grant of right, is the question. 10. The term „copyright‟ has not been defined in the Income-tax Act. The dictionary meaning is that it is the exclusive right given by law for a certain term of years to an author, composer, etc. or his assignee to print, publish and sell copies of his original work. According t....
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....yrighted article and where the payment is for obtaining rights limited to enabling effective operation of the software and not for the end-user to commercially exploit the underlying rights in the software, it would be inappropriate to classify the payment as royalty. It is submitted by the applicant that payment received by the applicant from Ingram is for sale of a copyrighted article and the price paid is not royalty under the provisions of the Act. 12. On the question whether the payment received is royalty within the meaning of Article 12 of the DTAC between India and Australia, in addition to reiterating the submissions made relating to the definition in the Income-tax Act, it is contended that the sum received by the applicant is in the nature of sale revenue, the right acquired by the purchaser from the sale is only to use the copyrighted article and not the right to use the copyright embedded in the software. It is pointed out that the OECD commentary also makes a distinction between the transfer of rights in the underlying copyright in the computer programme and the transfer of rights in a copy of computer programme, based on the nature and extent of rights which have be....
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.... to royalty. It is pointed out that the right parted with to the end-user and the exercise of the right so granted, also take in within it, the grant of a right to use the intellectual property. If it were not so, the use of the software would be in violation of the copyright, the Intellectual Property embedded in the software. 15. We shall notice some of the provisions of the Copyright Act before we consider the question whether the Revenue is right in its contention that the provisions of the Copyright Act cannot make a dent in the taxability of the particular income in terms of the Income-tax Act. As noticed, the Income-tax Act or DTAC does not define copyright. But Section 14 of the Copyright Act, gives the meaning of the expression „copyright‟. It says that for the purpose of that Act, copyright means the exclusive right subject to the provisions of that Act to do or authorize doing of any of the acts referred to therein in respect of a work or any substantial part thereof. In the case of a literary, dramatic or musical work other than a computer programme, the right takes in; the right (i) to produce the work in any material form including the storing of ....
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....signed by him. Regarding the mode of transfer, the provisions of Section 19 are made applicable by Section 30A of the Act. Section 51 lays down that a copyright in a work shall be deemed to be infringed, if some one does anything, the exclusive right to do which is by the Act conferred upon the owner of the copyright without a license from the owner. When a person makes for sale or hire or sells or lets for hire or distributes any work without license, it will be an infringement. Section 52 indicates what would not be an infringement of a copy right. The making of copies or adaptation of a computer programme by a lawful prossessor of a copy of such computer programme from such copy, in order to utilize the computer programme for the purpose for which it was supplied or make backup copies purely as an temporary protection against loss destruction or damage in order only to utilize the computer programme for the purpose for which it was supplied, is not an infringement. Making of copies or adaptation of the computer programme from a personally legally obtained copy for non-commercial personal use will not be an infringement. Chapter XII of the Act deals with civil remedies of the ow....
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....s the owner of that copyright. He can transfer or license that right either by himself or through an agent. When he sells or licenses the software for use, he is also selling or licensing the right to use the copyright embedded therein. If a software is used without being lawfully acquired either by purchase or by license, that would amount to an infringement of the copyright obviously because of the copyright embedded in the software. The software is a literary work and clearly the copyright of the creator over the software is an important and commercially valuable right. So, whenever a software is assigned or licensed for use, there is involved an assignment of the right to use the embedded copyright in the software or a license to use the embedded copyright, the Intellectual Property Right in the software. Therefore, it appears to us that it is not possible to divorce the software from the Intellectual Property Right of the creator of the software embedded therein. The amendment to Section 14(1)(b) of the Copyright Act, by Act 49 of 1999, clarifying that in the case of a computer programme, copyright means the right to sell or give on commercial rental or offer for sale or comme....
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.... his own use, what are the rights that pass on to the licensee or the buyer? When software is acquired either on license or on purchase, the licensee or the purchaser gets the right to use the software without being held guilty of infringement of the copyright. But a user of the software without a license or a purchase would obviously make the user of the software liable for infringement of the copyright embedded in the software. More often than not, software for such special applications like Citrix XenApp, is also patented. When the use of software, without anything more, would render the user liable for infringement of the copyright embedded in the software, can it not be said that the sale or the licensing of the software involves the grant of a right to use the copyright in the software? Will it not be the grant of a right to use the intellectual property embedded in the software? We think that it does. It is, therefore, difficult to accept the argument that the licensing of a software for use by the end-use customer, is the mere sale of a copyrighted article and does not involve the grant of a right to use the copyright in the software. 23. It is pointed out that considerati....
