TaxTMI 
TaxTMI 
2017 (2) TMI 916
X X X X Extracts X X X X
X X X X Extracts X X X X
....ax resident of the United States of America (USA) and it does not have any permanent establishment in India. According to assessee the license fees payable to ZES does not fall within the ambit of royalty as per the provisions of explanation 2 to section 9(1)(vi) of the Act as well as Article 12 of DTAA between India and USA. The assessee further contended that tax is not required to be withheld on the payments made to ZES under the provisions of Act as well as under the DTAA. On the application, the AO passed order holding that the license fees payable to ZES can be considered as royalty as per the explanation 2 to section 9(1)(vi) of the Act as well as Article 12 of DTAA. Therefore, the income earned by ZES is taxable in India. The AO while passing order relied upon the decision of Karnataka High Court in the case of Samsung Electronics Company Limited dated 24.09.2009. The AO further observed that section 90(2) of the Act provides that the assessee shall be taxed under the provisions of the Act or under the provisions of tax treaty whichever is more beneficial to them. As per DTAA the tax rate is15% whereas the Income-tax provide 10%, therefore, assessee was directed to deduct t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....in and outside India. Thus, the consideration received on supply of software without transfer of any copyright in in business income of ZES and not royalty. The assessee is liable to pay on cross basis as assessee is has to be a bit tax and thus the application under section 195(2) was filed by the assessee. The ld AR of the assessee further submitted that the grounds of appeal raised by revenue pages squarely covered against the revenue by the decisions of coordinate bench in M/s Capgemini Business Services India Ltd Versus ACIT in ITA No.7779 /M 2011 dated 29 February 2016 and in the DDIT Vs M/s Reliance Industries Ltd in ITA No(s) 1980, 1981, 1982, 1984 1986, 2523, 2529/M/2008 dated 18.05.2016. 6. We have considered the rival contention of the parties and have gone through the order of authorities below. The AO while deciding the application of assessee under section 195(2) observed that license fees payable to ZES can be considered as Royalty as per the provisions of Explanation 2 to section 9(1)(vi) as well as under article 12 of DTAA between India and USA and income earned by ZES is taxable in India. The AO relied upon the decision of Karnataka High Court in case of Samsung ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ictions on the use of the product so that his copyrights in the copyrighted article or the work, which has been written on such CD ROM/diskette, may not be infringed. Such conditions, in our view, are not the license to use the product. The purchaser gets the right to use the product/diskette along with the property in the 'good' in the shape of work embedded or written in it when the sale is complete i.e. when such diskette/COD ROM is delivered by the seller to the purchaser in lieu of the consideration paid to him. Thus what is restricted by the so called agreement or commonly used software license is that the user will not infringe the copyrights in the product of the copyright owner of the work. The purchaser is always entitled to fair use of the work which he has purchased. Thus at the most, what can be said to be granted under such a license is the right to use the copyrighted work and the right to use the copyright itself in the work. What is prohibited through these conditions is its misuse which may infringe the rights of the owner of the software e.g. the purchaser of the product may attempt as it is easy in case of software to make copies etc. These license agreements in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nforceability of such a license is highly doubtful. So far as the legal enforceability of such a Licence Agreements is concerned, in spite of the fact that it may fulfill all the requirements of a valid contract, such an agreement may not be enforceable, if, its stipulations conflict with the law governed in the country where such licenses are intended to be enforced, or if it is an unconscionable or unreasonable bargain. In computer software, generally it is the tendency of software producers to do away with the rights and privileges of the user, even which are specifically conferred upon the user by the relevant laws such as Copyright Act, Contract Act and other relevant laws. The fair use of the purchased article is the other plea which contradicts the license theory. As per the provisions of section 52 of the Copyright Act 1957, which has provisions similar to the provisions of section 117 of the US Copyright Act, the owner of a copyright of computer software is legally entitled to fair use that copy of software even without a license from the software publisher and any condition put in a license restricting the fair or reasonable use of the product purchased by the buyer in th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....te is the owner of the copy and in such a case, a license is not technically required in order for the purchaser to use the copyrighted product/software for his own/ business use. So what the buyer buys is the copyrighted product and he is entitled to fair use of the product as is provided under section 52 of the Copyright Act. He is also entitled to perform all or any of the activities which is essentially required for the fair use and for the purpose for which the product is purchased by the buyer. 38. It may also be pointed out here that even, if, such a license agreement is not signed by the end user still the owner of the product will have the copyrights in such a product, as are defined and explained under the Indian Copyright Act; even the registration of the product or the work under the Copyright Act is not compulsory. The owner of the work is deemed to be protected in relation to the copyrights in the work but the fair use of the product/work cannot be denied and any clause in such agreement should be deemed to be void as against the principle of fair use of the product. 39. Further, to determine whether a copyright in a work is infringed or not or would be deemed to ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n sub-cls. (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 or offer 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. ........................" 41. Section 51 of the copyright is also relevant which deals as to when the copyright is infringed which for the sake of convenience is reproduced as under: "CHAPTER XI Infringement of Copyright 51. When copyright infringed. -Copyright in a work shall be deemed to be infringed- (a) when any person, without a licence granted by the owner of the copyright or the Registrar of Copyrights under this Act or in contravention of the conditions of a licence so granted or of any condition imposed by a competent authority under this Act- (i) does anything, the exclusive right to do which is by this Act conferred upon the owner of the copyright, or (ii) permits for profit any place to be used for the communication of the work to the public where such communication cons....
