TaxTMI 
TaxTMI 
2005 (2) TMI 438
X X X X Extracts X X X X
X X X X Extracts X X X X
....or telecommunication system, for office appliances, for computer systems and for mobile devices etc. The software developed by the assessee is for in-house use by the parent company. In the assessment year 1999-2000, the assessee imported software products of Rs. 2,28,960 from Tektronix Inc., USA. Similarly, during the other two years, it imported software products from USA, France and Sweden. According to the assessee, the imported software product, namely, Telelogic Tau TTCN Suite, are readily available software in the market. Hence, payment made to the foreign companies cannot be treated as Royalty, as per the provision of section 9(1)(vi) read with Double Taxation Avoidance Agreements (DTAA for short) between India and USA, India and France respectively. The contention of the assessee was not accepted by the ITO (TDS). It was held by the Assessing Officer that the assessee was a defaulter by not deducting tax from the remittance made by the assessee for purchase of these softwares. The reply of the assessee was not accepted by the Assessing Officer and it was held that as per the provision of section 9(1)(vi) of the Act, the payment made by the assessee is Royalty. Hence, the a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....TR 80 (Ken); (ii) V.V.S. Alloys Ltd. v. Asstt. CIT [2000] 68 TTJ (All.) 516; (iii) Dy. CIT v. Tollygunj Club [1995] 52 ITD 166 (Cal.). 4. The learned counsel further submitted on merits of the case and also filed a written submission in this regard. We shall first deal with the matter on merit. It was submitted that the assessee had imported branded off-the-shelf software packages from different suppliers in the USA, Sweden and France. The relevant documents are placed at pages 4 to 54 of the paper book. The Assessing Officer held that the payments made by the assessee for the import of software packages were in the nature of Royalties being considerations for use of commercial/scientific/industrial equipments as software was in the nature of equipment. Accordingly, the Assessing Officer applied the provisions of Article 12(2)(b) of India-US, Article 12(2) of India-Sweden, and Article 13(2) of India-France treaties to the payments made to the respective suppliers. 5. It was submitted by the learned counsel for the assessee that internationally, as well as in India 'software', which in legal parlance known as 'computer programme' is covered un....
X X X X Extracts X X X X
X X X X Extracts X X X X
....h work. The acquisition of a product, wherein the subject-matter of copyright is embedded, without right to exploit the copyright does not amount to use or right to use the copyright of such literary/artistic/scientific i.e., copyrighted work. (b) In this connection, he drew our attention to the contents in sections 101, 106, 117 and 202 of the Copyright law of USA, the relevant extracts are placed at pages 27 to 38 of the paper book, to the effect that the exclusive right enjoyed by the owner of copyright means the right to reproduce the copyrighted work or to prepare derivative works based upon the same or to distribute the copies of the copyrighted work to the public. Mere making of a copy of the computer programme which is a copyrighted work does not amount to use of the copyright provided such copy is necessary for utilization of the computer or is for archival purposes only. Also, transfer of such copies along with the originals without retaining any copies thereof does not amount to utilization of the copyright. He submitted that section 202 of the US copyright law itself provides that transfer of ownership of any material object including the copy in which the work....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nts for use of equipments' to mean payment of any kind received as a consideration for use or right to use industrial, commercial or scientific equipment. (e) Based on the above, the learned counsel for the assessee submitted that under the Indo-France treaty also, income by way of royalty would arise in case of a copyrighted work only if the payer is allowed to commercially exploit such copyright in the copyrighted work. (f) In this connection, the learned counsel for the assessee drew our attention to sections 14(6), 52(1)(aa) to (ad) of the Indian Copyright Act, 1957. According to him, under the Indian copyright law also, unless the owner of the copyright of the computer programme authorizes any other person to do any of the acts mentioned in section 14(b), it cannot be said that he has allowed the other person the use of or right to use the copyright of the computer programme. He submitted that universally a computer programme is categorized as a 'copyrighted work' and transfer of a copy of such computer programme to another person does not amount to allowing the use of the copyright by such other person. He also submitted that the payment received....