TaxTMI 
TaxTMI 
2017 (6) TMI 167
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.... Act. The assessee explained before the A.O that the payment was made towards purchase of software license from M/s.Vector Software Inc., USA. The explanation of the assessee was reproduced by the AO in Page No.2 of the Assessment Order and for the sake of convenience the same is extracted as under: The assessee in its submission has stated that these payments are towards purchase of software licenses from Vector Software Inc., USA. Vector is a corporation and a resident of USA having its principal place of business at the USA. The company has been granted a non-exclusive, non-transferable software license by Vector used for carrying out the testing in connection with the software developed by the company for automotive industries. According to assessee, the key terms in relation to licensing of software are: * The license can be used by the company only in connection with its internal business' * The company cannot distribute externally or sub-license or demonstrate the software to any third party. Assessee submitted that, * The software is used by the company only for internal purposes of the business and cannot be shared externally or sub-licensed to be third party or com....
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....er referred to as 'Ld.CIT(A)') and the Ld.CIT(A) confirmed the order of the Ld.AO. 5.0 Aggrieved by the Order of the Ld.CIT(A), the assessee filed appeal before this Tribunal. 6.0 Appearing for the assessee, the Ld.AR argued that the assessee has purchased the software for the exclusive use of the company in the automobile industry. The license can be used by the company only in connection with the internal business and the company cannot distribute or sub-license or demonstrate the software to any other party and the same cannot be saved externally and the consideration paid for use of software license is not taxable as royalty. The assessee also stated that under US,DTAA there was no specific reference to the software, he referred the treaty of Indo US treaty which reads asunder: "The term "royalties' as defined in India-USA DTAA: a) payments of any kind received as a consideration for the use of, or the right to use, ay copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formu....
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.... other hand the Ld.DR relied on the lower authorities orders. 7.0 We heard the rival submissions and perused the material placed on record. The assessee has purchased the software license from the 'Vector' for internal use of the company. As per the agreement for purchase of license the assessee cannot transfer/ share externally or sub-license to the third party or commercially exploit and can only use in the company for its internal use. The company is not permitted to make any alteration of the software and did not get any ownership right in any Vector Software except rights of use in the company. The assessee referred the Indo US treaty and the 'computer software' does not fall under the definition of Royalty. Further the AR invited our attention Section 14 of the Copy right act which was placed in paper book in page No.6 which reads asunder: "the exclusive right subject to the Provisions of this Act, to do or authorize the doing of any of the following acts in respect of a work or any substantial part thereof, namely: (a) In the case of a literary, dramatic or musical work, not being a computer programme, i) to reproduce the work in any material form including the storin....
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....permitting the another to use the property; the share of the produce reserved to the owner for permitting another to exploit and use the property; a share of the profit, reserved by the owner for permitting another to use the property; the amount reserved or the rental to be paid the original owner of the whole estate." 5. The Madras High Court in CIT Vs. Neyveli Lignite Corporation Ltd., reported in 243 ITR 458 states thus explaining the concept of Royalty:- "The term "royalty' normally connotes the payment made by a person who has exclusive right over a thing for allowing another to make use of that thing which may be either physical or intellectual property or thing. The exclusivity of the right in relation to the thing for which royalty is paid should be with the grantor of that right. Mere passing of information concerning the design of a machine which is a tailor-made to meet the requirement of a buryer does not by itself amount to transfer of any right of exclusive user so as to render the payment made there for being regarded as 'royalty" 6. Courts have consistently noted the difference between a transaction of sale of a 'copyrighted article' and one of 'copyright' itse....