TaxTMI 
TaxTMI 
2006 (1) TMI 167
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....ction 248 of the Act, there is no finding of the Assessing Officer available on the issue. However, the Assessing Officer on earlier occasion has held that the assessee as the 'assessee in default' under section 201 for failure to deduct tax on similar payments. Learned CIT(A) by order dated 27-2-2004 has confirmed the action of Assessing Officer. The assessee challenged the order of learned CIT(A) dated 27-2-2004 before this Tribunal. The Tribunal by its order in ITA Nos. 864 & 865/Bang./2004, dated 28-4-2005 following the decision of Income-tax Appellate Tribunal in the case of Samsung Electronics. Co. Ltd. v. ITO in ITA Nos. 264 to 266 dated 18-2-2005, [2005] 94 ITD 91 (Bang.) held that the amount paid by assessee is for purchase of goods and not towards payment of royalties. The payment is for use of copyrighted article and not to acquire any copyrights in such articles. Thus the payment was not treated as payment for royalty within the meaning of Explanation 2 to section 9(1)(vi) of the Act. It was held that since the payee has no permanent establishment in India, the business profit in such transaction cannot be deemed to be accruing or arising in India. The assessee ....
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....ia without opening the package. The assessee acquires during the course of business a copyrighted article whereas the copyright remains with the owner or the seller. What the assessee acquires is the material object available off the shelf which is different from copyright. The assessee has mainly obtained the right to distribute the copyrighted material, which is different from ownership of the copyright in the software. The assessee considered the incomes represented by these payments to be "business profits" of the non-resident taxable only under Article 7 of respective Double Taxation Avoidance Agreements (DTAA), if there was a permanent establishment in India of the non-residents in India. In the absence of a P.E., the assessee considered the payments as not chargeable to tax in India and therefore outside the purview of tax deduction under section 195. According to the Assessing Officer the payments are covered by definition of 'Royalty' under section 9(1)(vi) of the Act and therefore section 195 applies in this case. The Assessing Officer thus held these payments, fall within the purview of section 9(1)(vi) of the Act, since the import of software packages does not c....
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....' or 'Process' or 'Scientific Work' or 'Patent'. He thereafter submitted that as per the decisions given by the High Courts and Supreme Court, 'the Tribunal is under the obligation to give findings on the arguments advanced by the parties' as held in - a. CIT v. G.M. Mittal Stainless Steel Ltd. [2004] 271 ITR 219 (MP) b. Udhavdas Kewalram v. CIT [1967] 66 ITR 462 (SC) c. E.A. Venkataramier & Sons v. CIT [1967] 65 ITR 316 (Mad.) d. CIT v. Hyderabad Secunderabad Foodgrains Association Ltd. [1989] 175 ITR 574 (AP) e. A. Venkata Rao v. CIT [1993] 203 ITR 64 (Ori.) In view of the above position of law, Sri Korde requested that, the Bench may kindly give findings on the submission made by the Department. In the cases of Samsung Electronics Co. Ltd. and Motorla Inc. v. Dy. CIT [2005] 95 ITD 269 (Delhi) (SB) have decided the case in which assessee-companies had imported software for their own use. In those cases, the Tribunal has laid down that payment for copy of software made by the Indian company to the foreign company was for the copyrighted article and was not for use of copyright. Therefore, such paym....
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....ndian Copyright Act prohibits sale or hire of computer software. As per section 1O6A of US Copyright Act, unauthorised sale or distribution of computer software is prohibited. Similarly under section 23 of Designs and Patents Act, 1988 of U.K, unauthorised sale or distribution of computer software is prohibited. Hon'ble Delhi High Court in the case of Penguin Books Ltd. v. India Book Distributors AIR 1985 Delhi 29 held that sale of imported copies of book by an Indian Distributor without license to do so infringes UK publishers copyright. The Special Bench of Income-tax Appellate Tribunal, Delhi in the case of Motorola Inc. held that right to sale and distribute computer software is available only to the owner of the computer software. Since the assessee has distributed the software, the assessee or the ultimate payee can be said to have acquired the copyright or right to use the copyright and hence to be treated as payment for royalty within the meaning of Explanation 2 to section 9(1)(vi) of the Act. 4.2 Alternatively, lump sum payment is to be apportioned towards taxable portion as royalty and non-taxable portion as cost of goods as royalty payment is embedded in total co....
