TaxTMI 
TaxTMI 
2013 (11) TMI 1382
X X X X Extracts X X X X
X X X X Extracts X X X X
....not relying upon Section 9(1)(vi) of the Income Tax Act and in view of the statement made by the counsel, we on 03.07.2013 held that Explanation 4 to Section 9(1)(vi) of the Income Tax Act, 1961 need not be examined and applied. Reference was also made to the judgment of the Supreme Court in UNION OF INDIA VS. AZADI BACHAO ANDOLAN (2003) 263 ITR 706. In view of what transpired on 03.07.2013, with respect to the examination and applicability of Section 4 to Section 9(1)(vi), the second issue framed on 20.10.2009, does not arise for consideration and is thus not dealt with in the present judgment. The substantial Question of law framed on 20.10.2009 was recast as under: "Whether the Income Tax Appellate Tribunal was right in holding that the consideration received by the respondent Assessee on grant of licences for use of software is not royalty within the meaning of Article 12(3) to the Double Taxation Avoidance Agreement between India and the United States of America?" 4. The respondent/Assessee is an international software marketing and development company of an international group. The holding company is based in US being Infrasoft Corporation. 5. The Assessee M/s Infrasoft L....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he judgment of the Supreme Court in the case of TATA CONSULTANCY SERVICES VS. STATE OF ANDHRA PRADESH (2004) 271 ITR 401 (SC) (BCAJ) (2005) 1 SCC 308 stated that the moment copies of software programmes were made and marketed, the same become goods which were chargeable to sales tax. The Assessee company further contended that when the software were goods as held by the Supreme Court in the said case, the Assessee company would be entitle to deduction of purchase cost of software as well as other expenses incurred and the net profit alone could be taxed as business profit as per Article 7 of DTAA between USA and India. The Assessee company further objected to the show cause notice contending alternatively that even if the receipts were to be treated as royalties or even for technical services, the same having arisen through a permanent establishment in India, it was chargeable to tax as business profit as per the said Article 7 of DTAA. The Assessee further contended before the AO that Section 44D inserted by Finance Act, 2003 w.e.f 01.04.2004, making all the expenditure incurred for earning royalty or fee for technical services allowable, was liable to be given retrospective appli....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ered as a scientific work. Therefore, the software can also be said to be information developed out of scientific experience. (iii) The payment is also qualified for the use of secret formula or process. The software developed by Infrasoft when installed in a computer responds to every instruction in a specific way. It recognizes the command and as per its programming yields the desired result and reflects the same on the output devices. This argument is further strengthen from the fact that cost of the medium viz. computer discs, floppy etc., on which the program is written is negligible as compared to the overall price of software. Had it not been a secret programming, anybody could have written these types of programs and sold it at a very low price as compared to the price of the original software. (iv) The software developed by infrasoft is customizing software which are used for specific purposes like design of highways, railways, airport, port, mines etc. This software are purchased by private consultant or end users and they further exploits for commercial purposes. This clearly falls under definition of 'royalty'." 12. In view of the above reasoning, the AO treated th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ction 44D read with Section 115A. 14. The CIT(A) vide the order dated 10.01.2008, rejected the submissions of the Assessee company. The CIT(A) in his order noted that the Assessee company was engaged in licensing of MX software which is an engineering friendly tool for designing all types of road projects to Indian customers. He noted the clarification on behalf of the Assessee company that the standard MX software needed to be customized depending on the country-wise, project-wise and customer specific requirements and that the software was supplied by the Assessee company to customers in India only after such customization to include Indian standard of road construction and project specific requirements of the Indian customers. On the issue of the Assessee company having PE in India in the form of a branch office, the CIT(A) noted that there was no dispute that the branch office of the Assessee company had been opened in terms of the approval granted by the Reserve Bank of India and constituted a PE in India. 15. The CIT(A) examined a sample representative agreement between the Assessee company and one of its Indian customers for software licensing and maintenance to ascertain ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....right sale or purchase, the consideration is for transfer of such design, secret formula etc. and could not be treated as royalty. The CIT(A) finally held that the amount received by the Assessee Company from its Indian customers under software licence agreement was in the nature of royalty and same was chargeable to tax in India as per Explanation 2 to Section 9(1)(vi). The CIT(A) rejected the plea of the Assessee company wherein the Assessee company had relied on the revised OECD commentary to contend that only transfer that enabled a transferee to commercially exploit a software copyright gave rise to royalty income and as only limited right to use the software had been transferred, the amount received for such limited use was not royalty income. The CIT(A) rejected the contention of the Assessee company holding that OECD had given a very conservative interpretation of the word "used" and the same was not applicable in the facts of the case of the Assessee company. The CIT(A) noted that the said revised OECD commentary on software payment had not been accepted even by some of the OECD member countries and was not applicable in India since India was not even a member of OECD and ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n India. 4.8.4 A copy of software supplied by the appellant did not amount to a sale but it is a licence to use the software. This is because software is an intellectual property right (IPR) which can be licensed to one use and can be given further to any number of user. In other words the IPR in software still remain intact with the supplier. Thus effectively the consideration paid is only for license use. It is pertinent to mention here that the Finance Act, 2004 has inserted Category No.55B to include intellectual property services" to mean. "(a) transferring whether permanent or otherwise or (b) permitting use or enjoyment of any intellectual property right" for levy of service tax. This amendment has been noticed by the CESTAT in Araco Corporation v. CCE [2005] (180) ELT 91 (Tri- Bang). 4.8.5 By the expedient of "deeming fiction" or inclusive definition" Parliament and State Legislatures are competent to give a specific definition to a particular transaction. Such definition is confined to the specific statute only. Such definition cannot be imported into a different statue which defines the same transaction differently. The necessary corollary is that "sales treatme....
