TaxTMI 
TaxTMI 
2020 (9) TMI 64
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....he Appellant on 4 January 2017) passed by the learned Deputy Commissioner of Income-tax, Circle 3(1)(2), International Taxation, New Delhi (hereinafter referred to as 'AO') in pursuance of the directions issued by the Hon'ble Dispute Resolution Panel - 2, New Delhi (hereinafter referred to as 'DRP') dated 17 October 2016 under section 143(3) of the Income-tax Act, 1961 ('Act') read with section l44C(13) of the Act on the following grounds, which are independent of and without prejudice to each other. Ground 1 - Consideration from sale of software licenses of Rs. 2,37,63,86,143 taxed as royalty i. On the facts and in the circumstances of the case and in law, the learned AO and the Hon'ble DRP has erred in treating the consideration received from sale of software license taxable as 'Royalty' both under the provisions of the Act as well as Article 12 of the Double Taxation Avoidance Agreement ('DTAA') between India and Singapore. ii. The learned AO and the Hon'ble DRP failed to appreciate the Appellant's arguments and submissions explaining that the software licences sold by the Appellant are goods and not servi....
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....ance on the ratio laid down by the Jurisdictional High Court in the case of DIT vs Infrasoft Ltd. 264 CTR 329 (Del.). The DRP vide directions dated 17.10.2016 upheld the order of the Assessing Officer on the ground that the Department has filed SLP before the Hon'ble Apex Court against the decision of Hon'ble Delhi High Court in DIT vs Infrasoft Ltd. (supra) and the matter needs to be kept alive in view thereof. The Assessing Officer passed final assessment order against which the assessee is in appeal before us. 4. The Ld.AR for the assessee points out that the issue raised vide Ground of appeal No.1 is against the taxability of consideration received on sale of software. Further, he pointed out that the assessee was a non-resident in India and it is noted by the Assessing Officer that there is no Permanent Establishment (in short "PE") in India and hence, the receipts are not to be taxed as Royalty either under the provision of DTAA or under the provisions of the Act. Our attention is drawn to various parts of assessment order wherein major reliance was placed on the decision of Delhi Bench of Tribunal in Gracemac Corporation vs ADIT 42 SOT 550 (Del.). The Ld.AR for the ass....
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.... for use of process, since there was no control of the customer over the software system and all rights therein are retained with the assessee. Further, the transaction merely involves supply of the products on a license basis and not the grant of rights (including any rights towards the copyright) in the software/computer programme embedded within the product. 10. Another plea raised by the assessee is that the payments received on supply of software to the end users or through the distributor do not fall within the definition of "Royalty" under Article 12 (3) between India and Singapore Tax Treaty, where such definition is narrower in ambit, as compared to the Act. On the other hand, the case of the authorities is that the sale of software is taxable as 'Royalty' in the hands of the assessee. For this proposition, reliance was placed on the ratio laid down by the Delhi Bench of the Tribunal in Gracemac Corporation vs ADIT (supra). 11. The question which arises is whether the receipts on sale of licensed software to the end user customers in India, which was an application software, can be covered under the term 'Royalty' income arising on sale of such software as provided i....
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.... 'Royalty' under Article 12(3) of DTAA. 20. The Hon'ble High Court of Delhi in DIT Vs. Infrasoft Ltd. (supra) have noted that under the license agreement, license was non-exclusive, nontransferrable and the software had to be used in accordance with agreement; the licensee was permitted to make only one copy of software and associated support information and that also for backup purpose. All copies of software were the exclusive property of 'Infrasoft' and it was stipulated that copy shall include 'Infrasoft' copyright and all copies of software also; and without consent of the licensor, the software could not be loaned, rented, sold, sub-licensed or transferred to any third party. The Hon'ble High Court further went on to hold that distinction had to be made between acquisition of copyright and copyrighted article; copyrighting was distinct from material object. 21. The Hon'ble High Court in DIT Vs. Infrasoft Ltd. (supra) vide its decision dated 22.11.2013 was of the view that where the assessee was governed by Indo-US DTAA, the income of assessee would be chargeable to tax in terms of provisions of Indo-US DTAA and if the same was more advantageous or beneficial....
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....e rights mentioned in Clauses (a) and (b) of Section 14, it would mean that it does not have any right in a copyright. In that case, the payment made by the cellular operator cannot be characterized as royalty either under the Income-tax Act or under the DTAA. The question, therefore, to be answered is whether any of the operators can exercise any of the rights mentioned in the above provisions with reference to the software supplied by the Assessee. 157. We may first look at the supply contract itself to find out what JTM, one of the cellular operators, can rightfully do with reference to the software. We may remind ourselves that JTM is taken as a representative of all the cellular operators and that it was common ground before us that all the contracts with the cellular operators are substantially the same. Clause 20.1 of the Agreement, under the title "License", says that JTM is granted a non - exclusive restricted license to use the software and documentation but only for its own operation and maintenance of the system and not otherwise. This clause appears to militate against the position, if it were a copyright, that the holder of the copyright can do anything with ....
