TaxTMI 
TaxTMI 
2016 (5) TMI 169
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....aw, the AO and the DRP erred in levying interest under section 234B of the Act, inspite of the fact that the appellant is a non-resident assessee. 3. Learned representatives fairly agree that the issue is covered, in favour of the assessee, by several orders of the co-ordinate benches in assessee's own case for the earlier assessment years, even as learned Departmental Representative vehemently relied upon the orders of the authorities below and invited our attention to decisions of non- jurisdictional High Courts, in favour of the revenue, on the same point. As a matter of fact, in the orders of the authorities below also it is specifically accepted that the issue is covered, by decisions of the coordinate benches in assessee's own case, but yet the taxability is upheld because the matter is pending before Hon'ble jurisdictional High Court. 4. We find that, in a very elaborate and well reasoned order for the immediately preceding assessment year- which also deals with the issues being raised now by the learned Departmental Representative, our distinguished colleagues have observed as follows: 3. The issue raised by the Revenue in this appeal is identical to the issu....
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....r. All distribution agreements are identical. As per the software distribution agreement, the distributor gets right to market distribute and support the product. However, distributor does not get any exclusive distributor rights. He also does not get any right to disassemble, decompile or reverse engineer the software. Copyright over software remain with the assessee. On these facts, it was claimed by the assessee before the Assessing Officer that the software being sold by the assessee was a shrink wrap software being sold to customers for their personal use without transfer of any copyright, trade mark, or patent etc. In view of this payment received for supply of software was not royalty and was only business income. The assessee did not have a permanent establishment (PE) in India and therefore business income is not taxable as per Article-7 of the DTAA. 5.The Assessing Officer did not agree with the plea of the assessee. He held that the payment received by the assessee was in the nature of royalty and he accordingly brought the same to tax. On appeal by the assessee, learned CIT(A) held that the payment in question was not in the nature of royalty and was payment fo....
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....he form of books or canvas (In case of painting) or computer discs or cassettes, and marketed would become 'good'. We see no different 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 just of the media which by itself has very little value. The software and the media cannot be 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 of sale of computer software is clearly a sale of goods within the meaning of the term as defined in the said Act." 8.Thus computer software when it is put on to a media and sold has become goods like any other audio cassette or painting on canvas or a book. It is ceases to be transfer of intellectual property right. In fact, Bangalore Bench of the Tribunal in the case of Lucent Technologies Hindustan Ltd. Vs. ITO, 92 ITD 366 (Bang) ....
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....licence agreement (EULA). The Learned DR drew out attention to the EULA and submitted that the end user is granted only a license to use the software. He also pointed out that the EULA in clause 1-C provides for a security mechanism being embedded in the software to ensure that the terms of the license are not violated. His submission was that the Assessee has complete control over the use of the software and therefore to say that the software is a copyrighted article and not use of software is not correct. His submission was that even the distributor gets only a license and therefore there can be no sale of a copyrighted article as has been held in the earlier assessment years. The submissions of the learned D.R. are principally based on the decision of the Hon'ble Karnataka High Court in the case of CIT Vs. Samsung Electronics co. Ltd. ITA No.2808 of 2005 dated 15.10.2011, a copy of which has been filed before us. The Hon'ble Karnataka High Court was dealing with a case where the question was as to whether the amounts paid to the foreign software suppliers were royalty. The Hon'ble Court after considering the provisions of Sec. 14 of the Copyright Act, 1957, definitio....
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....Indian market. By no stretch of imagination, it would be termed as royalty." Therefore, the contention of the learned senior counsel appearing for the respondents that there is no transfer of any part of copyright or copyright under the impugned agreements or licenses cannot be accepted. Accordingly, we hold that right to make a copy of the software and use it for internal business by making copy of the same and storing the same in the hard disk of the designated computer and taking back up copy would itself amount to copyright work under Section 14 (1) of the Act and licence is granted to use the software by making copies, which work, but for the licence granted would have constituted infringement of copyright and licencee is in possession of the legal copy el the software under the licence. Therefore, the contention of the learned senior counsel appearing for the respondents that there is no transfer of any part of copy right or copyright and transaction only involves sale of copy of the copyright software cannot be accepted. It is also to be noted that what is supplied is the copy of the software of which the respondent - supplier continues to be the owner of the copyri....