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....more than one category is recognized in IRS Regulations also when it is considered under categories of copyright as well as know-how. Consideration paid for the use of a patented article would fall within the definition of Royalty payment. Since one of the rights of the patent holder is the right to use the invention (apart from the right to make or vend), which he can license to others. Softwares are entitled to Patents which is evidenced from thousands of Softwares have been patented all over the world. Patent gives an exclusive right to inventor to use make and/or vend his patented article. In Patent Law, the Patentee gets, inter alia, an exclusive right to sue the article (on which he has the Patent). This exclusive right (to use) can be transferred to others either by selling the product (where an ownership is transferred) or thought a license agreement, allowing the license to use the article for a consideration. Hence, it is absolutely correct to say that payment made for the use of patented article is for the use of patent since physical use of the article (which is patented) is a right vested to patentee by Patent Law. In respect of Software, which is patented, the same....
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....of same. 'Invention' means innovative article or an innovative process. Even if it is not patented, a software programme of this kind is a high technology work, and is essentially an "invention" (to "invent" means create by thought, devise, originate a new method, an instrument, etc .... and "inventions" means the process of inventing, a thing invented). These softwares are not routine, run-of the mill kind of programmes but are highly sophisticated and complex, which require investments in millions of dollar and hundreds of man-hours for development. An inventor's property rights in the invention may be transferred by granting a license to use his invention on Royalty. "Consideration paid for the use of invention" - The expression used in the definition of 'Royalty' means consideration paid inter alia, for the physical use of an innovative article or an innovative process. Since a patent as per Patent Law can be given only to an invention, and the very fact that tens of thousands of softwares have been patented, it can only mean, that there is no stretching and over stating the meaning of the word "invention" when applied in the context of "software". When a pe....
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....done by rule in order to secure a result. This is exactly how a software works in a series of instructions/operations to achieve a desired result. It would suffice to say here that software can rightly be termed as "formula". And since the source code is not given, to the user the formula (in form of the logic of the software) actually remain secret since the use is unable to decipher the object code. It may also be mentioned here that Canada (which is a part of OECD) has not accepted the OECD Model Convention in respect of tax treatment of software purchases. In Canada payments by sue of software are payments for the use of secret formula or process and thus are royalties. Similarly, countries like Spain, Greece, Portugal (who are part of OECD) have reserved the rights to tax the software income as royalties. It may also be mentioned here that many companies in India (including some MNCs) have been regularly deducting tax on their own on such remittances treating them as royalty payments. 4.7 Shri Korde ultimately submitted that what is taxed as royalties is the amount received as consideration for the use or the right to use, and not outright purchase of the right to use, a....
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....ransferred is not a payment for the use of something belonging to another party and therefore, not royalty : (D.B. Group Ltd. v. CIT, DGB Production Ltd.'s case. In an outright transfer to be treated as sale of property as opposed to license, alienation of all right in the property is necessary. The said distinction has been recognized and given effect to in the following judicial pronouncements: Hon'ble Calcutta High Court in the case of CIT v. Davy Ashmore India Ltd. [1991] 190 ITR 626 held thus: "The term 'royalty' has been defined in the agreement to mean, inter alia, the payment of any kind including rentals received as a consideration for the use of or the right to use any patent, trademark, design or model, plan, secret formula or process. It is important-that in order that a payment may be treated as royalty for the purposes of article XIII of the Agreement for Avoidance of Double Taxation between India and the U.K, the person who is the owner of such patents, designs or models, plans, secret formula or process, etc. retains the property in them and permits the use or allows the right to use such patents, designs or models, plans, secret....
