TaxTMI 
TaxTMI 
2013 (11) TMI 1382
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....ounsel for the respondent Assessee submitted that he was 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 i....
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....9. In reply to the said show cause notice, the Assessee company relying on the 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 ....
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.... sophisticated infrastructure and huge investments. Similarly, the software can also be considered 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 purpose....
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.... the receipts were not royalty and since the receipts were not taxable as royalty and fee for technical services, the same could not be subjected to tax under Section 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. Th....
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....transferee retains the property rights in a design, secret formula etc. and allows the use of such rights, the consideration received for such user was in the nature of royalty and where there is an outright 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) note....
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....5A of the Act which specifically refers to cases where royalties are paid to non-resident for the transfer of all or any right (including the granting of the license) in respect of any computer software to a person resident in 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 ....
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....y was for a copyright then it would classify as royalty both under the Income Tax Act, 1961 and under the DTAA. However, if the payment was for a copyrighted article then it would represent the purchase price of an article and could not be considered as royalty either under 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 softwa....
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....ame was not transferred to the Assessee. The Tribunal in the case of SAMSUNG ELECTRONICS (SUPRA) had held that the right to use of a copyright is totally different from the right to use a programme embedded in a cassette or a CD which may be a software and the payment made for 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 ITA....
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....ot fully covered within the meaning of royalty. He further contended that computer software was one of the intellectual property referred to in the Explanation 2 and transfer of rights therein by the licensor would give right to royalty income. 26. Learned Counsel for the Revenue relied 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 b....
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....es stipulate agreed rate of tax and jurisdiction on specified types of income arising in a country to tax resident of another country. 32. To resolve the controversy, we would need to examine some of the relevant provisions of the Income Tax Act and the Indo US Double Taxation Avoidance Agreement. 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 o....
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.... under this Act as well as the act of the said contracting country. Section 90 (2) lays down that where the Central Government has entered into an agreement with the government of any other country for granting relief of tax or for avoidance of double taxation, then the provisions of this Act shall apply to the Assessee only to the extent that they are more beneficial to the 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 o....
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....lief due in the said country in respect of double taxation, divided by the whole amount of the income as assessed in the said country; (iv) the expression "income-tax" in relation to any country includes any excess profits tax or business profits tax charged on the profits by the Government of any part of that country or a local authority in that country. 36. Section 91 of the Act provides relief to the taxpayers who have paid taxes to 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 ....
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....the intention of the Legislature to make a departure from the general principle of chargeability to tax under section 4 and the general principle of ascertainment of total income under section 5 of the Act, then there was no purpose in making those sections 'subject to the provisions' of the Act. The very object of grafting the said two sections with the said clause is to enable the Central Government to issue a notification under section 90 towards implementation 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 pro....
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....no meaning at all. [See also in this connection Leonhardt Andra Und Partner, GmbH v. CIT, (2001) 249 ITR 418 (Cal)] 25. In CIT v. R.M. Muthaiah [(1993) 202 ITR 508 (Kant)] the Karnataka High Court was concerned with DTAT between the Government of India and the Government of Malaysia. The High Court held that under the terms of the Agreement, if there was a recognition of the power of taxation with the Malaysian Government, by implication it takes away the corresponding power of the Indian Government. The 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 whe....
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....le Taxation Avoidance Agreement, that provision will prevail over the general provisions contained in the Act. 40. Thus, where a Double Taxation Avoidance Agreement provides is more advantageous to an assessee, irrespective of the provisions in the Act, the agreement prevails. Where there is no provision in the Agreement, it is the basic law i.e. the Income Tax Act, that will govern the taxation of income. 41. The Supreme Court of India has approved the reasoning of the KARNATAKA HIGH COURT IN CIT V. R.M. MUTHAIAH (SUPRA) that 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 Appell....
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.... hand, the tax status of a corporation is determined under the law of each of the countries where it carries on business, be it as resident or non-resident." 64. In paragraph 4.1 it is observed that the principle of universality of taxation i.e. the principle of worldwide taxation, has been adopted by a majority of States. One has to consider the worldwide income of a company to determine its taxable profit. In this system it is crucial to define the fiscal residence of a company very accurately. The State of residence is the one entitled to levy tax 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. Hence, it is opined: "When all these elements coexist in the....