X X X X Extracts X X X X
X X X X Extracts X X X X
....der the Act or under the DTAA. The Tribunal noted the decision of a Special Bench of ITAT in the case of MOTOROLA INC., ERICSON RADIO SYSTEM AB AND NOKIA NETWORKS OY VS. DEPUTY CIT (2005) 147 TAXMAN 39 (DEL.). The Tribunal noted that the Special Bench of ITAT referring to the definition of "copyright", as given in Section 14 of the Copyright Act, 1957, had noted that the right mentioned in sub-clause (ii) of clause (b) of Section 14 was available only to a computer programme and if the licensees did not have any of such rights, as mentioned in clauses (a) and (b) of Section 14, it would mean that they did not have any right in the copyright and in such cases, the payments made to them could not be characterized as royalty under the Act for DTAA. The ITAT noted that the Special Bench of the Tribunal in the case of MOTOROLA INC. (SUPRA), had held that since the licensees were not allowed to exploit the computer software commercially, they had acquired under licence agreement, only the copy righted software which by itself was an article and not any copyright therein. The ITAT relying on the judgment in the case of MOTOROLA INC. (SUPRA), noted that in the case of the Assessee company,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....or the same could not be said to be received as consideration for the use of or right to use of any copyright to bring it within the definition of royalty as given in the DTAA. It was held that what the Assessee had acquired was only a copy of the copyrighted articles whereas the copyright remained with the owner and the Assessee had acquired a computer programme for being used in its business and no right was granted to the Assessee to utilize the copyright of a computer programme and thus it was held that the payment for the same was not in the nature of royalty. 22. The ITAT noted that the CIT(A) had distinguished the case of SAMSUNG ELECTRONICS (SUPRA) on the basis that the software licenced by the Assessee in the case of SAMSUNG ELECTRONICS (SUPRA) was off the shelf software whereas the software in the case of the Assessee Company required to be customized to meet the needs of an Indian customer. The ITAT held that the customization of the concerned software or the professional services rendered by the Assessee company for such customization had not resulted in any material change in the terms and conditions of the licence agreement or in the relationship between the Assessee....
X X X X Extracts X X X X
X X X X Extracts X X X X
....elied upon the decision of the Andhra Pradesh High Court in the case of COMMISSIONER OF INCOME TAX VS SAMSUNG ELECTRONICS CO. LTD (2012) 345 ITR 494 (KARN) to contend that right to make a copy of the software and storing the same in the hard disk of the designated computer and taking backup copy would amount to copyright work under section 14(1) of the Copyright Act and the payment made for the grant of the licence for the said purpose would constitute royalty. 27. Contradicting the stand of the appellant/Revenue, learned counsel appearing for the Assessee company/respondent submitted that what was transferred was neither the copyright in the software nor the use of the copyright in the software, but what was transferred was the right to use the copyrighted material which was clearly distinct from the rights in a copyright. Learned counsel contended that no doubt, if right to use the copyright had been transferred, the same would give rise to royalty. But where right that is transferred is not a right to use the copyright but is only limited to the right to use the copyrighted material, the same would not give rise to any royalty income and would be business income. 28. We have e....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ent. 33. Section 90 of the Act, 1961 lays down as under: "90. (1) The Central Government may enter into an agreement with the Government of any country outside India or specified territory 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 incometax in that country or specified territory, as the case may be, or (ii) income-tax chargeable under this Act and under the corresponding law in force in that country or specified territory, as the case may be, 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 specified territory, as the case may be, or (c) for exchange of information for the prevention of evasion or avoidance of incometax chargeable under this Act or under the corresponding law in force in that country or specified territory, as the case may be, or investigation of cases of such evasion or avoidance, or (d) for recovery of income-tax under this Act and under the corresponding law in force in that country or specified territory, as the case may....
X X X X Extracts X X X X
X X X X Extracts X X X X
....said Assessee. In case the provisions of this Act are more onerous and burdensome then the provisions of this Act would not apply and the Assessee would be governed squarely by the provisions of the double taxation avoidance agreement. 35. Section 91 of the Act lays down as under: "91(1) If any person who is resident in India in any previous year proves that, in respect of his income which accrued or arose during that previous year outside India (and which is not deemed to accrue or arise in India), he has paid in any country with which there is no agreement under section 90 for the relief or avoidance of double taxation, income-tax, by deduction or otherwise, under the law in force in that country, he shall be entitled to the deduction from the Indian income-tax payable by him of a sum calculated on such doubly taxed income at the Indian rate of tax or the rate of tax of the said country, whichever is the lower, or at the Indian rate of tax if both the rates are equal. (2) If any person who is resident in India in any previous year proves that in respect of his income which accrued or arose to him during that previous year in Pakistan he has paid in that country, by deduction....
