AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2017 (3) TMI 430
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....icable rates. The assessee challenged the decisions rendered by the AO by filing appeals before Ld CIT(A). In some of the cases, the Ld CIT(A) has accepted the contentions of the assessee that the payments so made constitutes business income in the hands of the recipient and the same is not taxable in India, since the recipient does not have Permanent Establishment in India. The revenue has filed the appeals in those cases, where the Ld CIT(A) has decided the issue by holding the same as not royalty, but business profits. The assessee has filed appeals, where the Ld CIT(A) has upheld the view of the AO that the payments constitute royalty. 2. In all these cases, the assessee has purchased software from various parties for using the same in its Jamnagar Refinery complex. The case of the Ld A.R is that the software is a standardized software supplied to the assessee on non-exclusive basis and further the assessee does not have right to copy the same except as provided in the agreement for internal use. He further submitted that the source code is not supplied to the assessee and the assessee has been given only license to use the software, which is akin to shrink wrapped software.....
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.... the relevant provisions under the DTAA and as compared with that of the Income Tax Act, 1961, reveals that the DTAA covers only a part of the items mentioned under sub clauses (i) to (v) to Explanation 2 to section 9(1)(vi). A perusal of the definition of royalty as provided in Article 12 of DTAA' reveals that it is the payment which is received as consideration for the use of' or the right to use' any copyright of literary, artistic, scientific work including .....‟ (emphasis supplied by us). Hence, what is relevant is the consideration paid for the use of' or the right to use' any copyright'. The right to use a computer software/programme has not been specifically mentioned in the DTAA with any country. We may clarify here that the contention of the revenue is that the term literary work' includes software' also, which contention we will discuss in the latter part of this order. Now coming to the relevant provisions of the Income Tax Act,1961, we may mention here that the scope of royalty' under clauses (a), (b), & (c) to section 9(1)(vi) is very broad to cover consideration paid for any right, property or information used or services utilized for the purpose of business o....
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....definition of royalty as under the Income Tax Act is in paramateria with that under the DTAA. Since the definition provided under the royalty in the DTAA is more beneficial to the assessee, hence as per the provisions of section 90, the definition of royalty as provided under DTAA is to be taken. So far as the reliance of the Ld. D.R. on the decision of the Hon'ble Madras High Court in the case of Vrizon Communication Singapore (supra) and of the Mumbai Tribunal in the case of Viacom 18 Media Pvt. Ltd. (supra) is concerned, we find that the said decisions have been rendered in context of some other item relating to the consideration paid for transponder/band width/telecom services. In that context, the Hon'ble Madras High Court has interpreted the right to use the equipment' and the word process' applying the definition provided under the domestic Income Tax Act as the definition of the same was not available in the DTAA. However, in the case in hand, we have to define the term literary work' and the term copyright; the definitions of the same are not available under the Income Tax Act, but, the same are available under the Copyright Act, 1957. 22. The Hon'ble Delhi High Court i....
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....d that the tax treaties are considered to be mini legislation containing in themselves all the relevant aspects or features which are at variance with the general taxation laws of the respective countries. The Parliament is not equipped with the power to, through domestic law, change the terms of a treaty. Amendments to domestic law cannot be read into treaty provisions without amending the treaty itself. It is fallacious to assume that any change made to domestic law to rectify a situation of mistaken interpretation can spontaneously further their case in an international treaty. Therefore, mere amendment to Section 9(1)(vi) cannot result in a change. It is imperative that such amendment is brought about in the agreement as well. Hon'ble Delhi High Court concluded in the said decision (supra) that the Finance Act, 2012 will not affect Article 12 of the DTAAs, it would follow that the first determinative interpretation given to the word royalty prior to the amendment in the Income Tax Act will continue to hold the field for the purpose of assessment years preceding the Finance Act, 2012 and in all cases which involve a Double Tax Avoidance Agreement, unless the said DTAAs are amend....
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....ommercial or scientific experience, scientific equipment etc. However, the Ld. DR has neither stressed nor has advanced any argument as to that software falls in any of the above mentioned other categories. All the contentions of the revenue are concentrated on the point that software is covered under the term copy right in a literary work' and thus included in the definition of 'royalty' as provided under the DTAAs of India with the other countries as detailed in the table above. It has been submitted by the ld. DR that the definition of 'Literary work' as provided under the domestic law viz. Copyright Act, 1957 should be considered while deciding the scope of the term Royalty as defined under the treaty. This issue has been discussed by the Hon'ble Karnataka High Court in the case of Samsung Electronics Company Ltd. & Others (supra) while relying upon Article 3 sub section (2) of the DTAA with US, observing that any term not defined in the convention shall, unless the context otherwise requires, have the meaning which it has under the laws of that State' concerning the tax to which the convention applies. Hence, the reference is to be made to the respective law of the taxing Stat....