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.... person no longer qualified for the exemption, the person would be liable to comprehensive taxation." 98. In John N. Gladden v. Her Majesty the Queen [85 DTC 5188 at p. 5190] the principle of liberal interpretation of tax treaties was reiterated by the Federal Court, which observed: "Contrary to an ordinary taxing statute a tax treaty or convention must be given a liberal interpretation with a view to implementing the true intentions of the parties. A literal or legalistic interpretation must be avoided when the basic object of the treaty might be defeated or frustrated insofar as the particular item under consideration is concerned." 100. Interpreting 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: "Dou....
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....y from a company law standpoint is usually determined under the law of the State of incorporation or of the country where the real seat is located. On the other hand, the tax status of a corporation is determined under the law of each of the countries where it carries on business, be it as resident or non-resident. 45. The Supreme Court held that the principle of universality of taxation i.e. the principle of worldwide taxation, has been adopted by a majority of States. One has to consider the worldwide income of a company to determine its taxable profit. In this system it is crucial to define the fiscal residence of a company very accurately. The State of residence is the one entitled to levy tax 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 activi....
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....racting States are said to „waive‟ tax claims or more illustratively, to divide „tax sources‟, the „taxable objects‟, amongst themselves. 49. In the present case the respondent Assessee is the resident of USA with which India has signed a double taxation avoidance agreement. In terms of the Law as laid down by the Supreme Court of India in AZADI BACHAO ANDOLAN (SUPRA) the Assessee has the right to be governed by the provisions of the Income Tax Act or the DTAA whichever is more beneficial. 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 and in case of inconsistency between 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 t....
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....asis. The estimate adopted shall, however, be such that the result shall be in accordance with the principles contained in this article. 3. In the determination of the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment, including a reasonable allocation of executive and general administrative expenses, research and development expenses, interest, and other expenses incurred for the purposes of the enterprise as a whole (or the part thereof which includes the permanent establishment), whether incurred in the State in which the permanent establishment is situated or elsewhere, in accordance with the provisions 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 f....
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....tablishment. However, only so much of profits of such enterprise shall be taxed in the country where there is a permanent establishment other than the country of residence to the extent the same is attributable to that permanent establishment or in respect of sales of goods or merchandise of same or similar kind as sold through the permanent establishment or other business activities effected through that permanent establishment. 52. Clause 2 of Article 7 stipulates that attributability in each contracting State of profits would be only to the extent, such profits would arise in case the enterprise was a distinct and independent enterprise engaged in same or similar activity. The purport of the said clause is that where the enterprise carries on business through a 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 ....
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....ivities (together with other such sites, projects or activities, if any) continue for a period of more than 120 days in any twelve-month period ; (l) the furnishing of services, other than included services as defined in Article 12 (Royalties and Fees for Included Services), within a Contracting State by an enterprise through employees or other personnel, but only if: (i) activities of that nature continue within that State for a period or periods aggregating more than 90 days within any twelve-month period ; or (ii) the services are performed within that State for a related enterprise [within the meaning of paragraph 1 of Article 9 (Associated Enterprises)]. 3. Notwithstanding the preceding provisions of this Article, the term "permanent establishment" shall be deemed not to include any one or more of the following: (a) the use of facilities solely 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 ; ....
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....s paragraph. 6. The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other." 55. Article 5 of the DTAA defines and lays down the number of conditions both positive and negative when an establishment would have a permanent establishment in the other contracting State. 56. In the present case, it is an admitted position that the Respondent Assessee has a branch office in India which is a permanent establishment as defined in Article 5 of the DTAA. Since the Assessee has a permanent establishment in India in terms of the law as laid down by the Supreme Court of India in AZADI BACHAO ANDOLAN (SUPRA), the Assessee be liable to tax in India and as held hereinabove the chargeability to tax 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 inconsiste....
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....s of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for included services, being a resident of a Contracting State, carries on business in the other Contracting State, in which the royalties or fees for included services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the royalties or fees for included services are attributable to such permanent establishment or fixed base. In such case the provisions of article 7 (business profits) or article 15 (Independent Personal Services), as the case may be, shall apply. 7. ........ 58. Clause 1 of Article 12 lays down that royalty or fees for included services arising in a contracting State and paid to a residents of the other contracting State may be taxed in that other state. 59. Clause 2 of Article 12 lays down that royalty and fees for included services may also be taxed in a contracting State in which they arise. However, if the beneficial owner of the royalties or fees for included services paid to the residents of the other contracting State then the tax has been limited ....