X X X X Extracts X X X X
X X X X Extracts X X X X
....a country with which India has not signed a double taxation avoidance agreement. This actually gives relief to Assessee in both situations, one where there is a double taxation avoidance agreement with a corresponding country under section 90 and second in cases where there is no double taxation avoidance agreement under section 91. Under the provisions of section 91 a person who has paid tax in any country with which there is no agreement under section 90, would be entitled to deduction from the Indian income tax payable by him of a sum calculated on such doubly taxed income at a lower of the two rates of tax that is Indian rate of tax or the rate of tax of the said country whichever is lower and in case both the rates are equal then at the Indian rate of tax. 37. In the case of DIT V. RIO TINTO TECHNICAL SERVICES (2012) 340 ITR 507 (DEL) the Delhi High Court has held as under: Section 90(2) mandates that where the Central Government has entered into a Double Taxation Avoidance Agreement under subsection (1) for granting relief of tax or, as the case may be, avoidance of double taxation, then in relation to the assessee to whom the agreement applies, the provisions of the Act a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n of the terms of DTAs which would automatically override the provisions of the Income-tax Act in the matter of ascertainment of chargeability to income-tax and ascertainment of total income, to the extent of inconsistency with the terms of DTAC." 38. The Supreme Court of India in the case of AZADI BACHAO ANDOLAN (SUPRA) has laid down that in case of conflict the provisions of the Double Taxation Avoidance Agreement would prevail over the statutory provisions of the Act in case the same are more beneficial to the Assessee and while discussing the judgments of various High Courts has held as under: 22. The Andhra Pradesh High Court in CIT v. Visakhapatnam Port Trust [(1983) 144 ITR 146 (AP)] held that provisions of Sections 4 and 5 of the Income Tax Act are expressly made "subject to the provisions of the Act" which means that they are subject to the provisions of Section 90. By necessary implication, they are subject to the terms of the Double Taxation Avoidance Agreement, if any, entered into by the Government of India. Therefore, the total income specified in Sections 4 and 5 chargeable to income tax is also subject to the provisions of the agreement to the contrary, if any. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Agreement was thus held to operate as a bar on the power of the Indian Government to tax and that the bar would operate on Sections 4 and 5 of the Income Tax Act, 1961, and take away the power of the Indian Government to levy tax on the income in respect of certain categories as referred to in certain articles of the Agreement. The High Court summed up the situation by observing (ITR at pp. 512-513): "The effect of an 'agreement' entered into by virtue of Section 90 of the Act would be: (i) if no tax liability is imposed under this Act, the question of resorting to the agreement would not arise. No provision of the agreement can possibly fasten a tax liability where the liability is not imposed by this Act; (ii) if a tax liability is imposed by this Act, the agreement may be resorted to for negativing or reducing it; (iii) in case of difference between the provisions of the Act and of the agreement, the provisions of the agreement prevail over the provisions of this Act and can be enforced by the Appellate Authorities and the court. 28. A survey of the aforesaid cases makes it clear that the judicial consensus in India has been that section 90 is specifically intended to enable....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the effect of an „agreement‟ entered into by virtue of Section 90 of the Act would be: (i) if no tax liability is imposed under this Act, the question of resorting to the agreement would not arise. No provision of the agreement can possibly fasten a tax liability where the liability is not imposed by this Act; (ii) if a tax liability is imposed by this Act, the agreement may be resorted to for negativing or reducing it; (iii) subject to above, in case of difference between the provisions of the Act and of the agreement, the provisions of the agreement prevail over the provisions of this Act and can be enforced by the Appellate Authorities and the court. 42. The Supreme Court of India has thus held that the judicial consensus in India has been that section 90 is specifically intended to enable and empower the Central Government to issue a notification for implementation of the terms of a Double Taxation Avoidance Agreement. When that happens, the provisions of such an agreement, with respect to cases to which they apply, would operate even if inconsistent with the provisions of the Act, to advantage of an assessee. A notification under section 90 towards implementat....