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....is for anything else than a copyright, the alternate plea raised by learned D.R. should not be entertained. Computer software is always treated as protected under Copyright Act and not under Patents Act. This is clear form the definition of "Computer programme" given in section 2(ffc) of the Copyright Act, 1957. At any rate there is no transfer of any right including granting of a licence in respect of such computer programme and hence cannot be considered as royalty within the meaning of Explanation 2 to section 9(1)(vi) of the Act. 6. We have carefully considered the relevant facts, argument advanced and decisions cited. It is agreed by both the counsels that the issue is covered in ITA Nos. 864 & 868/Bang./04, dated 28-4-2005 in assessee's own case. However, since it is the contention of learned D.R. that the issue is to be examined whether the payment is covered as royalty whereunder clause (i) or under clause (v) of Explanation 2 to section 9(1)(vi) of the Act, we shall deal with the same. It is also clear that no contrary decision has been cited before us. However, to rest the matter we shall deal with all the argument raised by learned D.R. The words "computer prog....
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.... investigating and prosecuting any infringement of the Products by any person. The Distributor agrees to promptly inform MRS or, if directed by MRS, a specified affiliate of MRS (including Microsoft Corporation or MO). (j) Refrain from making copies of any diskettes or documentation related to any Microsoft software product for any purpose without the prior written consent of MO, MRS or Microsoft Corporation." Further Exhibit 1 to the agreement is regarding Product Ordering and Delivery Terms, Exhibit 2 Product Return Terms, Exhibit 3 General Provisions Applicable in Territory, Exhibit 4 Territory Specific Tax Provisions, Exhibit 5 - Notices, Exhibit 6 - Confidentiality Terms. Clause 4 of this Exhibit reads as under: "4. Miscellaneous: (a) All Confidential Information and Confidential Materials are and shall remain the property of MRS. By disclosing information to Company, MRS does not grant any express or implied right to Company to or under Microsoft patents, copyrights, trademarks, or trade secret information. (b) If MRS or any MRS affiliate provides pre-release PC operating system software ("Product") as Confidential Information or Confide....
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....rneys to enforce any rights arising out of or relating to this Agreement, the prevailing party shall be entitled to recover reasonable attorneys' fees. This Agreement shall be construed and controlled by the laws of Singapore, and company further consents to the jurisdiction of the courts sitting in Singapore. Process may be served on either party by postal service, postage pre-paid, certified or registered, or return receipt requested. (f) Subject to the limitations set forth in this Agreement, this Agreement will inure to the benefit of and be binding upon the parties, their successors and assigns. (g) If any provision of this Agreement shall be held by a court of competent jurisdiction to be illegal, invalid or unenforceable, the remaining provisions shall remain in full force and effect. (h) All obligations created by this Agreement shall survive change or termination of the parties' business relationship". A perusal of the above agreement indicates that in all the cases the copyright is retained with the owner and only the copyrighted article has been sold to the Distributor (the Appellant) for distribution in India. 6.2 At this j....
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....te of software i.e., copyright and other attributes like patent, invention, process etc. had not been considered at all. He was of the view that the US ruling therefore does not advance the case of the appellant. He has thereafter referred to the OECD commentary where the US has observed that where payments were made for software for the personal or business use and the purchaser is required to make payments by referring productivity or use of software, it may constitute royalty. Therefore, according to the Assessing Officer where the payment has been made for the use of software for a fixed period, it would constitute royalty. He thereafter referred to software in the context of the ruling of an Australian Court which held that the amount received in respect of Computer software would not be royalty if it does not give any rights in the copyrights. He has however not followed that reasoning to the appellant without giving any reasons. He has thereafter dealt with the contention that the software constitutes goods. According to the Assessing Officer software does not constitute "goods". Accordingly he has directed that tax on royalty under section 195 ought to be deducted at the....
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.... 'royalty' is defined under the various DTAA relating to the case of the assessee as under:- "Singapore Article 12- Royalties and fees for technical services.-1.& 2. 3. The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use: (a) any copyright of a literary, artistic or scientific work, including cinematograph film or films or tapes used for radio or television broadcasting, any patent, trademark, 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, property or information; (b) any industrial, commercial or scientific equipment, other than payments derived by an enterprise from activities described in paragraph 4(b) or 4(c) of Article 8." "USA Article 12 - Royalties and fees for included services - 1. & 2. **** 3. The term "royalties" as used in this Article means: (a) payments of any kind received as a consideration for the use of, or the right to use, any copyright or a literar....