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s made for computer programmes, as also the Taxation laws of USA. He further submitted that the reliance placed by the assessee on OECD commentary was based on the principle enunciated by the decision of the Hon'ble Andhra Pradesh High Court in CIT v. Visakhapatnam Port Trust [1983] 144 ITR 146, Which has been confirmed by the decision of the Supreme Court in Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706. (j) The learned counsel in support of his submissions relied on the following decisions: (i) Tata Consultancy Services v. State of Andhra Pradesh [2004] 271 ITR 401 (SC); (ii) Associated Cement Companies Ltd. v. Commissioner of Customs 2001 (128) ELT 21 (SC); (iii) R.S. Bhagwat v. Asstt. CIT [2003] 78 TTJ (Mum.) 641; (iv) B.K. Roy (P.) Ltd. v. CIT [1995] 211 ITR 500 (Cal); (v) CIT v. Anjum M.H. Ghaswala [2001] 252 ITR 1 (SC); (vi) Gestetner Duplications (P.) Ltd. v. CIT [1979] 117 ITR 1 (SC); (vii) UCO Bank v. CIT [1999] 237 ITR 889 (SC); (viii) State of Madhya Pradesh v. G.S. Dall & Flour Milk [1991] 187 ITR 478 (SC). 7. To sum up the aforesaid submission of the assessee, we find t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ted from non-resident companies of USA, France and Sweden. It was further noticed by the ITO that no tax was deducted at source in respect of such payments despite the position that it was incumbent on the part of the appellant to have deducted the tax at source in respect of such payments. (2.1) Accordingly, the ITO had taken up the proceedings in the appellant's case for the latter's failure to deduct tax at source. In the said proceedings, the only contention put forth by the appellant in justification of the non-deduction of tax at source was to the effect that inasmuch as 'software imported by the company is a shrink-wrap product and the same not being customized, no tax amount were deducted'. As referred to in the order itself, the ITO had given one more opportunity to the appellant to furnish written explanation if any. As there was no response, the ITO passed the order under sections 201 and 201(1A) of the IT Act holding that the consideration paid by the appellant for the import of the software partook the character of royalty in terms of the provisions of section 9(1)(vi) of the Act and also in terms of provisions of the DTAA between India and US,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he various salient features of the software imported by the appellant in the light of the related statutory provisions and has eventually held that the consideration paid by the appellant for the import of software was in the nature of a royalty payment and therefore constituted income chargeable under the IT Act in terms of section 9(1)(vi) of the Act read with the related relevant articles of the DTAA and thereby the provisions of section 195 of the IT Act is attracted in the appellant's case. (2.4) The appellant, aggrieved by the appellate order of the Commissioner of Income-tax(A), has preferred the present appeals assailing the legality of the said order. (3) The appellant has reiterated the two-fold contentions to the effect that (i) the ITO has passed the order without affording opportunity to the appellant and (ii) that the consideration paid by the appellant cannot be considered as royalty under the provisions of section 9(1)(vi) of the Act so as to apply the provisions of section 195 of the said Act to the appellant's case. (4) It is submitted that as elaborated hereafter, the two-fold grounds so urged by the appellant are untenable and ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....acknowledged the position that internationally as well as in India, software, known in legal parlance as 'computer program' is covered under the broad category of 'literary, artistic or scientific work' which is copyrightable and that the copyright laws of different countries do recognize a computer programme to be subject-matter of copyright. However, it is urged that 'royalty' in respect of the subject-matter of copyright can only relate to such payments for the use i.e., exploitation of the copyright of such literary/artistic or scientific work and that 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 are otherwise protected by the respective copyright law in favour of the owner of the copyright in that the acquisition of a product, wherein the subject-matter of copyright is embedded without right to exploit the copyright does not entail use or right to use the copyright of such literary/artistic/scientific i.e., copyrighted work. On such premise, it is claimed that the consideration paid by the appellant towards the import of software d....