X X X X Extracts X X X X
X X X X Extracts X X X X
....company is subject to unlimited fiscal liability in that State. In the case of a company, however, several factors enter the picture and render the decision difficult. First, the company is necessarily incorporated and usually registered under the tax law of a State that grants it corporate status. A corporation has administrative activities, directors and managers who reside, meet and take decisions in one or several places. It has activities and carries on business. Finally, it has shareholders who control it. Hence, it is opined: "When all these elements coexist in the same country, no complications arise. As soon as they are dissociated and 'scattered' in different States, each country may want to subject the company to taxation on the basis of an element to which it gives preference; incorporation procedure, management functions, running of the business, shareholders' controlling power. Depending on the criterion adopted, fiscal residence will abide in one or the other country. All the European countries concerned, except France, levy tax on the worldwide profit at the place of residence of the company considered. South Korea, India and Japan in Asia, Australia and N....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nterpreting the article of the Treaty Against Avoidance of Double Taxation, the Federal Court said (at p. 5): "The non-resident can benefit from the exemption regardless of whether or not he is taxable on that capital gain in his own country. If Canada or the US were to abolish capital gains completely, while the other country did not, a resident of the country which had abolished capital gains would still be exempt from capital gains in the other country." 103. According to Klaus Vogel: "Double Taxation Convention establishes an independent mechanism to avoid double taxation through restriction of tax claims in areas where overlapping tax claims are expected, or at least theoretically possible. In other words, the contracting States mutually bind themselves not to levy taxes or to tax only to a limited extent in cases when the treaty reserves taxation for the other contracting States either entirely or in part. Contracting States are said to 'waive' tax claims or more illustratively, to divide 'tax sources', the 'taxable objects', amongst themselves." Double Taxation Avoidance Treaties were in vogue even from the time of the League of Nations. The experts appointed in the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....x on the corporation's worldwide profit. The company is subject to unlimited fiscal liability in that State. In the case of a company, however, several factors enter the picture and render the decision difficult. First, the company is necessarily incorporated and usually registered under the tax law of a State that grants it corporate status. A corporation has administrative activities, directors and managers who reside, meet and take decisions in one or several places. It has activities and carries on business. Finally, it has shareholders who control it. When all these elements coexist in the same country, no complications arise. As soon as they are dissociated and „scattered‟ in different States, each country may want to subject the company to taxation on the basis of an element to which it gives preference; incorporation procedure, management functions, running of the business, shareholders' controlling power. Depending on the criterion adopted, fiscal residence will abide in one or the other country. 46. The Supreme Court held that liability to taxation is a legal situation; payment of tax is a fiscal fact. For the purpose of application of Article 4 of DT....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the terms of the Agreement and the taxation statute, the Agreement alone would prevail. In the present case there is an Agreement for avoidance of double taxation between India and USA and the Assessee is covered by the same. The chargeability to tax of the income of the Assessee would have to be thus governed by the provisions of the DTAA i.e. India - US Double Taxation Avoidance Agreement. In case the income of the Assessee is chargeable under the DTAA then the provisions of the Agreement would prevail over the provisions of the Act, even if they are inconsistent with the DTAA. 50. To further resolve the controversy we need to examine the provisions of the Indo US DTAA. We notice that the Authorities below and the Tribunal have referred to Article 13 of the Indo - UK DTAA whereas in the Memo of appeal the Revenue has relied upon Article 12 of the Indo - US DTAA and both the counsels relied upon and referred to the Indo - US DTAA at the time of hearing of the present Appeal. The Provisions of Articles 7 and 13 of the Indo - UK DTAA and Articles 7 and 12 of the Indo - US DTAA for the purposes of the present case are pari-materia so we are referring to the same. Article 7 of the I....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s of and subject to the limitations of the taxation laws of that State. However, no such deduction shall be allowed in respect of amounts, if any, paid (otherwise than towards reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents, know-how or other rights, or by way of commission or other charges for specific services performed or for management, or, except in the case of banking enterprises, by way of interest on moneys lent to the permanent establishment. Likewise, no account shall be taken, in the determination of the profits of a permanent establishment, for amounts charged (otherwise than toward reimbursement of actual expenses), by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents, know-how or other rights, or by way of commission or other charges for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the head ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....permanent establishment, the profits would be calculated on the basis of an arm‟s length principle which really implies that if two independent entities were carrying on business with each other. The profit that the enterprise would earn through the said permanent establishment would be the profit that an independent enterprise would have earned if it was dealing with the enterprise in question. However, in case the profits were not so determinable than the reasonable profits on estimation basis would be carried out. 53. Clause 3 of Article 7 lays down the deductible expenses which an enterprise would be entitled to while computing the profits attributable to the permanent establishment. The permanent establishment is permitted to deduct expenses that are incurred for the purposes of conduct of business of the permanent establishment. The broad expenses that are permitted to be deducted relate to execution, in general administrative expenses, research and development expenses, interest and other expenses incurred for the purposes of an enterprise as a whole irrespective of the fact whether the same are incurred in the country of residents of an enterprise or in a country whe....