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.... 155. It appears to us from a close examination of the manner in which the case has proceeded before the Income-tax authorities and the arguments addressed before us that the crux of the issue is whether the payment is for a copyright or for a copyrighted article. If it 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. If the payment is really for a copyrighted article, then it only represents the purchase price of the article and, therefore, cannot be considered as royalty either under the Act or under the DTAA. This issue really is the key to the entire controversy and we may now proceed to address this issue. 156. We must look into the meaning of the word "copyright" as given in the Copyright Act, 1957. Section 14 of this Act defines "Copyright" as "the exclusive right subject to the provisions of this Act, to do or authorize the doing of any of the following acts in respect of a work or any substantial part thereof, namely: --------- It is clear from the above definition that a computer programme mentioned in Clause (b) of the secti....
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....This means that the supplier of the software, namely, the Assessee, can supply similar software to any number of cellular operators to which JTM can have no objection and further all the cellular operators can use the software only for the purpose of their own operation and maintenance of the system and not for any other purpose. The user of the software by the cellular operators in the public domain is totally prohibited, which is evident from the use of the words in Article 20.1 of the agreement, "restricted" and "not otherwise". Thus JTM has a very limited right so far as the use of software is concerned. It needs no repetition to clarify that JTM has not been given any of the seven rights mentioned in Clause (a) of Section 14 or the additional right mentioned in Sub-clause (ii) of Clause (b) of the section which relates to a computer programme and, therefore, what JTM or any other cellular operator has acquired under the agreement is not a copyright but is only a copyrighted article. 159. Clause 20.4 of the supply contract with JTM is as under: 20.4 In pursuance of the foregoing JT MOBILES shall: (a) not provide or make the Software or Documentation o....
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....rposes, it cannot be said that it has acquired a copyright in the software. 160. Clause 20.4(c) makes it mandatory for the cellular operator, while making copies of the software for backup purposes, to also mark the copied software with copyright or other marking to show that the rights of the Assessee are reserved. This is one more indication that what the cellular operator acquired is not a copyright. 161. Clause 20.4(d) says that the cellular operator cannot use the software for any other purpose than what is permitted and shall not also license or sell or in any manner alienate or part with its possession. This has to be read with Clause 20.5 which says that the license can be transferred, but only when the GSM system itself is sold by the cellular operator to a third party. This in a way shows that the software is actually part of the hardware and it has no use or value independent of it. This restriction placed on the cellular operator (not to license or sell the software) runs counter to Section 14(b)(ii) of the Copyright Act which permits a copyright holder to sell or let out on commercial rental the computer programme. For this reason also it cannot be sa....
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.... issue them to the public" (underline is ours). The above observations of the author show that one cannot have the copyright right without the copyrighted article but at the same time just because one has the copyrighted article, it does not follow that one has also the copyright in it. Mr. Sharma's objection cannot be accepted. 164. It is not necessary, therefore, to consider the alternative argument of Mr. Dastur, namely, that even assuming that the Department is right in saying that if you have the copyrighted article, you also have the copyright right therein, still it would mean that the copyright rights are transferred (acquired by JTM) and it would not be a case of merely giving the right to use and consequently Article 13 of the DTAA would not apply. Mr. Dastur, however, was fair enough to concede that if the Department is right in saying that if you have the copyrighted article, you also have the copyrighted rights, then Clause (v) of Explanation 2 below Section 9(1) of the Income-tax Act will apply because this clause ropes in "transfer of all or any rights" and is not restricted to "use" or "right to use", the copyright. However, he added t....
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.... binding on us but they have a persuasive value and throw light on the question before us, namely the difference between a copyright right and a copyrighted article. These regulations have been placed at pages 136 to 157 of Paper book No. II. The actual regulations as well as the explanatory Note explaining the object and the purpose of the proposed regulations have also been given. In paragraph 1 of the Note titled "Background", it has been stated that the proposed regulations require that a transaction involving a computer programme may be treated as being one of the four possible categories. Two such categories are the transfer of copyright rights and the transfer of a copyrighted article. The U.S. regulations distinguished between transfer of copyright rights and transfer of copyrighted articles based on the type of rights transferred to the transferee. Briefly stated, if the transferee acquires a copy of a computer programme but does not acquire any of the rights identified in certain sections (of the U.S. Regulations), the regulation classified the transaction as the Transfer of a copyrighted article. Paragraph 3 of the Explanatory Note says that if a transfer of a computer p....