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....ell or in any manner alienate or part with its possession. (e) Not use or transfer the Software and/or the Documentation outside India without the written consent of the Contractor and after having received necessary export or re -export permits from relevant authorities. This clause places stringent restrictions on the cellular operator so far as the use of software is concerned. It first says that the cellular operator cannot make the software or portions thereof available to any person except to its employees and even with regard to employees it has to be only on a "need to know basis" which means that even the employees are not to be told in all its aspects. What the Assessee can do is only to tell the particular employee what he has to know about the software for operational purposes. The cellular operator has been denied the right to make copies of the software or parts thereof except for archival backup purposes. This means that the cellular operator cannot make copies of the software for commercial purposes. This condition is plainly contrary to Section 14(a)(i) of the Copyright Act which permits the copyright holder to reproduce the work in any m....
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.... 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 other cellular operator has acquired under the supply contract is only the copyrighted software, which is an article by itself and not any copyright therein. 163. We may now briefly deal with the objections of Mr. G.C. Sharma, the learned senior counsel for the Department. He contended that if a person owns a copyrighted article then he automatically has a right over the copyright also. With respect, this objection does not appear to us to be correct. Mr. Dastur filed an extract from Iyengar's Copyright Act (3rd Edition) edited by R.G. Chaturvedi. The following observations of the author ar....
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.... COMMENTARY ON ARTICLE 12 - PAPER BOOK V "14. In other types of transactions, the rights acquired in relation to the copyright are limited to those necessary to enable the user to operate the program, for example, where the transferee is granted limited rights to reproduce the program. This would be the common situation in transactions for the acquisition of a program copy. The rights transferred in these cases are specific to the nature of computer programs. They allow the user to copy the program, for example onto the user's computer hard drive or for archival purposes. In this context, it is important to note that the protection afforded in relation to computer programs under copyright law may differ from country to country. In some countries the act of copying the program onto the hard drive or random access memory of a computer would, without a license, constitute a breach of copyright. However, the copyright laws of many countries automatically grant this right to the owner of software which incorporates a computer program. Regardless of whether this right is granted under law or under a license agreement with the copyright holder, copying the pro....
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....titute him the owner of a copyright right. They are: (a) The right to make copies of the computer programme for purposes of distribution to the public by sale or other transfer of ownership, or by rental, lease, or lending. (ii) The right to prepare derivative computer programmes based upon the copyrighted computer programme (iii) The right to make a public performance of the computer programme. (iv) The right to publically display the computer programme. 169. A copyrighted article has been defined in the regulation (page 147 of the paper book) as including a copy of a computer programme from which the work can be perceived, reproduced or otherwise communicated either directly or with the aid of a machine or device. The copy of the programme may be fixed in the magnetic medium of a floppy disc or in the main memory or hard drive of a computer or in any other medium. 170. So far as the transfer of copyrighted articles and copyright rights are concerned, the regulation goes on to say (page 148 of the paper book) that the question whether there was a transfer of a copyright right or only of a copyrighted article must be de....
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....reement shows that the license is nonexclusive, non-transferable and the software has to be uses in accordance with the Agreement. Only one copy of the software is being supplied for each site. The licensee is permitted to make only one copy of the software and associated support information and that also for backup purposes. It is also stipulated that the copy so made shall include Infrasoft's copyright and other proprietary notices. All copies of the Software are the exclusive property of Infrasoft. The Software includes a licence authorisation device, which restricts the use of the Software. The software is to be used only for Licensee's own business as defined within the Infrasoft Licence Schedule. Without the consent of the Assessee the software cannot be loaned, rented, sold, sublicensed or transferred to any third party or used by any parent, subsidiary or affiliated entity of Licensee or used for the operation of a service bureau or for data processing. The Licensee is further restricted from making copies, decompile, disassemble or reverse-engineer the Software without Infrasoft's written consent. The Software contains a mechanism which Infrasoft may activate to deny the L....
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....ight, is not the same thing as transferring or assigning rights in relation to the copyright. The enjoyment of some or all the rights which the copyright owner has, is necessary to invoke the royalty definition. Viewed from this angle, a non -exclusive and non-transferable licence enabling the use of a copyrighted product cannot be construed as an authority to enjoy any or all of the enumerated rights ingrained in Article 12 of DTAA. Where the purpose of the licence or the transaction is only to restrict use of the copyrighted product for internal business purpose, it would not be legally correct to state that the copyright itself or right to use copyright has been transferred to any extent. The parting of intellectual property rights inherent in and attached to the software product in favour of the licensee/customer is what is contemplated by the Treaty. 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 does not, amount to transfer of rights in relation to copyright or conferment of the right of using the copyright. The transfer of rights in or over copyright or....
