AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2010 (11) TMI 1020
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....of the Act, for purchase/use of software from the parties who are resident of Netherland. The softwares in question are undisputedly operational softwares, purchased for the internal use of the assessee. The assessee was granted non-exclusive , perpetual, irrevocable, royalty free, worldwide license to use the number of copies of the software enumerated in the agreement solely for internal operation, including use of software for ASP Services and web housing services. The parties from whom the assessee acquired the software do not have a "PERMANENT ESTABLISHMENT" in India. 3. The assessee purchased the software for Seismic Data Processing/Interpretation Software for O&G Division from M/s Jason Geosystems BV and for Reservoir Engineering Software for O & G Division from Geoquest Systems BV, Netherlands. 4. The learned CIT(Appeal) in her order dated 19-11-2007, has considered an agreement for purchase with M/s Jason Geosystems BV, Netherlands and in order dated 21-08-2008 has considered an agreement for purchase with Geoquest Systems BV, Netherlands. The facts are brought out at para 1.1 to 1.5 of her order dated 19-11-2007 which are extracted below for ready reference : ....
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....Para 2 of the Software License Agreement and has held that the appellant has only got a license and has not purchased the software and thus the transaction dos not amount to sale. I find that the AO has taken the same arguments as taken by him in respect of appeal No. CIT(A)XXXI/DDIT(IT)2(1)/IT-303/02-03/07-08 and which arguments have been examined and dealt with by me in the said Appeal Order dt. 02.11.2007. 5. The facts given by the CIT(Appeals) in her order dated 21-01-2008 regarding agreement for purchase with Geoquest Systems BV, Netherlands are more or less the same as given in her order dated 19-11-2007. 6. The terms and conditions of purchase with M/s Jason Geosystems BV, Netherlands are brought out at para 1.6 of the order of the CIT(Appeals) dated 19- 11-2007 which are extracted below for ready reference : `1.6 I have also examined the Software License Agreement between the Appellant and JG. The Appellant has entered into an agreement for sale and purchase of software with JG. General terms and conditions of purchase are prescribed in the agreement. Clauses 2 & 6 of the Software License Agreement provide for the Software License and Intellectual Property. The same r....
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...., SELLER supplies Software Use's Kit that comprises. a) a CD with executable code and documentation for the Software. b) Installation manual and User manuals in one softcopy (on CD) and c) One Security key. In case of Network copy the Security key allows the software tools to be installed on Network serve and any number of client machines connected to the Net Work Server. Net Work copies of Software can be Concurrently accessed and used by as many users as are the Supplied number of Network Copies." Thus, a perusal of Para 2 of the Special terms of Purchase Order reveals that the Appellant has not received any right or copy right over the software." 7. The general terms and conditions of agreement of purchase can be summarized as under: i) The assessee is not entitled to use the software for ASP Services on behalf of third party. ii) The assessee has no right to use, copy, duplicate or display the software except as specifically provided in the agreement. iii) The assessee cannot make more copies of the software than what is specified in the agreement. iv) The assessee cannot provide access to the s....
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.... in the Indo-US DTAA is primarily expanding the definition of royalty in Indo-Australia DTAA. 1.12 Accordingly I hold that my decision in the case of appellant in appeal No. CIT(A)XXXU/DDIT(IT)2(1)/ IT-303/02-03 dated 29/10/2007, is applicable to this case as well. Therefore, following my order in that appeal, I hold that the payment made by the appellant to M/s Paradigm is only business income of M/s. Paradigm and not royalty. In the absence of any PE in India, business profit is not taxable in India as per Article-5 & 7 of DTAA. In view of this appeal on ground No.1 to 7 is allowed. " 9. This Bench of the Tribunal, on similar issue, in the case of purchase of software from USA vide its order dated 29th Oct., 2010 has held as follows "12. The Bangalore Bench of the Tribunal in the case of Samsung Electronic Company Ltd. vs. ITO reported in 276 ITR (AT) 1 held as follows : " Held, allowing the appeals, that the provisions of the Income-tax Act would be applicable to the extent they were more beneficial to the assessee. Otherwise, the provisions of the Double Taxation Avoidance Agreement had to be followed. Therefore, the provisions of the Double Taxation Avo....
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.... (i) to reproduce the work in any material form including the storing of it in any medium by electronic means: (ii) to issue copies of the work to the public not being copies already in circulation; (iii) to perform the work in public, or communicate it to the public; (iv) to make any cinematograph film or sound recording in respect of the work; (v) to make any translation of the work; (vi) to make any adaptation of the work; (vii) to do, in relation to a translation or an adaptation of the work, any of the acts specified in relation to the work in sub-clauses (i) to (vi); (b) in the case of a computer programme,- (i) to do any of the acts specified in Cl. (a); (ii) to sell or give on commercial rental for sale or for commercial rental any copy of the computer programme; Provided that such commercial rental does not apply in respect of computer programmes where the programme itself is not the essential object of the rental, (c) in the case of an artistic work,- (i) to reproduce the work in any material form including depiction in three dimensions of a two dimensional work or ....
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....rence to the software supplied by the assessee. Further, the Delhi Special Bench of ITAT in paras 162, 168 and 169 held as follows: 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 ....
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....the copyright of such literary/artistic or scientific work. Therefore, in order to be classified as royalty, the right of the person in possession of the subject-matter of a copyright should be to utilize such copyright in the manner which is otherwise protected by the respective copyright law in favour of the owner of the copyright. The use of a copyright of a copyrighted work is different from use of such work itself. The acquisition of a product, wherein the subject-matter of copyright is embedded, without right to exploir the copyright, does not amount to use or right to use the copyright of such literary/artistic/scientific i.e., copyrighted work [para 6]. Further, as per clause 13.1 of the OECD model commentary, payments made for acquisition of partial rights in copyright would represent a royalty where the consideration is for the right to use the programmes in a manner that would, without such license, constitute an infringement of the copyright. In other words, the payment can constitute royalty only if the transferor grants to the transferee the right to use the copyright of the product. If, on the other hand, the use of the programmes by the transferee (by acqui....
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....DCIT held that section 9(1)(vii) is not attracted in such cases where there is a transfer of copyrighted article and not a transfer of a copyright itself. On facts we have held that in this case, it is a transfer of a copyright article. Hence it is not Royalty u/s 9(1)(vii) of the Income-tax Act . 12. Applying these propositions to the facts of the case, we uphold the order of the first appellate authority wherein it is held that : a) It is now established law that Computer software after being put on to a media and then sold, becomes goods like any other Audio Cassette or painting on canvas or a book and that the AO is wrong in holding that Computer software on a media, continues to be an intellectual property right. b) That the assessee has purchased a copyrighted article and not the copyright itself. There is no transfer of any part of copyright. c) The present computer software cannot be treated as a patent or an invention. 13. In view of the above discussion, we respectfully follow the decision of the Special Bench of the Tribunal in the case of Motorola Inc. (supra) and hold that the software supplied was a copy righted article and not a copy ....