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.... significant rights in the underlying copyright itself, which is what should determine the characterization of the revenue as sale proceeds rather than royalties. He has further opined that consideration relating to sale of software can amount to royalty only in limited circumstances. 172. For the above reasons, we are of the view that the payment by the cellular operator is not for any copyright in the software but is only for the software as such as a copyrighted article. It follows that the payment cannot be considered as royalty within the meaning of Explanation 2 below Section 9(1) of the Income-tax Act or Article Article of the DTAA with Sweden. -------- 184. In view of the foregoing discussion, we hold that the software supplied was a copyrighted article and not a copyright right, and the payment received by the Assessee in respect of the software cannot be considered as royalty either under the Income-tax Act or the DTAA. 66. Referring to the Commentary on the OECD Model Convention (dated 28.1.2003), which was considered to be of persuasive value, the Tribunal noticed that the rights acquired in relation to the copyright are limited to those ne....
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.... publically display the computer programme. 68. The Tribunal further noticed that a copyrighted article has been defined in the regulation 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 fixed in the magnetic medium of a floppy disc or in the main memory or hard drive of a computer or in any other medium. 69. The Tribunal has held and rightly so that the question whether there was a transfer of a copyright right or only of a copyrighted article must be determined taking into account all the facts and circumstances of the case and the benefits and burden of ownership which have been transferred. 70. The appeal filed by the Revenue against the Judgment of the Special Bench of the ITAT was dismissed by the High Court of Delhi in the case of DIT V. M/S NOKIA NETWORKS OY (2012) 253 CTR (DEL) 417. The bench approved of the findings of the Special Bench of the Tribunal in the Motorola case supra that Copyright is distinct from the material object, copyrighted. I t is an intangible incorporeal right in the nature of a privi....
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....ade between the acquisition of a "copyright right" and a "copyrighted article". 60. Mr. Dastur is right in this submission which is based on the commentary on the OECD Model Convention. Such a distinction has been accepted in a recent ruling of the Authority for Advance Ruling (AAR) in Dassault Systems KK 229 CTR 125. We also find force in the submission of Mr. Dastur that even assuming the payment made by the cellular operator is regarded as a payment by way of royalty as defined in Explanation 2 below Section 9 (1) (vi), nevertheless, it can never be regarded as royalty within the meaning of the said term in article 13, para 3 of the DTAA. This is so because the definition in the DTAA is narrower than the definition in the Act. Article 13(3) brings within the ambit of the definition of royalty a payment made for the use of or the right to use a copyright of a literary work. Therefore, what is contemplated is a payment that is dependent upon user of the copyright and not a lump sum payment as is the position in the present case. We thus hold that payment received by the assessee was towards the title and GSM system of which software was an inseparable parts incap....
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....to the shoes of the owner/grantor and he enjoys the copyright to the extent of its grant to the exclusion of others. As the right attached to copyright is conveyed to such licencee, he has the authority to commercially deal with it. In case of infringement of copyright, he can maintain a suit to prevent it. Different considerations will arise if the grant is non-exclusive that too confined to the user purely for in-house or internal purpose. The transfer of rights in or over copyright or the conferment of the right of use of copyright implies that the transferee/licensee should acquire rights either in entirety or partially co-extensive with the owner/ transferor who divests himself of the rights he possesses pro tanto. That is what, in our view, follows from the language employed in the definition of "royalty" read with the provisions of the Copyright Act, viz., section 14 and other complementary provisions. We may refer to one more aspect here. In the definition of royalty under the Act, the phrase "including the granting of a licence" is found. That does not mean that even a non-exclusive licence permitting user for inhouse purpose would be covered by that expression. A....
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....e (i) of section 14(a) would be wholly out of place. Otherwise, in respect of even off-the-shelf software available in the market, it can be very well said that the right of reproduction which is a facet of copyright vested with the owner is passed on to the customer. Such an inference leads to unintended and irrational results. We may in this context refer to section 52(aa) of the Copyright Act (extracted supra) which makes it clear that "the making of copies or adaptation" of a computer programme by the lawful possessor of a copy of such programme, from such copy (i) in order to utilize the computer program, for the purpose for which it was supplied or (ii) to make back up copies purely as a temporary protection against loss, destruction, or damage in order to utilize the computer programme for the purpose of which it was supplied" will not constitute infringement of copyright. Consequently, customization or adaptation, irrespective of the degree, will not constitute "infringement" as long as it is to ensure the utilization of the computer programme for the purpose for which it was supplied. Once there is no infringement, it is not possible to hold that there is transfer or licen....