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....urely as a temporary protection against loss, destruction or damage has been held by the Delhi High Court in DIT v. M/s Nokia Networks OY (Supra) as not amounting to acquiring a copyright in the software." 25. Further, the Hon'ble High Court of Delhi in Pr.CIT vs M.Tech India Ltd. (P.) [2017] 381 ITR 31 (Del.) held as under:- "12. In the cases where an Assessee acquires the right to use a software, the payment so made would amount to royalty. However in cases where the payments are made for purchase of software as a product, the consideration paid cannot be considered to be for use or the right to use the software. It is well settled that where software is sold as a product it would amount to sale of goods. In the case of Tata Consultancy Services v. State of Andhra Pradesh: (2004) 271 ITR 401 (SC), the Supreme Court examined the transactions relating to the purchase and sale of software recorded on a CD in the context of the Andhra Pradesh General Sales Tax Act. The court held the same to be goods within the meaning of Section 2(b) of the said Act and consequently exigible to sales tax under the said Act. Clearly, the consideration paid for purchase of goods cann....
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....planation 2 thereto, it is necessary to establish that there is transfer of all or any rights (including the granting of any licence) in respect of copyright of a literary, artistic or scientific work. Section 2(o) of the Copyright Act makes it clear that a computer programme is to be regarded as a "literary work". Thus, in order to treat the consideration paid by the cellular operator as royalty, it is to be established that the cellular operator, by making such payment, obtains all or any of the copyright rights of such literary work. In the present case, this has not been established. It is not even the case of the Revenue that any right contemplated under section 14 of the Copyright Act, 1957, stood vested in this cellular operator as a consequence of article 20 of the supply contract. Distinction has to be made between the acquisition of a "copyright right" and a "copyrighted article". 60. Mr. Dastur is right in this submission which is based on the commentary on the OECD Model Convention. Such a distinction has been accepted in a recent ruling of the Authority for Advance Ruling (AAR) in Dassault Systems KK 229 CTR 125. We also find force in the submission of Mr. Das....
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....right to use copyrighted material, then the receipts on sale of licensing of software is not Royalty in view of the beneficial provisions of the DTAA between India and Sweden. We further hold that amended definition of 'Royalty' under the domestic law cannot be extended to the definition of 'Royalty' under DTAA, where the term 'Royalty' originally defined has not been amended. As per definition of 'Royalty' under DTAA, it is payment received in consideration for use or right to use any copyright of literary, artistic or scientific work, etc.; thus, purchase of copyrighted article does not fall in realm of 'Royalty'. We also hold that since the provisions of DTAA overrides the provisions of Income Tax Act and are more beneficial and the definition of 'Royalty' having not undergone any amendment in Tax Treaty, the assessee was not liable to be taxed on aforesaid receipts of Licensing software and also on sale of Hardware. Accordingly, we hold so. The Ground of appeal Nos. 3 to 6 are thus allowed." 13. We may also refer to the decision of the Pune Bench of the Tribunal in the case of sister concern of the assessee i.e. Symantac Corporation wherein also similar issue arose and the o....
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....oftware also; and without consent of the licensor, the software could not be loaned, rented, sold, sub-licensed or transferred to any third party. The Hon_ble High Court further went on to hold that distinction had to be made between acquisition of copyright and copyrighted article; copyrighting was distinct from material object. 66. The Hon_ble High Court in DIT Vs. Infrasoft Ltd. (supra) vide its decision dated 22.11.2013 was of the view that where the assessee was governed by Indo-US DTAA, the income of assessee would be chargeable to tax in terms of provisions of Indo-US DTAA and if the same was more advantageous or beneficial, then definition of the word "royalty_ as defined in Explanation 2 to section 9(1)(vi) of the Act could not be applied. The Hon_ble High Court vide paras 64 and 65 held as under:- "64. To be taxable as royalty income covered by Article 12 of the DTAA the income of the Assessee should have been generated by the "use of or the right to use of" any copyright. 65. The issue whether consideration for software was royalty came up for consideration before the Special Bench of the Tribunal in Delhi in the case of MOTOROLA INC VS DEPUTY ....
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....rators, can rightfully do with reference to the software. We may remind ourselves that JTM is taken as a representative of all the cellular operators and that it was common ground before us that all the contracts with the cellular operators are substantially the same. Clause 20.1 of the Agreement, under the title "License", says that JTM is granted a non - exclusive restricted license to use the software and documentation but only for its own operation and maintenance of the system and not otherwise. This clause appears to militate against the position, if it were a copyright, that the holder of the copyright can do anything with respect to the same in the public domain. What JTM is permitted to do is only to use the software for the purpose of its own operation and maintenance of the system. There is a clear bar on the software being used by JTM in the public domain or for the purpose of commercial exploitation. 158. Secondly, under the definition of "copyright" in Section 14 of the Copyright Act, the emphasis is that it is an exclusive right granted to the holder thereof. This condition is not satisfied in the case of JTM because the license granted to it by the....