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... for the purpose of storage, display, or occasional delivery of goods or merchandise belonging to the enterprise ; (b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display, or occasional delivery ; (c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise ; (d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise ; (e) the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research or for other activities which have a preparatory or auxiliary character, for the enterprise. 4. Notwithstanding the provisions of paragraphs 1 and 2, where a person-other than an agent of an independent status to whom paragraph 5 applies - is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first-mentioned State, if : (a) he has and habitually exercises in the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....x of the income of the Assessee would have to be governed by the provisions of the Indo US DTAA and the provisions of the Agreement would prevail over the provisions of the Act even if they are inconsistent with the same. 57. Article 12 of the DTAA with USA stipulates as under: Royalties and fees for technical services 1. Royalties or fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties or fees for technical services may 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 or fees for technical services is a resident of the other Contracting State the tax so charged shall not exceed 10 per cent. of the gross amount of the royalties or fees for technical services. 3. The term "royalties " as used in this article means: (a) payments of any kind received as consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connecti....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... or fees for included services paid to the residents of the other contracting State then the tax has been limited in percentage depending upon the number of years the convention has effect. 60. Clause 3 of Article 12 lays down that the term royalty means payment of any kind received as consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work.............., including gains derived from the alienation of any such right or property which are contingent on the productivity, use of deposition thereof. The term royalty has been defined by clause 3 of Article 12 as payment received for the use of, or the right to use any copyright. 61. The amount received by the Assessee company had been treated as royalty income by the AO and the CIT(A) on the basis of Explanation 2 to Section 9(1)(vi) of the Act holding that there was transfer of some rights (including the granting of a licence) in respect of the copyright. 62. In terms of the law as laid down by the Supreme Court of India in AZADI BACHAO ANDOLAN (SUPRA) and since the Assessee is governed by the Indo US DTAA, the income of the Assessee would be chargeable to tax in terms of the prov....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... definition that a computer programme mentioned in Clause (b) of the section has all the rights mentioned in Clause (a) and in addition also the right to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer programme. This additional right was substituted w.e.f. 15.1.2000. The difference between the earlier provision and the present one is not of any relevance. What is to be noted is that the right mentioned in Sub-clause (ii) of Clause (b) of Section 14 is available only to the owner of the computer programme. It follows that if any of the cellular operators does not have any of the rights mentioned in Clauses (a) and (b) of Section 14, it would mean that it does not have any right in a copyright. In that case, the payment made by the cellular operator cannot be characterized as royalty either under the Income-tax Act or under the DTAA. The question, therefore, to be answered is whether any of the operators can exercise any of the rights mentioned in the above provisions with reference to the software supplied by the Assessee. 157. We may first look at the supply contract itself to find out what JTM, one of the cellular operators,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....or make the Software or Documentation or any portions or aspects thereof (including any methods or concepts utilized or expressed therein) available to any person except to its employees on a "need to know" basis; (b) not make any copies of Software or Documentation or parts thereof, except for archival backup purposes; (c) when making permitted copies as aforesaid transfer to the copy/copies any copyright or other marking on the Software or Documentation. (d) Not use the Software or Documentation for any other purpose than permitted in this Article 20, Licence or sell or in any manner alienate or part with its possession. (e) Not use or transfer the Software and/or the Documentation outside India without the written consent of the Contractor and after having received necessary export or re-export permits from relevant authorities. This clause places stringent restrictions on the cellular operator so far as the use of software is concerned. It first says that the cellular operator cannot make the software or portions thereof available to any person except to its employees and even with regard to employees it has to be only on a "need to know basis" which means that even t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....M or any cellular operator acquired a copyright in the software. 162. A conjoint reading of the terms of the supply contract and the provisions of the Copyright Act, 1957 clearly shows that the cellular operator cannot exploit the computer software commercially which is the very essence of a copyright. In other words a holder of a copyright is permitted to exploit the copyright commercially and if he is not permitted to do so then what he has acquired cannot be considered as a copyright. In that case, it can only be said that he has acquired a copyrighted article. A small example may clarify the position. The purchaser of a book on income-tax acquires only a copyrighted article. On the other hand, a recording company which has recorded a vocalist has acquired the copyright in the music rendered and is, therefore, permitted to exploit the recording commercially. In this case the music recording company has not merely acquired a copyrighted article in the form of a recording, but has actually acquired a copyright to reproduce the music and exploit the same commercially. In the present case what JTM or any other cellular operator has acquired under the supply contract is only the co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....demonstrated to be wrong, Clause (v) of Explanation 2 below Section 9(1) is not an impediment to accepting the assessee's contention. 165. We may also usefully refer to the Commentary on the OECD Model Convention (dated 28.1.2003) which is of persuasive value and which throws considerable light on the character of the transaction and the treatment to be given to the payments for tax purposes. Paragraph 14 of the Commentary, a copy of which was filed in Paper book No. V is relevant: COMMENTARY ON ARTICLE 12 - PAPER BOOK V "14. In other types of transactions, the rights acquired in relation to the copyright are limited to those necessary to enable the user to operate the program, for example, where the transferee is granted limited rights to reproduce the program. This would be the common situation in transactions for the acquisition of a program copy. The rights transferred in these cases are specific to the nature of computer programs. They allow the user to copy the program, for example onto the user's computer hard drive or for archival purposes. In this context, it is important to note that the protection afforded in relation to computer programs under copyright la....