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....evance in the formation and execution of the sale contract. In context of copyright law, a license is a permission to do an act, that, when the doing of the same without permission, would be unlawful. In Software Licences, the copyright owner retains substantial rights and greater ability to control the use of software. Licence may have provisions relating to the persons who may use the programme, the number of copies that can be made, warranty, limitation of liability, distribution of the software, etc. These are generally biased towards the licensor. Now, the question before us is as to whether the sale of such computer software by the non-resident to the resident assessee amounts to the transfer for the use of or the right to use any copyright in a literary work? 27. The plea raised on behalf of the Revenue is that in case of sale of software, the title to the disk, manual etc. in which the software is embedded may pass to the buyer, but, the title to Intellectual Property in the software does not. The Ld. DR has relied upon the decision of the Hon'ble Karnataka High Court in CIT vs. Samsung Electronics Company Ltd. & Others (2012) 345 ITR 494 wherein it has been observed tha....
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....nd it is a case of transfer of a copyrighted article. The payment is for a copyrighted article and represents the purchase price of an article and cannot be considered as royalty. The Hon'ble Delhi High Court has further held that what is transferred is neither can be right in the software nor the use of the copyright in the software, but is the right to use copyrighted material or article which is clearly distinct from the rights in a copyright and the same does not give rise to any royalty income and would be the business income' of the non-resident. The Hon'ble Delhi High Court in the case of Infrasoft Ltd. (supra) has also relied upon another decision of the Hon'ble Delhi High Court in the case of DIT vs. Nokia Networks OY‖ (2013) 212 taxman 68 wherein the Hon'ble Delhi High Court has held that the copyright is distinct from material object. It is intangible, incorporeal right in the nature of privilege, quite independent of any material substance such as manuscript. The transfer of the ownership of a physical thing in which copyright exists comes to the purchaser with the right to do with it whatever he pleases, except the right to make copies and issue them to the publi....
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.... held that all tangible, movable articles are goods for charge of custom duties under section 12 read with section 2(22)(e) of the Customs Act, 1962, irrespective of what the article may be or may contain. It may be that what the importer wanted and paid for was technical advice or information technology, an intangible asset, but the moment the information or advice is put on media, whether paper or cassette or diskette or any other thing, that what is supplied, it becomes chattel. The Hon'ble Supreme Court, thus, held that the intellectual property such as drawings, license and technical material when put on a media is to be regarded as an article and there is no scope for splitting the engineering drawings or encyclopedia into intellectual input on the one hand and the paper on which it is scribed on the other hand. 30. No doubt, the dominant object of sale in such transaction is the computer software and not the disk or the CD upon which such software is loaded. As understood by us, what the computer programme' or the software' is an expression of work/ideas written on a media in a computer programming language and that is why it has been included worldwide in the category of....
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.... the property in such a goods passes to the buyer and the buyer has every right of fair use of the said product and subject to the conditions mentioned in the sale agreement which in fact are restrictions or limitations to the effect that the buyer will not misuse the product which may amount to infringe of copyright in the product. So what the buyer purchases is the copyrighted product and he is entitled to fair use of the product. The restriction or the terms mentioned in the agreement are the conditions of sale restricting misuse and cannot be said to be license to use. The purchaser, thus, is entitled to perform all or any of the activities which is essentially required for the fair use for the purpose for which the product is purchased by him. Section 52 of the Copyright Act expressly recognizes such a right of the purchaser, which we will discuss in later part of this order. Further, the computer software, as generally observed, has a shorter life cycle. When software is sold, the owner gets the price of the copy of the product/work. He in fact receives the price for the expected life of the work and product. In such case the purchaser pays the price for the product itself an....
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.... sale of the product. 33. Further, a question, which needs to be examined whether the statutory rights of the purchaser/user of the software can be curtailed or done away with by the terms of such licenses/agreements. A License Agreement, 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 prevalent 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 publi....
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.... void as against the principle of fair use of the product. 34. Further, to determine whether a copyright in a work is infringed or not or would be deemed to be infringed or not, the most important test is to find out whether the use is likely to harm the potential market or the value of the copyrighted work. When it is not the allegation of the owner/purchaser of the work that the purchaser/user was reproducing the work and distributing it so as to affect his potential market in exercising the reproduction right, then it cannot be said that the user has infringed the rights of the purchaser, who in fact has paid the consideration to use the copyrighted work. The use of the product itself' by the purchaser for the purpose for which he purchases such a product/diskette/CD ROM is thus comes within the scope of fair use. Copyright does not protect the fair or exclusive use of the work, rather, the purpose of copyright protection is to regulate the reproduction of the copies of the copyrighted work and distribution thereof. It is pertinent to mention here that the use of information viz. a new technology or invention, though, can be protected under the Patents Act, 1970; yet, under t....
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....ght to use the copy right in work. Our above view also finds support from certain other provisions of the Copyright Act, which we discuss in the following paras. 37. Section 51 of the copyright Act 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 constitutes an infringement of the copyright in the work, unless he was not aware and had no reasonable ground for believing that such communication to the public would be an infringement of copyright; or (b) when any person- ....