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....n the present case is the transfer of copyright including the right to make copy of software for Internal business, and payment made in that regard would constitute royalty for imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill as per clause (iv) of explanation 2 to Section 9(1)(vi) of the Act. In any view of the matter, in view of the provisions of Section 90 of the Act, agreements with foreign countries DTAA would override the provisions of the Act. Once it is held that payment made by the respondents to the non-resident Companies would amount to royalty within the meaning of Article 12 of the DTAA with the respective country, it is clear that the payment made by the respondents to the non-resident supplier would amount to royalty. In view of the said finding, it is clear that there is obligation on the part of the respondents to deduct tax at source under Section 195 of the Act and consequences would follow as held by the Hon'ble Supreme Court while remanding these appeals to this Court. Accordingly. we answer the substantial, question of law in favour of the revenue and against the assessee by holding that ....
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....ly represents the purchase price of the article and, therefore, cannot be considered as royalty either under the Act or under the DTAA. The Tribunal after referring to definition of Royalty under the Act and the definition copyright under the Copyright Act, 1957 held that what was sold by the non resident was a copyrighted article and payment to the non resident was not for copyright. On further appeal by the Revenue, the Hon'ble Delhi High Court examined the issue which we have set out earlier. The Hon'ble Delhi High Court held that income did not accrue to the nonresident by virtue of a business connection in India and therefore the question of the Non resident having a permanent establishment in India did not arise for consideration at all. On the issue whether the payment to the non resident was of the nature of royalty which could be brought to tax in India, the Hon'ble Delhi High Court held as follows: "WHETHER THE INCOME FROM THE SUPPLY CONTRACT CAN BE TREATED AS 'ROYALTY' UNDER SECTION 9(1)(vi) OF THE ACT: 50. Section 9 (1) (i) of the Act which deals with the taxability of „royalty income" reads as under :- "Section 9 .IN....
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.... 53.Mr. Prasaran, countered the aforesaid reasoning arguing that Clause 20 of the Supply Contract uses the term „licence" and the same term is used in the context of software throughout the three Agreements, indicating that it is not an outright sale of goods, or a full transfer of rights from the assessee to the Indian company. He also submitted that the software is a computer programme, which is treated differently from a book, not only in the Copyright Act, 1957 but also the Income Tax Act itself. His submission was that Section 52(1) (aa) of the Copyright Act only deems that certain acts will not to amount to infringement in the light of various concerns, where otherwise such acts would amount to infringement under Section 51 of the Copyright Act. The provision cannot by itself be used to hold that no right exists in the first place, since the scope of the right has to be understood only from the provisions of Section 14 of the Copyright Act, 1957. He also argued that the ITAT has misinterpreted the provisions of the DTAA, specifically Article 13, para 3 of the DTAA (Article 12, para 3 of the Model Convention) which defines royalties to mean "payments of any kind re....
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....rt in TATA Consultancy Services Vs. 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, liable to sales tax. Following discussion in this behalf is required to be noted:- "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". We see no difference between a sale of a software programme on a CD/floppy disc from a sale of music....
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.... 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 CIT Vs. Sundwiger EMFG Co., 266 ITR 110 wherein it was held: "A plain and cumulative reading of the terms and conditions of the contract entered into between the principal to principal i.e., foreign company and Midhani i.e., preamble of the contract, Part-I and II of the contract and also the separate agreement, as referred to above, would clearly show that it was one and the same transaction. One cannot be read in isolation of the other. The services rendered by the experts and the payments made towards the same was part and parcel of the sale consideration and the same cannot be severed and treated as a business income of the non-resident company for the services rendered by them in erection of the machinery in Midhani unit at Hyderabad. Therefore, the contention of the Revenue that as the amounts reimbursed by Midhani under a separate contract for the technical servic....