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s a transfer of a copyright right. 167. Paragraph 4 says that if a person acquires a copy of a computer programme but does not acquire any of the four listed copyright rights, he gets only a copyrighted article but no copyright. 168. The actual regulations bring out the distinction very clearly between the copyright right and a copyrighted article. They also specify the four rights which, if acquired by the transferee, constitute him the owner of a copyright right. They are: (a) The right to make copies of the computer programme for purposes of distribution to the public by sale or other transfer of ownership, or by rental, lease, or lending. (ii) The right to prepare derivative computer programmes based upon the copyrighted computer programme (iii) The right to make a public performance of the computer programme. (iv) The right to publically display the computer programme. 169. A copyrighted article has been defined in the regulation (page 147 of the paper book) as including a copy of a computer programme from which the work can be perceived, reproduced or otherwise communicated either directly or with the aid of a machine or device. The copy of the programme may be ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n transactions for the acquisition of a program copy. The rights transferred in these cases are specific to the nature of computer programs. They allow the user to copy the program, for example onto the user's computer hard drive or for archival purposes. Copying the program onto the computer's hard drive or random access memory or making an archival copy is an essential step in utilizing the program. Therefore, rights in relation to these acts of copying, where they do no more than enable the effective operation of the program by the user, should be disregarded in analyzing the character of the transaction for tax purposes. Payments in these types of transactions would be dealt with as commercial income in accordance with Article 7. 67. The Tribunal further referred to the proposed amendments to the regulations of the Internal Revenue Service (IRS) in the USA not as binding but as having persuasive value and throwing light on the question i.e. the difference between a copyright right and a copyrighted article. The Tribunal noticed that the U.S. regulations distinguished between transfer of copyright rights and transfer of copyrighted articles based on the type of rights t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....herein. The transfer of the ownership of a physical thing in which copyright exists gives to the purchaser the right to do with it (the physical thing) whatever he pleases, except the right to make copies and issue them to the public. Just because one has the copyrighted article, it does not follow that one has also the copyright in it. 71. In the case of DIT V. ERICSSON A.B. (2012) 343 ITR 470 (DEL), one issue that the Delhi High Court was considering was whether the consideration for supply of software was payment by way of royalty and hence assessable both under Section 9(1)(vi) and the Double Taxation Avoidance Agreement between the government of India and Sweden? The High Court relying on the Judgment of the Supreme Court of India in TATA CONSULTANCY SERVICES VS. STATE OF ANDHRA PRADESH, (2004) 271 ITR 401 (SC), held that software incorporated on a media would be goods and liable to sales tax. The High Court has held as under: 56. A fortiorari when the assessee supplies the software which is incorporated on a CD, it has supplied tangible property and the payment made by the cellular operator for acquiring such property cannot be regarded as a payment by way of royalty. ......
X X X X Extracts X X X X
X X X X Extracts X X X X
....eld that payment in question is not royalty which would come within the mischief of clause (vi), the Explanation will have no application and that the question of applicability of the Explanation would arise only when payment is to be treated as "royalty" within the meaning of clause (vi) or "fee for technical services" as provided in clause (vii) of the Act. 73. In the case of DASSAULT SYSTEMS K. K., IN RE (2010) 322 ITR 125 (AAR) the Authority on Advance Ruling has held as under: Passing on a right to use and facilitating the use of a product for which the owner has a copyright is not the same thing as transferring or assigning rights in relation to the copyright. The enjoyment of some or all the rights which the copyright owner has, is necessary to trigger the royalty definition. Viewed from this angle, a non-exclusive and non-transferable licence enabling the use of a copyrighted product cannot be construed as an authority to enjoy any or all of the enumerated rights ingrained in a copyright. Where the purpose of the licence or the transaction is only to establish access to the copyrighted product for internal business purpose, it would not be legally correct to state that t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hatever be its nature, can be characterized as transfer. 74. The Authority on Advance Ruling in the case of DASSAULT SYSTEMS K. K., IN RE (SUPRA) negated the contention of the revenue that the right permitting the licensee to make a copy of the programme by loading the programme on the hard disk of the computer amounted to assignment of a right in the copyright in terms of section 14 of the Copyright Act as under: It has been contended on behalf of the Revenue that the right to reproduce the work in any material form including the storing of it in any medium by electronic means (vide section 14(a)(i) of the Copyright Act) must be deemed to have been conveyed to the end user. It is pointed out that a CD without right of reproduction on the hard disc is of no value to the end-user and such a right should necessarily be transferred to make it workable. It appears to us that the contention is based on a misunderstanding of the scope of right in sub-clause (i) of section 14(a). As stated in Copinger's treatise on Copyright, "the exclusive right to prevent copying or reproduction of a work is the most fundamental and historically oldest right of a copyright owner". We do not think....