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....except to its employees and even with regard to employees it has to be only on a "need to know basis" which means that even the employees are not to be told in all its aspects. What the Assessee can do is only to tell the particular employee what he has to know about the software for operational purposes. The cellular operator has been denied the right to make copies of the software or parts thereof except for archival backup purposes. This means that the cellular operator cannot make copies of the software for commercial purposes. This condition is plainly contrary to Section 14(a)(i) of the Copyright Act which permits the copyright holder to reproduce the work in any material form including the storing of it in any medium by electronic means. We may also notice Section 52(1)(aa) of the Copyright Act which lists out certain acts which cannot be considered as infringement of copyright. The particular clause permits the making of copies or adaptation of a computer programme by the lawful possessor of the copy and the computer programme in order to utilize the public programme for the purpose for which it was supplied or to make backup copies purely as a temporary protection....
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....has actually acquired a copyright to reproduce the music and exploit the same commercially. In the present case what JTM or any other cellular operator has acquired under the supply contract is only the copyrighted software, which is an article by itself and not any copyright therein. 163. We may now briefly deal with the objections of Mr. G.C. Sharma, the learned senior counsel for the Department. He contended that if a person owns a copyrighted article then he automatically has a right over the copyright also. With respect, this objection does not appear to us to be correct. Mr. Dastur filed an extract from Iyengar's Copyright Act (3rd Edition) edited by R.G. Chaturvedi. The following observations of the author are on the point: "(h) Copyright is distinct from the material object, copyrighted: It is an intangible incorporeal right in the nature of a privilege, quite independent of any material substance, such as a manuscript. The copyright owner may dispose of it on such terms as he may see fit. He has an individual right of exclusive enjoyment. The transfer of the manuscript does not, of itself, serve to transfer the copyright therein. The....
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....ture of computer programs. They allow the user to copy the program, for example onto the user's computer hard drive or for archival purposes. In this context, it is important to note that the protection afforded in relation to computer programs under copyright law may differ from country to country. In some countries the act of copying the program onto the hard drive or random ITA No.387/PUN/2017 Symantec Corporation access memory of a computer would, without a license, constitute a breach of copyright. However, the copyright laws of many countries automatically grant this right to the owner of software which incorporates a computer program. Regardless of whether this right is granted under law or under a license agreement with the copyright holder, copying the program onto the computer's hard drive or random access memory or making an archival copy is an essential step in utilizing the program. Therefore, rights in relation to these acts of copying, where they do no more than enable the effective operation of the program by the user, should be disregarded in analyzing the character of the transaction for tax purposes. Payments in these types of transactions would ....
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....he computer programme. (iv) The right to publically display the computer programme. 169. A copyrighted article has been defined in the regulation (page 147 of the paper book) as including a copy of a computer programme from which the work can be perceived, reproduced or otherwise communicated either directly or with the aid of a machine or device. The copy of the programme may be fixed in the magnetic medium of a floppy disc or in the main memory or hard drive of a computer or in any other medium. 170. So far as the transfer of copyrighted articles and copyright rights are concerned, the regulation goes on to say (page 148 of the paper book) that the question whether there was a transfer of a copyright right or only of a copyrighted article must be determined taking into account all the facts and circumstances of the case and the benefits and burden of ownership which have been transferred. Several examples have been given below these regulations to find out whether a particular transfer is a transfer of a copyright right or a transfer of a copyrighted article. 171. The Commentary of "Charl P. du TOIT" on this question has been placed at pages 20....
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....r scientific work, etc.; thus, purchase of copyrighted article does not fall in realm of "royalty_. We also hold that since the provisions of DTAA overrides the provisions of Income Tax Act and are more beneficial and the definition of "royalty_ having not undergone any amendment in DTAA, the assessee was not liable to deduct tax for payments made for purchase of software. In such scenario, the assessee cannot be held to be in default and the demand created under section 201(1) and interest charged under section 201(1A) of the Act is thus, cancelled." 12. The Tribunal thus, in the hands of recipient had held that where the purchase of software was copyrighted article, then the same was not covered by the term 'royalty' under section 9(1)(vi) of the Act and it was further held that the amended definition of 'royalty' under the domestic law could not be extended to the definition of 'royalty' under DTAA, where the term originally defined had not been amended. Applying the said ratio to the facts of the present case, we hold that in the hands of assessee, the consideration received on sale of software is not 'royalty' under Explanation 2 to sec....