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....the use of, or the right to use, any industrial, commercial or scientific equipment; (c) the supply of scientific, technical, industrial or commercial knowledge or information; (d) the rendering of any technical or consultancy services (including those of technical or other personnel) which are ancillary and subsidiary 19 the application or enjoyment of any such property or right as is mentioned in sub-paragraph (a), or any such equipment as is mentioned in sub-paragraph (b) or any such knowledge or information as is mentioned in sub-paragraph (c); (e) the use of, or the right to use: (i) motion picture films; (ii) films or video tapes for use in connection with television; or (iii) tapes for use in connection with radio broadcasting; (f) total or partial forbearance in respect of the use or supply of any property or right referred to in subparagraphs (a) to (e); or (g) the rendering of any services (including those of technical or other personnel), which make available technical knowledge, experience, skill, know-how or processes or consist of the development and transfer of a technical plan or design; but the....
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.... Computer programmes are not considered capable of protection under Patent Law. Manuals and papers included in computer software may be considered as literary works. Similarly computer printouts can be considered as literary work. The concept or idea of algorithms, frequently used in computer programming is not capable of copyright protection. Punched cards contain certain information in a particular notation. They may, therefore, be considered as literary work. Magnetic tapes and discs including floppy disc contain information recorded by means of electronic impulses. It may perhaps be considered as literary work if electronic impulses recorded in it could be considered as a form of writing in notation. There is, however, no authority on this point. Programmes devised for the working of computers, is generally regarded as coming within the definition of literary and artistic works. Computer - "Computer" includes any electronic or similar device having information processing capabilities. See section 2(ffb). No exhaustive definition of a computer is possible or available because the type of computer functions, capacities and technology involved is rapidly changing....
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....de entitled to copyright protection. 3.65 Present English law on computer programmes under section 3(1) of the Copyright, Designs and Patents Act, 1988, (U.K) literary work includes a computer programme. But the Act does not define what a computer or computer programme is? 3.66 In Sega Enterprise Ltd. v. Richards [1983] FSR 73 (interlocutory proceedings) it was held that under the provisions relating to literary works in the Copyright Act, 1956, copyright subsisted in the assembly code programme of a video game and that the machine code programme derived from it was either a reproduction or adaptation of the copyright work. 3.67 In Apple Computer Inc. v. Computer Edge Pty. Ltd. [1984] FSR 481 at p. 496 (Fed CT Australia) - it was held that a computer programme consisting of a source code is original literary work. A source code is a computer programme written in any of the several programming languages employed by computer programmers. An object code is the version of a programme in which the source code language is converted or translated into the machine language of the computer with which it is to be used. It was further held that an object code is an ....
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....of, 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 storing of it in any medium by electronic means; (ii) to issue copies of the work to the public not being copies already in circulation; (iii) to perform the work in public, or communicate it to the public; (iv) to make any cinematograph film or sound recording in respect of the work; (v) to make any translation of the work; (vi) to make any adaptation of the work; (vii) to do, in relation to a translation or an adaptation of the work, any of the acts specified in relation to the work in sub-clauses (i) to (vi); (b) in the case of a computer programme, (i) to do any of the acts specified in clause (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]; (c) in the case of an artisti....
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.... public (rental or lending right); (4) perform, show, or play the work in public (public performance right); (5) broadcast the work (broadcasting right); (6) include it in a cable-programme service (cable right); (7) make an adaptation of the work, or do any of the above acts in relation to an adaptation (right of adaptation); (8) the right to authorize others to carry out any of these activities. The rights of a copyright owner are sometimes called restricted rights and acts which do not constitute infringement (exceptions contained in section 52) are called permitted acts. The author P. Narayanan clarifies these rights into five main categories as under- "7.2 Negative right Copyright is not a positive right but a negative right, that is, the right to stop others from exploiting the work without the copyright owners' consent or licence. Thus where, for instance, the work is derived from some other work in which copyright subsists as in the case of translation, adaptation or abridgement of a literary work the author of such work can stop others from exploiting it but cannot himself exploit that work without the consent or....