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r. It seems to us that reproduction and adaptation envisaged by section 14(a)(i) and (vi) can contextually mean only reproduction and adaptation for the purpose of commercial exploitation. Copyright being a negative right (in the sense explained in paragraph 9 supra), it would only be appropriate and proper to test it in terms of infringement. What has been excluded under section 52(aa) is not commercial exploitation, but only utilizing the copyrighted product for one's own use. The exclusion should be given due meaning and effect; otherwise, section 52(aa) will be practically redundant. In fact, as the law now stands, the owner need not necessarily grant licence for mere reproduction or adaptation of work for one's own use. Even without such licence, the buyer of product cannot be said to have infringed the owner's copyright. When the infringement is ruled out, it would be difficult to reach the conclusion that the buyer/licensee of product has acquired a copyright therein. 75. The Authority on Advance Ruling in the case of DASSAULT SYSTEMS K. K., IN RE (SUPRA) further approved the reasoning of the Special Bench of Income-tax Appellate Tribunal in MOTOROLA INC. (SUP....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... CONSULTANCY CASE (SUPRA) was considering the question whether the sale of software was sale of goods and thus exigible to sales tax. The Supreme Court held that software may be intellectual property and contained on a medium was a marketable commodity and an object of trade and commerce. The Supreme Court of India held as under: "15. Sorabjee submitted that the question as to whether software is tangible or intangible property has been considered by the American Courts. He fairly pointed out that in America there is a difference of opinion amongst the various Courts. He submitted that, however, the majority of the Courts have held that a software is an intangible property. He showed to the Court a number of American Judgments, viz., the cases of Commerce Union Bank v. Tidwell 538 S.W.2d 405; State of Alabama v. Central Computer Services. INC 349 So. 2d 1156; The First National Bank of Fort Worth v. Bob Bullock 584 S.W.2d 548; First National Bank of Springfield v. Department of Revenue 421 NE2d 175; Compuserve, INC. v. Lindley 535 N.E. 2d 360 and Northeast Datacom, Inc., et al v. City of Wallingford 563 A2d 688. In these cases, it has been held that 'computer software' is....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e additional incidents of ownership include the right to produce and sell more copies, the right to change the underlying work, the right to license its use to other and the right to transfer the copyright itself. It is these incidents of the intellectual, intangible competent of the software property that Wallingford has impermissibly assessed as tangible property by linking these incorporeal incidents with the tangible medium in which the software is stored and transmitted." 16. It has been fairly brought to the attention of the Court that many other American Courts have taken a different view. Some of those cases are South Central Bell Telephone Co. v. Sidney J. Barthelemy 643 So.2d 1240; Comptroller of the Treasury v. Equitable Trust Company 464 A.2d 248; Chittenden Trust Co. v. Commissioner of Taxes 465 A.2d 1100; University Computing Company v. Commissioner of Revenue for the State of Tennessee 677 S.W.2d 445 and Hasbro Industries, INC. v. John H. Norberg, Tax Administrator 487 A.2d 124. In these cases, the Courts have held that when stored on magnetic tape, disc or computer chip, this software or set of instructions is physically manifested in machine readable form by arra....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l or song. ....... 19. Thus this Court has held that the term "goods", for the purposes of sales tax, cannot be given a narrow meaning. It has been held that properties which are capable of being abstracted, consumed and used and/or transmitted, transferred, delivered, stored or possessed etc. are "goods" for the purposes of sales tax. The submission of Mr. Sorabjee that this authority is not of any assistance as a software is different from electricity and that software is intellectual incorporeal property whereas electricity is not, cannot be accepted. In India the test, to determine whether a property is "goods", for purposes of sales tax, is not whether the property is tangible or intangible or incorporeal. The test is whether the concerned item is capable of abstraction, consumption and use and whether it can be transmitted, transferred, delivered, stored, possessed etc. Admittedly in the case of software, both canned and uncanned, all of these are possible." 78. The Supreme Court of India in TATA CONSULTANCY CASE (SUPRA) referred to the Judgment of the Supreme Court in ASSOCIATED CEMENT COMPANIES LTD. VS COMMISSIONER OF CUSTOMS (2001) 4 SCC 593 as under: 43. Similar wo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e paintings are worth millions. A painting or a portrait may be specially commissioned or an article may be tailormade. This aspect is irrelevant since what is taxed is the final product as defined and it will be an absurdity to contend that the value for the purposes of duty ought to be the cost of the canvas and the oil paint even though the composite product, i.e., the painting, is worth millions. ...... 48. The above view, in our view, appears to be logical and also in consonance with the Customs Act. Similarly in Advent Systems Ltd. v. Unisys Corporation 1925 F 2d 670 it was contended before the Court in the United States that software referred to in the agreement between the parties was a "product" and not a "good" but intellectual property outside the ambit of the Uniform Commercial Code. In the said Code, goods were defined as "all things (including specially manufactured goods) which are moveable at the time of the identification for sale". Holding that computer software was a "good" the Court held as follows : "Computer programs are the product of an intellectual process, but once implanted in a medium they are widely distributed to computer owners. An analogy can be ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....split up. What the buyer purchases and pays for is not the disc or the CD. As in the case of paintings or books or music or films the buyer is purchasing the intellectual property and not the media i.e. the paper or cassette or disc or CD. Thus a transaction sale of computer software is clearly a sale of "goods" within the meaning of the term as defined in the said Act. The term "all materials, articles and commodities" includes both tangible and intangible/incorporeal property which is capable of abstraction, consumption and use and which can be transmitted, transferred, delivered, stored, possessed etc. The software programmes have all these attributes. 80. S.B. Sinha J. in TATA CONSULTANCY CASE (SUPRA) concurring with the decision of the Majority referred to the Judgment in the case of South Central Bell Telephone Co. v. Sidney J. Barthelemny, et al. [643 So. 2d 1240 : 36 A.L.R. 5th 689], the Supreme Court of Louisiana as under: 26. The court, however, noticed that the shift in the trend was not uniform. Having regard to the fact that the computer software became the knowledge and understanding and upon discussing the characteristics of computer software and classification th....