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ther words, when the said proviso to section 9(1) of the Act distinctly provides that nothing contained in the said section shall apply to so much of the income by way of royalty consisting of lump sum payment as made by the resident for transfer of all or any rights, including the granting of a licence, in respect of Computer Software supplied by a non-resident manufacturer if such software is supplied along with the computer or computer based equipment under the approved scheme/policy there is a categorical legislative recognition of the position that when on the other hand, there is sale of computer software alone unaccompanied by sale of computer or computer based equipment, such sale of computer software involving transfer of all or any rights including the granting of licence, would come within the ambit of the provisions of section 9(1)(vi) of the Act. Thus, a transaction involving transfer of all or any right including granting of a licence would come within the ambit of section 9(1) of the Act. (5.1) In the present case, admittedly the appellant has purchased the software and such purchase is not along with supply of any computer or computer based equipment. It is....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ation software program, it would have to be stored in the computer in such a manner so as to be integrated with the operating system. This result is formally achieved by actually recording all the components of the computer program onto a storage medium and which could be referred to by the computer, whenever a particular component is required. The program is then called upon by the operator by invoking a command or a series of commands. Once so called or invoked, the program will begin to issue all the instructions contained on the storage medium and process through the processing unit of the computer, all the various inputs and computation that are provided. Therefore, to summarise: (i) A software program is essentially a series of commands issued to the hardware of the computer that enables the computer to perform in a particular manner. (ii) The software program to be effective needs to be integrated with the hardware of the computer in such a manner so as to enable the series of commands to be initiated by the operator and in order that the computer can call upon any part of the series of commands at a given point of time. (iii) To render the foregoi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tion including computer databases'. As such, the Copyright Act, 1957 brings computer programs within the definition of a literary work and therefore the said Act provides copyright protection as available to literary work. (Section 14 of the Copyright Act which defines the expressions 'copyright' and 'computer program' are extracted in pages 15 and 16 of the paper book filed by the Standing Counsel for the revenue). It can be therefore noticed that computer software as an intangible item has Intellectual Property Right (IPR) embedded therein belonging to the developer/author of the software and the Indian Copyright Law does recognise this position, as referred to above. (5.4) In the present case, it is submitted that, as mentioned earlier, it is an admitted fact that the appellant has imported software under 'End User Licence Agreement' which is a legal agreement entered into between the appellant-importer and the exporter of the software. Such a software licence agreement so entered into is the most common form of agreement entered into in respect of the software. Under such an agreement, the developer of the software licences its inte....
X X X X Extracts X X X X
X X X X Extracts X X X X
....appellant partakes the character of royalty. The finding recorded by the Commissioner of Income-tax(A) does not suffer from any infirmity at all. (5.5) At this juncture, it is also necessary to advert to the meaning of royalty as contained in DTAA between India and USA and also between other countries from where the appellant has imported the software. As per sub-article 3 article 12 of the DTRAA between India and USA, the expression 'royalty' is defined thus: "Payment of any kind received as consideration for the use of, or the right to use, any 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 formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use or disposition hereof." It may be noticed that even as per the DTAA with USA, royalties would mean payment of any kind received as considerat....
X X X X Extracts X X X X
X X X X Extracts X X X X
....les Tax Acts. At this stage, it may also be mentioned that even earlier to the decision in Tata Consultancy Services's case, the Supreme Court has held that both tangible and intangible goods fall within the definition of the expression 'goods'. Indeed in its judgment in the case of Tata Consultancy Services, the Apex Court has made reference to the earlier decisions on the subject-matter as under: "18. This Court in the case of H. Anraj v. Government of Tamil Nadu [1986] 61 STC 165 (SC) had in the context of Bengal Finance (Sales tax) Act, 1941, occasion to consider whether lottery tickets were goods. It has been submitted that the lottery tickets were an actionable claim as the essence of a lottery was a chance for a prize. This court noted that definition of 'goods' and held that the term 'movable property' for the purposes of sales-tax could not be taken in a narrow sense. It was held that incorporeal rights, like copyright or an intangible thing like electric energy, were regarded as goods exigible to sales-tax and, therefore, entitlement to a right to participate in a draw, which was beneficial interest in movable property, would fall with....