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....mme recorded on any disc, tape, perforated media or other information storage device and includes any such programme or any customized electronic data. Under the second proviso the income by way of 'royalty' consisting of lump sum payment made by a resident for the transfer of all or any rights (including the grant of licence) in respect of the computer software by a nonresident manufacturer along with a computer based equipment under a scheme approved as per the 1986 Policy on computer software export, software development and training, is excluded from the purview of 'royalty' clause. It does not, however, mean that wherever computer software is transferred on outright sale basis or is leased or licensed, it would become royalty income. Whether or not the income is in the nature of royalty has to be judged with reference to the exhaustive definition in Explanation 2. In this context, subclause (v) of Explanation 2 which has been referred to by both sides become relevant. It is in the light of the language of that clause one has to see whether the income in question ought to be treated as 'royalty'. The transfer of rights envisaged by sub-clause (v) should ....
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.... It has been held that even though the intellectual process is embodied in a tangible and physical manner, that is on the punch cards, magnetic tapes, etc. the logic or intelligence of the program remains intangible property. It is held that it is this intangible property right which is acquired when computer software is purchased or leased. It has been held that what is created and sold is information and the magnetic tapes or the discs are only the means of transmitting these intellectual creations from the originator to the user. It has been held that the same information could have been transmitted from the originator to the user by way of telephone lines or fed directly into the user's computer by the originator of the programme and that as there would be no tax in those cases merely because the method of transmission is by means of a tape or a disc, it does not constitute purchase of tangible personal property and the same remains intangible personal property. It has been held that what the customer paid for is the intangible knowledge which cannot be subjected to the personal property tax. In these cases, difference is sought to be made between purchase of a book, music ....
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....rceived by the senses. It has been held that the purchaser does not receive mere knowledge but receives an arrangement of matter which makes his or her computer perform a desired function. It has been held that this arrangement of matter recorded on tangible medium constitutes a corporeal body. It has been held that a 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 disk, tape, hard drive, or other device. It has been held that the fact that the information can be transferred and then physically recorded on another medium does not make computer software any different from any other type of recorded information that can be transferred to another medium such as film, video tape, audio tape or books. It has been held that by sale of the software programme the incorporeal right to the software is not transferred. It is held that the incorporeal right to software is the copyright which remains with the originator. What is sold is a copy of the software. It is held that the original copyright version is not the one which operates the computer of the customer but the physical copy of t....
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....ce fee for its right to use the software for the Bank countrywide. The claim for the refund of the customs duty paid on the aforesaid amount of US Dollars 3,683,428 was not accepted by this Court as in its opinion, on a correct interpretation of Section 14 read with the Rules, duty was payable on the transaction value determined therein, and as per Rule 9 in determining the transaction value there has to be added to the price actually paid or payable for the imported goods, royalties and the licence fee for which the buyer is required to pay, directly or indirectly, as a condition of sale of goods to the extent that such royalties and fees are not included in the price actually paid or payable. This clearly goes to show that when technical material is supplied whether in the form of drawings or manuals the same are goods liable to customs duty on the transaction value in respect thereof. 44. It is a misconception to contend that what is being taxed is intellectual input. What is being taxed under the Customs Act read with the Customs Tariff Act and the Customs Valuation Rules is not the input alone but goods whose value has been enhanced by the said inputs. The final produ....
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....as under: 25. To be noted that this authority is directly dealing with the question in issue. Even though the definition of the term "goods" in the Customs Act is not as wide or exhaustive as the definition of the term "goods" in the said Act, it has still been held that the intellectual property when it is put on a media becomes goods. .... 27. In our view, the term "goods" as used in Article 366(12) of the Constitution of India and as defined under the said Act are very wide and include all types of movable properties, whether those properties be tangible or intangible. We are in complete agreement with the observations made by this Court in Associated Cement Companies Ltd. (supra). A software programme may consist of various commands which enable the computer to perform a designated task. The copyright in that 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. Even intellectual property, once it is put on to a media, whether it be in the form of books or canvas (In case of painting) or computer discs or cassettes, and marketed would become "goods"....
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....ransferred 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. See Crockett, supra, at 872-74; Shontz, at 168-70; Cowdrey, supra, at 188-90. As the court of appeal explained, and as Bell readily admits, the programs cannot be utilized by Bell until they have been recorded into the memory of the electronic telephone switch. 93-1072, at p. 6, 631 So.2d at 1342. The essence of the transaction was not merely to obtain the intangible "knowledge" or "information", but rather, was to obtain recorded knowledge stored in some sort of physical form that Bell's computers could use. 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....