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....t 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. 40. Hence, as per section 51 of the Act, copyright in a work shall be deemed to be infringed when any person without license granted by the owner of the copyright or in contravention of the conditions of a license so granted does anything, the copyright of the owner is stated to be infringed. However a perusal of the above provi....
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.... 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. 42. 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 the author of the work shall not have 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. 43. Further in case of imported software i.e. if the original work has been published outside India, as per the provisions of the....
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....omatically or impliedly, so far as the Indian copyright laws are concerned. 44. 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 analysed 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, 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 of section 40,40A, 41 and 42 of the Copyright Act 1957. 45. The provisions of the Copyright Act, as discussed above are clear and unambiguous in this respect. If the assessee has purchased a copy of a computer software programme and he uses the said copy for his business purpose and if the said use falls within the scope and purview of the....
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....ubject 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 can not be said to grant of or infringement of copyright in the light of specific statutory provisions of Copyright Act 1957. 46. While finalizing this order, we have come across a recent decision of the Co-ordinate Delhi Bench of the Tribunal in the case of Datamine International Ltd. vs. ADIT in ITA No.5651/Del/2010 vide order dated 14.03.16 on the identical issue wherein the definition of royalty vis-à-vis computer software in the light of India UK Treaty has been discussed. The Tribunal in para 12.1 of the said order(supra) has observed that in the India-UK Treaty, in para 3(a) of Article 13 which deals with the definition of royalty' in the relevant India-UK Treaty, there was no specific mention of word computer software' along with other terms such as literary, artistic or scientific work, patent, trade mark' etc. The Tribunal observed that such a language of the India-UK DTAA was in sharp contrast to the specific use of the term computer software' or computer software programme' together with other terms such as li....
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.... as such. We, therefore, fully agree with the observations of the co-ordinate bench of the Tribunal in the case of Datamine International Ltd. vs. ADIT (supra) that wherever the Government of India intended to include consideration for the use of software as 'Royalties', it explicitly provided so in the DTAA with the concerned country viz. Malaysia, Kazakhstan and Turkmenistan. We find that in the cases before us, in the DTAA of India with respective countries (names mentioned in the chart given above), the definition of royalty in none of the respective treaties specifically include any consideration for the use of or the right to use any 'computer software' and therefore, the same cannot be imported or read into it. 48. We may further clarify here that without expressing our opinion or any view in relation to the definition of royalty' vis-à-vis 'computer software' as provided under the Income Tax Act, we have given our findings only in respect of the scope of royality' under the DTAA. 49. In view of our detailed discussion made above, the assessee cannot be said to have paid the consideration for use of or the right to use copyright but has simply purchased ....
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....f M/s Baan Global B V (supra) has considered an identical issue and rendered its decision as under:- "10. We have heard the rival submissions, perused the relevant finding given in the impugned order and also the various decisions, cited before us. The sole issue involved before us is, whether the payment received by the assessee on sale of computer software product is to be treated as income by way of "royalty" or business income. In case, if it is a 'business' income, then admittedly, assessee being a non-resident company with no permanent establishment in India, the same will not be taxable in India and if it is a "royalty", then it has to be taxed at the rate of 15% as provide under the treaty. Thus, the only issue for consideration is, whether the said payment falls within the terms of "royalty" under Article 12(4) of India-Netherland DTAA or under 9(1)(vi) of Income Tax Act. Here again, it is an undisputed fact that, assessee being a tax resident of Netherland has sought benefit under Indo Netherland DTAA, therefore, the payment received by the assessee from its Indian Subsidiary, INFOR India has to be examined under the treaty provisions. Briefly recapitulating the releva....
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....or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience". From the plain reading of the article it can be inferred that, it refers to payments of any kind received as a consideration for the use of, or the right to use any 'copyright' of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. Thus, in order to tax the payment in question as "royalty", it is sine qua non that the said payment must fall within the ambit and scope of Para 4 of Article 12. The main emphasis on the payment constituting 'royalty' in Para 4 are for a consideration for the 'use of' or the 'right to use' any copyright.......... The key phrases "for the use" or "the right to use any copyright of"; "any patent.......; "or process", "or for information.........,"; "or scientific experience", etc., are important parameter for treating a transacti....
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.... 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." (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 in two dimensions of a three dimensional work; (ii) to communicate the work to the public; (iii) to issue copies of the work to the public not being copies already in circulation; (iv) to include the work in any cinematograph film; (v) to make any adaptation of the work; (vi) to do in relation to an adaptation of the work any of the acts specified in relation to the work in sub-clauses (i) to (iv); (d) In the case of cinematograph film, - (i) to make a copy of the film, including a photograph of any image forming part thereof; (ii) to sell or give on hire, or offer for sale or hire, any copy of the film, regardless of whether such copy has been sold or given on hire on earlier occasions; (iii....