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....e 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. 61.We thus hold that payment received by the assessee was towards the title and GSM system of which software was an inseparable parts incapable of independent use and it was a contract for supply of goods. Therefore, no part of the payment therefore can be classified as payment towards royalty." 6.Before us the learned D.R. as well as the learned counsel for the Assessee referred to several decisions of the Tribunal rendered on identical issue. These decisions are not being considered as the two decisions of the Hon'ble High court of Karn....
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....to non-resident assesse in this case. 9.On the other submission of the learned D.R. that the decision rendered by the Hon'ble Delhi High Court was in respect of use of software embedded in an equipment supplied and therefore the same should not be applied to the case of shrink wrap software, we are of the view that the Hon'ble Delhi High Court after referring to the decision of the Hon'ble Supreme Court in the case of Tata Consultancy Services (supra) went on to observe at para-56 of its judgment that when software is incorporated in a CD it becomes a tangible property and the payment made for acquiring the same is not a payment by way of royalty. In paraI. 60 of its judgment, the Hon'ble Delhi High Court has approved the ruling of the Authority for Advance Ruling (AAR) in the case of Dassault Systems KK 322 ITR 125 (AAR). The facts giving rise to the ruling of the AAR were that the applicant, a Japanese company, engaged in the business of providing "Products lifecycle management" software solutions, applications and services, marketed licensed software products mostly through a distribution channel comprising value added resellers (VAR) who were independen....
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.... of a product for which the owner had a copyright was not the same thing as transferring or assigning rights in relation to the copyright. Where the purpose of the licence or the transaction was only to establish access to the copyrighted product for internal business purpose, it was not legally correct to say that the copyright itself had been transferred to any extent. 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 did not amount to transfer of rights in relation to copyright or conferment of the right of using the copyright. (iii)That the VAR had not been given an independent right to sell or offer for sale the software products of the applicant to the end-users. What the VAR did, in the course of carrying out its marketing function, was to canvass for orders, collect the purchase order from the interested customer and forward that offer to the applicant; and it was the applicant that accepted or rejected that offer. In the absence of an independent right to conclude the sale or offer for sale, section 14(b)(ii) of the Copyright Act, 1957, could not be invo....
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....nder copyright law may differ from country to country. In some countries the act of copying the programme onto the hard drive or random access memory of a computer would, without a licence, constitute a breach of copyright. However, the copy right laws of many countries automatically grant this right to the owner of software which incorporates a computer programme. Regardless of whether this right is granted under law or under a licence agreement with the copyright holder, copying the programme onto the computer's hard drive or random access memory or making an archival copy is an essential step in utilizing the programme. Therefore, rights in relation to these acts of copying, where they do no more than enable the effective operation of the programme 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 article7. The method of transferring the computer programme to the transferee is not relevant. For example, it does not matter whether the transferee acquires a computer disk containing a copy of the programme or directly rece....
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.... 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 licensing of "copyright" as defined in the Copyright Act and as understood in common law. This is because, as pointed out earlier, copyright is a negative right in the sense that it is a right prohibiting someone else to do an act, without authorization of the same, by the owner. It seems to us that r....
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....nate bench. There is nothing much that we can add to such a well researched and erudite order either. The decisions of non jurisdictional High Courts, in favour of the revenue on this point, have already been dealt with in this order. As to what should be done in a situation in which there are conflicting views of Hon'ble non jurisdictional High Courts and in which we do not have the benefit of guidance from Hon'ble jurisdictional High Court, we can only add, with respectful concurrence, the views expressed below by the coordinate benches: ...........It will be wholly inappropriate for us to choose views of one of the High Courts based on our perceptions about reasonableness of the respective viewpoints, as such an exercise will de facto amount to sitting in judgment over the views of the High Courts something diametrically opposed to the very basic principles of hierarchical judicial system. We have to, with our highest respect of both the Hon'ble High Courts, adopt an objective criterion for deciding as to which of the Hon'ble High Court should be followed by us. 8. We find guidance from the judgment of Hon'ble Supreme Court in the matter of CIT vs. Vegetable Pr....