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ct. The issue and subject-matter of consideration by the Supreme Court in the said case was therefore not identical to the one which arises for consideration in the present appeal. It may not be out of place herein to refer to a decision of the Supreme Court in the case of PSI Data Systems Ltd. v. Collector of Central Excise [1997] 2 SCC 78 wherein while dealing with the issue of assessable value of the computer for the purpose of excise duty, it is held by the Supreme Court that a computer and its software are distinct and separate both as a matter of commercial parlance and also upon the material on record. The position is analysed thus: "13. Secondly, that a computer and its software are distinct and separate is clear, both as a matter of commercial parlance as also upon the material on record. A computer may not be capable of effective functioning unless loaded with software such as discs, floppies and CD ROMSs. But that is not to say that these are a part of the computer or to hold that, if they are sold along with the computer, their value must form part of the assessable value of the computer for the purposes of excise duty. To give an example, a cassette-recorder w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to the use of rigid, hard, aluminum or glass as the base for recording medium. What is covered by the said heading is recorded tapes, magnetic tapes or other similar recorded phenomena. As per the literature supplied by the Department, hard disk drive is used to store data and programs permanently inside the computer. The difference between hard disk drive and common magnetic storage device or floppy disk is the base for recording medium. It also provides faster access and larger storage capacity; its function is to store the data instructions, sound images etc., and it is like phonograph records. Floppy disk uses flexible plastic like carrier for magnetic recording medium. Information is stored in the hard disk drive using the magnetic recording method which is used to store songs on an audio tape or movies on a video tape. Therefore, hard disk is a refined form of floppy and serves the same purpose of recording material in a more efficient way. The moot difference between the hard disk and the software is that a hard disk is a hardware whereas software is a representation of any type of data and which can be stored in the hard disk. There is a no dispute that a floppy on which so....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed branded off-the-shelf software from different suppliers in USA, Sweden and France. This fact has not been disputed by the revenue. According to the ITO (TDS), the payment made by the assessee-company to the foreign companies for purchase of software is to be treated as royalty under section 9(1)(vi) of the IT Act read with section DTAA of relevant countries. 12. On the other hand, it is the case of the assessee that under the DTAA of different countries, when the right to copyright is transferred, that will come within the purview of royalties. Although the definition of section 9(1)(vi) of the IT Act is wider, however, in view of section 90(2), the provisions of DTAA has to be followed. Reliance can be placed on the decision of the Supreme Court in Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 and the decision of A.P. High Court in the case of CIT v. Visakhapatnam Port Trust [1983] 144 ITR 1462 According to the assessee, it had purchased copy righted articles or goods. Right to use any copyright was not transferred in its favour. From the reply filed by the learned standing counsel on behalf of the department, we find that this aspect has been accepted by the rev....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ions of IT Act will be applicable to the extent they are more beneficial to the assessee. Otherwise, the provisions in the DTAA has to be followed. Therefore, in our considered view, the provisions of DTAA has to be followed for the purpose of deciding the issue whether the payments made by the assessee is royalty or not. The learned standing counsel on behalf of the revenue supported the order passed by the ITO(TDS) that the payment is covered by section 9(1)(vi) read with the definition of the word 'Royalty' as provided in the treaties. However, in view of the provisions of section 90(2) of the Act, we have to give preference to the definition as provided in the treaties. Apart from the provisions of the treaties, we have to consider the licence agreement entered into by the assessee with foreign companies which has been quoted at page 17 of the paper book filed by the revenue. It has been submitted by the revenue that under such an agreement, the developer of the software licences its intellectual property in the software in favour of the licensee. As a result of such agreement, the licensor of the software retains ownership over the copyright in the software and protect....