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....(SUPRA) have thus laid down that Computer programs are the product of an intellectual process, but once implanted in a medium they are widely distributed to computer owners. That a computer program may be copyrightable as intellectual property does not alter the fact that once in the form of a floppy disc or other medium, the program is tangible, moveable and available in the marketplace. 82. The Supreme Court has further held that a software programme may consist of various commands which enable the computer to perform a designated task. The copyright in that 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. Even intellectual property, once it is put on to a media, whether it be in the form of books or canvas (In case of painting) or computer discs or cassettes, and marketed would become "goods". There is no difference between a sale of a software programme on a CD/floppy disc from a sale of music on a cassette/CD or a sale of a film on a video cassette/CD. In all such cases, the intellectual property has been incorporated on a media for purposes of transfer. Sale is not ....
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....ks, music, etc. can also be recorded into the permanent memory of the computer. That the information, knowledge, story, or idea, physically manifested in recorded form, can be transferred from one medium to another does not affect the nature of that physical manifestation as corporeal, or tangible. Likewise, that the software can be transferred from 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, it still has corporeal qualities and is inextricably intertwined with a corporeal object. The software must be stored in physical form on some tangible object somewhere. In sum, once the "information" or "knowledge" is transformed into physical existence and recorded in physical form, it is corporeal property. The physical recordation of this software is not an incorporeal right to be comprehended. 84. To further elucidate the nature of the transaction in the case of the Assessee it is necessary to examine some of the clauses of the Licensing software agreement entered into by the Assessee with its customers: INFRASOFT LICENCE AGREEMENT. 2. GRANT, SUPPLY AND USE OF LICENCE a) I....
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....e concerned. Requests for the appropriate information should be directed to the Vice president Technical of Infrasoft. 3. LICENCE FEES, PAYMENT AND TAXES a) Licensee shall pay Infrasoft a licence fee for the use of the Software as agreed in the order. Infrasoft confirms that where the Licensee has purchased the Software through an authorised reseller of the Software the Licensee shall owe no license fees to Infrasoft where the Licensee has made payment of the licence fees to the authorised reseller. b) All licence fees are exclusive of and net of any taxes, duties or other such additional sums including, but without prejudice to the foregoing generality, value added//purchase tax, excise tax (tax on sales, property or use), import or other duties and whether levied in respect of this Agreement, the Software its use or otherwise. All such taxes shall be the responsibility of the Licensee and shall be payable in addition to the licence fee. c) Infrasoft advises the Licensee that 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 ....
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....e 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 property rights in and to the Software, and copies made by Licensee, are owned by or duly licensed to Infrasoft. 87. In order to qualify as royalty payment, it is necessary to establish that there is transfer of all or any rights (including the granting of any licence) in respect of copyright of a lite....
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....se, it would not be legally correct to state that the copyright itself or right to use copyright has been transferred to any extent. The parting of intellectual property rights inherent in and attached to the software product in favour of the licensee/customer is what is contemplated by the Treaty. Merely authorizing or enabling a customer to have the benefit of data or instructions contained therein without any further right to deal with them independently does not, amount to transfer of rights in relation to copyright or conferment of the right of using the copyright. The transfer of rights in or over copyright or the conferment of the right of use of copyright implies that the transferee/licensee should acquire rights either in entirety or partially co-extensive with the owner/ transferor who divests himself of the rights he possesses pro tanto. 90. The license granted to the licensee permitting him to download the computer programme and storing it in the computer for his own use is only incidental to the facility extended to the licensee to make use of the copyrighted product for his internal business purpose. The said process is necessary to make the programme functional an....
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....e and the payment made for the same cannot 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. What the licensee has acquired is only a copy of the copyright article whereas the copyright remains with the owner and the Licensees have acquired a computer programme for being used in their business and no right is granted to them to utilize the copyright of a computer programme and thus the payment for the same is not in the nature of royalty. 95. We have not examined the effect of the subsequent amendment to section 9 (1)(vi) of the Act and also whether the amount received for use of software would be royalty in terms thereof for the reason that the Assessee is covered by the DTAA, the provisions of which are more beneficial. 96. The amount received by the Assessee under the licence agreement for allowing the use of the software is not royalty under the DTAA. 97. What is transferred is neither the copyright in the software nor the use of the copyright in the software, but what is transferred is the right to use the copyrighted material or article which is clearly distinct f....