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....countries. These are (1) the right to decide whether to publish or not to publish the work (droit de divulgation - the right of publication); (2) the right to claim authorship of a published or exhibited work (droit a la paternite - the right of paternity); and (3) the right to prevent alteration and other actions that may damage the author's honour or reputation (droit au respect de loeuvre - the right of integrity). These rights were originated by France and hence the French' titles. The Berne Convention (Article 6 bis) recognizes some of these rights and requires member States to provide the author with the right to claim authorship and to object to alterations. These rights remain with the author even after the transfer of copyright and the protection lasts during the whole of the copyright term". The special feature of the rights conferred on computer programme are the rights referred to in section 14(b)(ii) which are comparable with the rights conferred on cinematograph films under section 14(d)(ii) and sound recording under section 14(e)(ii) which reads as under:- Section 14(b)(ii) Section 14(d)(ii) Section 14(e)(ii) [to sell or give on commercial rent....
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....porary reproduction, the running and storage of the programme, the translation or adaptation, distribution or rental of programmes; as well as certain liabilities for 'secondary infringers'. The Directive also requires member States to recognize certain exceptions to the exclusive rights. Negotiations over these exceptions caused intense and acrimonious lobbying in Brussels. Ultimately, the Directive requires member States to enact four exceptions. First, as regards acts done by a lawful acquirer of a programme which are necessitated by use of the programme for its intended purpose. Second, to allow the making of back-up copies. Third, to permit the studying and testing of the programme. Fourth, and most controversially, to permit - in very limited circumstances - the decompilation of programmes". "7.2 Rental directive (1992).-The Rental Directive is in two parts, one part dealing with the specific issues of rental and lending, the other dealing with related rights. The second part comes as close to the codification of copyright as any of the European Directives. Most of the provisions in the Directive had to be implemented by 1-7-1994. Chapter 1 of the Di....
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....ot previously put into circulation in the EEA or elsewhere. The distribution right is given in respect of the issuing of each and every copy (including the original). As such it needs to be distinguished from a right to make the works available to the public for the first time (that is a 'publication' or 'divulgation' right of the kind previously recognized in UK Law). Essentially the distribution right is a right to put tangible copies (which have not previously been put into circulation) into commercial circulation. Once copies are in circulation (at least where the first circulation was consensual), the right no longer operates. As the right of distribution does not include 'any subsequent distribution', copyright owners cannot control resale. It is important to note that the distribution right incorporates certain geographical distinctions. In particular, the distribution right was drafted to recognize the principle of Community wide exhaustion. That is, once tangible copies have been placed on the market in the EEA, a copyright owner cannot utilize national rights to prevent further circulation within the EEA. The corollary of Community-wide exhau....
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....n adaptation (right of adaptation); (6) The right to authorise others to carry out any of these activities. The first and most well-known right given to copyright owners is the right to copy the work. The right to copy the work is the oldest of the rights granted to owners of copyright. While the right applies to all works, the scope of the right varies depending on the type of subject-matter in question. One factor that is common to all works is that infringement takes place whether the copy is permanent, transient, temporary or incidental to some other use of the work. This means a person will infringe (in the absence of section 52) when they reproduce a copyright work on a computer screen, or store it in computer memory, as much as when they copy the work from disk to disk. The owner of copyright in all categories of work is given the right to issue copies of the work to the public. This is commonly known as the 'distribution right' and is given in respect of the issuing of each and every copy including the original. Essentially the distribution right is a right to put tangible copies (which have not previously been put into circulation). The significance of ....
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....ave rise to new sorts of works and new modes of distribution. For example, under TRIPS, protection was required to be given to computer programmes as literary works within the Berne Convention [TRIPS Article 10(1)]. Having regard to the impact of new modes of distribution, members were required to give copyright owners the right to authorise rental of computer programmes, cinematographic works, and phonograms. [TRIPS Article 11, Article 14(4)]. In December 1996, WIPO Copyright Treaty and the WIPO Performances and Phonograms Treaty was signed requiring the contracting parties to provide copyright owners with the exclusive right of distribution of fixed copies that can be put into circulation as tangible objects (WCT Article 6). In addition, contracting parties were required to provide copyright owners whose works are embodied in phonograms, computer programmes and cinematographic work with the exclusive right to authorise the commercial rentals of those fixed copies (WCT Article 7). India is a party to all these conventions and agreements. These Articles read as under:- "Article 10 Computer Programmes and Compilations of Data 1. Computer programmes, whe....