X X X X Extracts X X X X
X X X X Extracts X X X X
....anslate the program except as specifically permitted by law without the possibility of contractual waiver; (iii) Sub-lease, rent or lease the program; or (iv) Copy the written materials accompanying the program. 5. Confidentiality. Program is confidential and proprietary information of Telelogic. You agree to take adequate steps to protect the program from unauthorized disclosure or use. Also, the relevant terms and conditions of the Software Licence Agreement between the appellant and M/s. OSS Nokalava inc., are reproduced below: Software Licence Agreement License No. 7903 OSS Nokalva, Inc. (OSS), One Executive Drive, Somerset, New Jersey 08873, grants to: Samsung Electronics Level T, Prestige Meridian II, 30, M.G. Road, Bangalore - 560 001, India (Customer) and Customer accepts an individual, non-transferable and non-exclusive licence to use the licensed software program(s) [Program(s)] on the following terms and conditions. Licensed Program(s) shall include any error corrections, enhancements, or documentation updates related thereto that they be furnished by OSS to customer ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ly publicly known through no wrongful act of the customer, or that the customer acquires from a third party having no obligation of confidence to OSS: (b) does (without limitation) include ideas, know-how algorithms and other proprietary information within program(s) received under this agreement (whether in source or object code form), and within any code generated by program(s). 2. Customer will not use confidential information [except as an incident of ordinary use of program(s)]. 3. Customer will not disclose confidential information and will maintain its confidentiality using at least the same care as its uses to maintain the confidentiality of its own confidential information. Customer agrees in any event to compile all and any source code generated by the program(s) into object code prior to any permitted external distribution. 4. Customer shall not remove any copyright, confidentiality, or other proprietary rights notice provided by OSS in connection with Confidential Information and any copies thereof which customer may make. Customer shall ensure that, in distributing an application, it does not disclose the Application Programme Interface (API)....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er a right to use the software the consideration paid by the appellant partakes the character of royalty. The finding recorded by the Commissioner of Income-tax(A) does not suffer from any infirmity at all." From the aforesaid submission, it appears that according to the revenue, although a limited right to use of the software (which is a copyrighted article) was transferred in favour of the assessee, but still it comes within the definition of 'Royalty'. 14. The learned counsel for the assessee heavily relied upon the decision of the Supreme Court in the case of Tata Consultancy Services. On behalf of the revenue, it was submitted that the Hon'ble Supreme Court has decided the issue in that case as to whether the software is 'goods' for the purpose of Andhra Pradesh General Sales-tax Act. Therefore, the context in which the Hon'ble Supreme Court has decided that software is 'goods', is different. 15. We have gone through the decision of the Supreme Court in Tata Consultancy Services case, it has been clearly laid down in that decision that the software is different from the computer and it is to be treated as goods. In this regard, we find ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... been fairly brought to the attention of the Court that many other American Courts have taken a different view. Some of those cases are South Central Bell Telephone Co. v. Sidney J. Barthelemy reported in 643 So. 2d 1240 : Comptroller of the Treasury v. Equitable Trust Company reported in 464 A 2d 248 : Chittenden Trust Co. v. Commissioner of Taxes reported in 465 A. 2d 1100: University Computing Co. v. Commissioner of Revenue for the State of Tennessee reported in 677 S.W. 2d 445 and Hasbro Industries INC v. John H. Norberg, Tax Administrator, reported in 487 A. 2d 124. In these cases, the Courts have held that when stored on magnetic tape, disc or computer chip, this software or set of instructions is physically manifested in machine readable form by arranging elections, by use of an electric current, to create either a magnetized or unmagnetized space. This machine readable language or code is the physical manifestation of the information in binary form. It has been noticed that at least three program copies exist in a software transaction : (i) an original, (ii) a duplicate, and (iii) the buyer's final copy on a memory device. It has been noticed that the program is develop....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... a disk or floppy takes the character of goods. 17. In para 14 of the judgment, the Hon'ble court has held that by sale of the software programme, the incorporeal right to the software is not transferred. It is held that the incorporeal right to software is the copyright, which remains with the originator. What is sold is a copy of the software and when one buys a copy of software, which is akin to the instance of one buying a copy of a novel from a bookstore or a recorded song in a cassette or videotape. 18. On perusal of the agreement between the parties, we are of the view that in the present case also what the assessee had acquired is only a copy of the copyrighted articles i.e., software, whereas the copyright remains with the owner, i.e., foreign parties. The decisions relied upon by the learned DR are distinguishable on facts of the case. 19. From the aforesaid discussion, we find that the incorporeal right to software i.e., copyright remained with the owner and the same was not transferred to the assessee. We have also noticed the definition of 'royalty' in the DTAA, which has been quoted above. The primary condition for bringing within the definition o....