TaxTMI 
TaxTMI 
2015 (3) TMI 306
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....rovision of user rights of software "OPUS" to be royalty as defined in Explanation 2 to section 9(1)(vi) of the Act and consequently, enhancing the income of the assessee by the said amount relating to provision of user rights of software "OPUS". 5. Both the Authorized Representatives agreed that the said consideration received for provision of user rights of software "OPUS" was held to be not taxable in the hands of the assessee by the Pune Bench of the Tribunal in ITA Nos.157 & 158/PN/2011, relating to assessment years 2004-05 & 2007-08 respectively, vide order dated 25.06.2012, as under:- "8. We have considered the rival arguments made by both the sides, perused the order of the AO and the Paper Book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the Tribunal in assessee's own case vide ITA No. 1569/PN/2008 order dated 14- 03-2012 for assessment year 2005-06 has held as under : 11. We have carefully considered the rival submissions. The pertinent point to be addressed in this appeal relates to the nature of the payments received by the assessee as license charges. As per the assessee, the payments have been received aga....
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....t this produce etc. Similar to the rights of Allianz in the Authorised Territory, the BA Life and BA General will enjoy the rights in India. The rights in this regard only mean the right to use the Software in India. 5.5The thing to be noted here is that the copyright over the software remained with the CGI Group." Pertinently, there is no disagreement that the copyright continue to remain with the CGI as observed by the Assessing Officer. The point to be addressed is as to whether the payments in question have been received by the assessee for grant of use of a copyright or for grant of use of a copyrighted article. Ostensibly, the payments have been received by the assessee for grant of use of a copyrighted article and not for use of the copyright itself. Thus, the point to be addressed is whether such payments are in the nature of royalty. Similar situation was considered by the Special Bench of the Tribunal in the case of Motorola Inc. (supra). In that case,, the Revenue had contended that the receipts in respect of license to use software, which was a part of the hardware, could be taxed on the basis that the same constituted 'royalty' within the meaning of section 9(1)(vi) ....
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....ed on the following reasoning: (i). Payment made by the cellular operator cannot be characterized as royalty either under the Income Tax Act or under the DTAA. (ii). The operator has not been given any of the seven rights under S.14 (a) (i) to (vii) of the Copyright Act, 1957 and, therefore what is transferred is not a copyright but actually a copyrighted article. (iii). The cellular operator cannot commercially exploit the software and therefore a copyright is not transferred. (iv). Further, the parties to the agreement have not agreed upon a separate price for the software and therefore it is not open for the income tax authorities to split the same and consider part of the payment for software to be royalty (v). The bill of entry for importing of goods shows that the price has been separately mentioned for software and that this was only for the purposes of customs. There is no evidence to show that the assessee was a party to the fixation of value for the customs duty purposes. (vi). The software provided under the contract is goods and therefore no royalty can be said to be paid for it. 53. Mr. Prasaran, countered the aforesaid reasoning arguing that Clause 20 of the Su....
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....aforesaid factual finding~difficult to hold that payment made to the assessee was in the nature of royalty either under the Income-Tax Act or under the DTAA. We have to keep in mind what was sold by the assessee to the Indian customers was a GSM which consisted both of the hardware as we] software, therefore, the Tribunal is right in holding that it permissible for the Revenue to assess the same under two articles. The software that was loaded on the hardware did not l independent existence. The software supply is an integral pal GSM mobile telephone system and is used by the cellular operator for providing the cellular services to its customers. There could no independent use of such software. The software is embodied in the system and the revenue accepts that it could not be used independently. This software merely facilitates the functioning of the equipment an integral part thereof. On these facts, it would be useful to refer judgment of the Supreme Court in TATA Consultancy Services State of Andhra Pradesh, 271 ITR 401, wherein the Apex Court held that software which is incorporated on a media would be goods and therefore, l liable to sales tax. Following discussion in this be....
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....d to computer owners. An analogy can be drawn to a compact disc recording of an orchestral rendition. The music is produced by the ministry of musicians and in itself is not a "good," but when transferred to a laser-readable disc becomes a readily merchantable commodity. Similarly, when a professor delivers a lecture, it is not a good, but, when transcribed as a book, it becomes a good. 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. The fact that some programs may be tailored for specific purposes need not alter their status as "goods" because the Code definition includes "specially manufactured goods." 56. A fortiorari when 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. 57. It is also to be borne in mind that the supply contract cannot be separated into two viz. hardware and software. We would like to refer the judgment of Supreme Court in ....
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....d by the cellular operator as royalty, it is to be established that the cellular operator, by making such payment, obtains all or any of the copyright rights of such literary work. In the presence case, this has not been established. It is not even the case of the Revenue that any right contemplated under Section 14 of the Copyright Act,1957 stood vested in this cellular operator as a consequence of Article 20 of the Supply contract. Distinction has to be made 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 he definition in the DTAA is narrower than the definition in the Act,....
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...., New Delhi (supra), which was favourable to the assessee:- "8. On the argument of the ld DR that where two views are available on an issue one favourable to the assessee should be preferred, should not be applied to nonresident assessees, we are of the view the same cannot be accepted in view of Article 24 of the DTAA between India and USA which provides for non-discrimination. Article 24(1) lays down that Nationals of a contracting State shall not be subjected in other contracting State to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances, in particular with respect to residence, are or may be subjected. This provision shall, notwithstanding the provisions of article 1, also apply to persons who are not residents of one or both of the Contracting States. Therefore where two views are available on an issue one favourable to the assessee and the one against the assessee, the view which is favourable to the assessee and does not support levy of tax on the assessee should be preferred, should be applied to non-resident assessee in this ca....
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....vision of user rights of software "OPUS" to BA Life to be 'Royalty' under Article 12 of the tax treaty and levying tax @ 10% on the same. 2.3 That the Hon'ble DRP and consequentially the learned Assessing Officer has erred in law and facts in not appreciating that the Appellant had provided to BA Life the user rights in the copyrighted article (Viz OPUS) and not right to use the copyright of OPUS and thus cannot be regarded as 'royalty' under the provisions of the Act and DTAA." 11. After hearing both the sides, we find the grounds raised by the assessee in the impugned appeal are identical to grounds of appeal in ITA No. 157/PN/2011 for Assessment Year 2004-05. We have already decided the issue and the grounds raised by the assessee have been allowed. Following the same ratio, the grounds raised by the assessee in the above appeal are allowed." 6. The Tribunal had allowed the claim of the assessee in assessment years 2004-05, 2005-06 and 2007-08. However, the Department has filed appeals before the Hon'ble Bombay High Court which have been admitted in respect of the aforesaid assessment years and the following substantial question of law has been framed. a. "Whether in the fac....