X X X X Extracts X X X X
X X X X Extracts X X X X
....daptation of the computer programme from a personally legally obtained copy for non-commercial personal use;" 43. The proviso to section 57 of the Act is also relevant. The said section 57 of the Act of 1957 is also reproduced as under: "57. [Author's special rights. (1) Independently of the author's copyright and even after the assignment either wholly or partially of the said copyright, the author of a work shall have the right- (a) to claim authorship of the work; and (b) to restrain or claim damages in respect of any distortion, mutilation, modification or other act in relation to the said work which is done before the expiration of the term of copyright if such distortion, mutilation, modification or other act would be prejudicial to his honour or reputation: Provided that the author shall not have any right to restrain or claim damages in respect of any adaptation of a computer programme to which clause (aa) of sub-section (1) of section 52 applies." 44. A perusal of the above provisions of the copyright Act reveals that the computer software is included in the definition of literary work and is covered under the purview and scope of copyright. The exclusive rights ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the Act. 45. It is also pertinent to mention here that the Income Tax Act does not specifically include the 'computer software' in the term 'literary work' and under such circumstances, if we apply the same analogy to the treaty, then perhaps the 'computer software' will be out of the scope of the treaty. However, if we apply the Copyright Act, then the 'computer software' will have to be included in the term 'literary work' but to constitute 'royalty' under the treaty, the consideration should have been paid for the use of or the right to use the copyright in the 'literary work' and not the 'literary work' itself. 46. Further, when we read the definition of copyright and literary work as provided in the Copyright Act, 1957, it is also important to note down that what constitutes infringement of copyright and what are the exceptions to it. If the software purchased by the assessee and the use of it by the assessee is covered within the exceptions as provided under section 52 of the Copyright Act, then in that event it cannot be said that the transfer of right to use or for use of the copyright has passed. The proviso to section 57 of the Copyright Act has further clarified that....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... does not automatically flow or extended to them. The rights of the foreign author are to be examined in the light of the Copyright Act and the relevant treaty or the convention, if any, signed by India with that country to which the foreign author belongs. The copyright in a foreign product thus does not flow automatically or impliedly, so far as the Indian copyright laws are concerned. 48. Hence, while interpreting the definition of 'royalty' as provided in the DTAA, it is to be seen as to what has been purchased by the assessee i.e. whether the 'copyright' itself has been purchased or what the assessee has purchased is only a 'copyrighted work'. It is also required to be analyzed as to whether the use of such right would amount to infringement of copyright if a license or permission in this respect is not given by the owner; and when assessee has purchased a copyrighted product i.e. off the shelf software, whether the use of the same for the business purpose of the assessee is covered within the exceptions as provided under section 52 of the Copyright Act. Further, in case of imported work/product, whether the protection of copyright is available to the foreign author in terms....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ll be the business income of the non-resident and taxable in accordance with the provisions of DTAA. We may clarify here that even in cases where the owner of the copyrighted work may restrict the use of or right to use the work by way of certain terms of the license/software agreement, the validity or the enforceability of the same may be subject matter in other laws such as Indian Contract Act 1872 , Sale of goods Act 1930 or the Consumer Protection Act 1986 etc., but, the same in any way cannot be said to grant of or infringement of copyright in the light of specific statutory provisions of Copyright Act 1957. 50. Now coming to the facts of the case in hand, the DRP has given a specific finding of fact that what the assessee in the present case has purchased is the shrink wrapped /off the shelf software. It has also been discussed in detail in paras above that the definition of 'royalty' given in the treaty is more beneficial to the assessee as compared to the provisions of section 9 of the Income Tax Act and the assessee has opted for the definition that is provided under the DTAA, thus as per section 90 of the Income Tax Act, definition of 'royalty' as provided in the DTAA w....