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... : "It is now common knowledge that books, music, and even movies or other audio/visual combinations can be copied from one medium to another. They are also all available on computer in such forms as floppy disc, tape, and CD-ROM. Such movies, books, music, etc .can all be delivered by and/or copied from one medium to another, including electrical impulses with the use of a modem. Assuming there is sufficient memory space available in the computer hard disc drive such movies, books, music, etc .can also be recorded into the permanent memory of the computer such as was done with the software in this case. 93- 1072, at p. 4, 5. 631 So.2d at 1346-47 (dissenting opinion). See also Shontz. Supra, at 168-170; Harris, supra, at 187. That the information, knowledge, story, or idea, physically manifested in recorded form, can be transferred from one medium to 15 another does not affect the nature of that physical manifestation as corporeal, or tangible. Shontz, supra, at 168-170. Likewise, that the software can be transferred from 1248 one type of physical recordation, e.g., tape, to another type, e.g., disk or hard drive, does not alter the nature of the software, Shontz, supra, at 168- ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e understanding. 83. It has been further held that the purchaser of computer software neither desires nor receives mere knowledge, but rather receives a certain arrangement of matter that will make his or her computer perform a desired function. This arrangement of matter, physically recorded on some tangible medium, constitutes a corporeal body. The form of the delivery of the software-magnetic tape or electronic transfer via modem- is of no relevance. That the software can be transferred to various media i.e. from tape to disc, or tape to hard drive, or even that it can be transferred over the telephone lines, does not take away from the fact that the software was ultimately recorded and stored in physical form upon a physical object. Recorded as such, the software is not merely an incorporeal idea to be comprehended, and would be of no use if it were. Rather, the software is given physical existence to make certain desired physical things happen. One cannot escape the fact that software, recorded in physical form, becomes inextricably intertwined with, or part and parcel of the corporeal object upon which it is recorded, be that a disc, tape, hard drive, or other device. That t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....et of support information to the Licensee. Licensee shall pay Infrasoft a fee for additional copies of any printed support information supplied by Infrasoft. d) Liecensee may make one copy of the software and associated support information for backup purposes, provided that the copy shall include Infrasoft's copyright and other proprietary notices. All copies of the Software shall be the exclusive property of Infrasoft. e) The Software includes a licence authorisation device, which restricts the use of the Software as specified in the Infrasoft Licence Schedule. f) The Software shall be used only for Licensee's own business as defined within the Infrasoft Licence Schedule and shall not, without prior written consent from Infrasoft: (i) be loaned, rented, sold, sublicensed or transferred to any third party (ii) used by any parent, subsidiary or affiliated entity of Licensee (iii) Used for the operation of a service bureau or for data processing g) If Licensee was granted an educational licence, as identified on the Infrasoft Licence Schedule, the Software may only be used for instruction or research purposes and not for any commercial purposes. h) Licensee may not copy....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... each site. The licensee is permitted to make only one copy of the software and associated support information and that also for backup purposes. It is also stipulated that the copy so made shall include Infrasoft‟s copyright and other proprietary notices. All copies of the Software are the exclusive property of Infrasoft. The Software includes a licence authorisation device, which restricts the use of the Software. The software is to be used only for Licensee‟s own business as defined within the Infrasoft Licence Schedule. Without the consent of the Assessee the software cannot be loaned, rented, sold, sublicensed or transferred to any third party or used by any parent, subsidiary or affiliated entity of Licensee or used for the operation of a service bureau or for data processing. The Licensee is further restricted from making copies, decompile, disassemble or reverse-engineer the Software without Infrasoft‟s written consent. The Software contains a mechanism which Infrasoft may activate to deny the Licensee use of the Software in the event that the Licensee is in breach of payment terms or any other provisions of this Agreement. All copyrights and intellectual ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... article, it does not follow that one has also the copyright in it. It does not amount to transfer of all or any right including licence in respect of copyright. Copyright or even right to use copyright is distinguishable from sale consideration paid for "copyrighted" article. This sale consideration is for purchase of goods and is not royalty. 88. The license granted by the Assessee is limited to those necessary to enable the licensee to operate the program. The rights transferred are specific to the nature of computer programs. Copying the program onto the computer's hard drive or random access memory or making an archival copy is an essential step in utilizing the program. Therefore, rights in relation to these acts of copying, where they do no more than enable the effective operation of the program by the user, should be disregarded in analyzing the character of the transaction for tax purposes. Payments in these types of transactions would be dealt with as business income in accordance with Article 7. 89. There is a clear distinction between royalty paid on transfer of copyright rights and consideration for transfer of copyrighted articles. Right to use a copyrighted art....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ncome Tax Act or under the DTAA. 92. The licensees are not allowed to exploit the computer software commercially, they have acquired under licence agreement, only the copy righted software which by itself is an article and they have not acquired any copyright in the software. In the case of the Assessee company, the licensee to whom the Assessee company has sold/licensed the software were allowed to make only one copy of the software and associated support information for backup purposes with a condition that such copyright shall include Infrasoft copyright and all copies of the software shall be exclusive properties of Infrasoft. Licensee was allowed to use the software only for its own business as specifically identified and was not permitted to loan/rent/sale/sub-licence or transfer the copy of software to any third party without the consent of Infrasoft. 93. The licensee has been prohibited from copying, decompiling, de-assembling, or reverse engineering the software without the written consent of Infrasoft. The licence agreement between the Assessee company and its customers stipulates that all copyrights and intellectual property rights in the software and copies made by th....