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....refore, even a partial right or confined right granted to the assignee would attract the definition of royalty as found in the Income-tax Act. Similarly, license recognized by Section 30 of the Copyright Act, contemplates the grant of any interest in the copyright by license. That interest can also be a limited interest or a comprehensive interest. The concept of conveying of exclusive right either by way of assignment or by way of license does not appear to be the sine qua non for coming within the definition of royalty in respect of the consideration paid for the transfer or licensing of a copyright. The fact that in Section 14 of the Copyright Act, copyright is said to mean the exclusive right to do or authorize the doing of any of the acts referred to therein, or that an exclusive licensee is equated to the owner, does not mean that the copyright holder has to convey exclusive rights either by assignment or by way of a license for attracting the definition of royalty in respect of the consideration he receives for the grant or licensing of that right. 25. In M/s. Dassault (AAR 821 of 2009), it was noticed that the core of the transaction in that case was to authorise the end-u....
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....covered by that expression. Any and every license is not what is contemplated. It should take colour from the preceding expression „transfer of rights in respect of a Copyright‟." 27. With respect, the words within brackets, „including the granting of a license‟ indicates an expansive definition. It is a devise to bring in something which might not otherwise be included in the words used. Clearly, the legislature must be taken to be aware of the possibilities ushered in by Section 30 of the Copyright Act. When words of expansion are used, is it justified to fall back upon the rule of ejusdem generis or Noscitur a sociis? Will not the application of that principle nullify the legislative intention of expanding the definition of transfer to include the grant of a license as well? With respect, we think that such a reading of the relevant provision would tend to defeat the legislative intent. In Craies on Statute Law, Seventh Edition, at page 213, it is stated "where the word defined is declared to include so and so, the definition is extensive". 28. A license is a mere permission or authority to do a particular thing. It is not transfer. One mode of e....
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....e words in a treaty has to be given meaning not strictly according to rules of interpretation of Statutes, but the meaning of the diplomat rather than a lawyer‟. (See page 751 of 263 ITR 706). So, when the convention speaks of royalty, and defines it, it must be understood as it is commonly understood. There is much to be said for the argument on behalf of the Revenue, that we should not feel ourselves constrained by the definition of Copyright in Section 14 of the Copyright Act, a definition that explicitly states that it is for the purposes of that Act, especially when construing the tax convention. 31. The article speaks of the use of or the right to use of any copyright. Use of a copyright takes place, when the copyright is used. This is distinct from the right to use a copyright. The two expressions are used disjunctively and the expression used is „or‟. The context does not warrant the reading of „or‟ as „and‟. If so, the consideration received for permitting another to use a copyright is also royalty. 32. Considerable arguments are raised on the so-called distinction between a copyright and copyrighted articles. What is a co....
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....on the point and no reference to the Copyright Act appears to be necessary. 36. In Millenium IT Software Ltd. (AAR No.835 of 2009), we have held that the payment made under the contract involved therein was royalty, based on the reasons contained therein supplementing the reasons we have given here. 37. Thus, it could be stated that there is no clear unanimity of view on the question even in this Authority. 38. A ruling by this Authority is based on the facts involved in the application leading to that ruling. It appears to be difficult to postulate the application of the doctrine of precedent to a Ruling under section 245R(4) of the Act. The Act has itself made it clear that the ruling is binding on the applicant in the application and the Revenue, in respect of that application and the transaction involved therein. 39. Even then, there is the aspect of judicial discipline and consistency involved. We have already noticed what we consider to be the divergence in views in this Authority. We are inclined to take the view that the sale or licensing for use of a copyrighted software amounts to or amounts also to the grant of a right to use a copyright. Differing view....
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....e have reasoned earlier, is also payment for use of the copyright embedded in the software. The observations in the ruling in P.No. 30 of 1999 (AAR) that countries like the USA consider the payment as royalty and the passages from Klaus Vogel quoted therein support this position. There cannot be a use of software, over which exists a copyright, without a use of the copyright therein. The payment for such use can only be royalty. We may notice here with respect, that in our view, in M/s. Dassault ruling, the scope of the expression „use of a copyright‟ used in Article 12 has not been specifically considered. For these reasons and the reasons given, leading to the ruling on question no.1, we rule on this question, that the payment received by the applicant is royalty within the meaning of Article 12 of the DTAC between India and Australia. 44. Question no. 3 concerns the character of the payment received by the applicant for grant of the right to down-load/receive version updates for software products of the applicant. We have ruled above that the payment received from the distributor for making available the software product of the applicant to the end-user is royalty w....