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....ed in section 18. This act applies to all forms of works of copyright. However, the subsequent distribution, sale, hiring or loan or importation of copies lawfully put into circulation does not infringe with the exception of the rental of computer programmes, films and sound recordings which is treated as equivalent to issuing copies to the public. Unless a licence agreement permits rental the licensee must not rent out copies of computer programmes to the public. In effect, once a copyright owner has allowed copies of his computer software to be issued to the public, he or she cannot subsequently use the public issue right to control further dealings in those particular copies. This might be important where a computer software company operates in several countries and has different pricing structures for those countries. If a software company sells copies of its software to the public in the United Kingdom for GBP250 and also sells copies to the French public but at a different price (say the equivalent of GBP150), another company might buy up copies in France and import them into the United Kingdom with the intention of selling the copies to the public there for GBP 200,....
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....commercial rental or offer for sale or for commercial rental is a right independent of the right to reproduce, the right to issue copies of the work etc. The question, therefore, for consideration is whether any of the vendors under the agreement with the appellant have transferred to the appellant the right to use any of the rights viz., reproduction right, distribution right or rental or lending right. A perusal of the agreements would indicate that none of the agreements give the assessee any reproduction right or any distribution right. It is the case of the Assessing Officer that what the assessee has got is the right under section 14(b)(ii) of the Copyright Act. The Assessing Officer has lost sight of the fact that there is a distinction between "the right to sell or give on commercial rental or offer for sale or for commercial rental" and exercise of that right by the various parties. What the Vendors have given to the assessee is a consequence of the exercise of the right under section 14(b)(ii) and not a transfer of the right under section 14(b)(ii). This distinction has been lost sight of by the Assessing Officer. In fact in each and every agreement clearly the Vendors ha....
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.... of employment or the work is a cinematograph film or sound recording. Since there is no copyright in ideas even if they are original, the originator of a brilliant idea is not the owner of the copyright in the work which gives concrete form to the idea unless he is also the creator of the work. Thus if a person has a brilliant idea for a story, play or a picture and if he communicates that idea to an author or playwright or an artist the production based on that idea is the copyright of the artist who has clothed the idea in a form whether by means of a book, play or picture and the originator of the idea has no right in the product, for copyright subsists not in ideas but in the tangible form in which it is expressed." "10.1 Exploitation of copyright.-There are a number of ways in which a copyright work can be exploited. In the case of a novel, for instance, it has got various rights which can be separately exploited. It can be published as a volume, or as serially in newspapers and magazines, it can be licenced for translation or filming or dramatisation, and so on. Besides there are separate national rights. Each of these rights can be separately assigned or l....
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.... same time, as stated in Copinger, the courts consider that the retention by the vendor of a picture of the copyright therein involves as unnatural dissociation of two kinds of property, and, consequently, they will lean (in ambiguous cases) towards construing any document given at the time of sale as an assignment of copyright. The distinction between copyright and the material, which is the subject of the copyright, is brought out in Amdur in the following words: The copyright in a book, picture or other, work is disconnected and distinct from the general property in the material book, picture or other object. Hence the sale or other transfer of the material object does not, of itself, constitute a transfer of the copyright therein. Even the transfer of the manuscript of a book will not, at common law, carry with it a right to print and publish the work, without the express consent of author, as the property in the manuscript, and the right to multiply the copies, are two separate and distinct interests." The Bangalore Tribunal in assessee's own case on identical issue for assessment year 2001-02 and assessment year 2002-03 where in appeal arisin....
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....00 copies of Microsoft Office 2000, the copyright is now owned by 10,000 different persons in India. Is this a fair conclusion to draw? It is submitted that this would be an absurd conclusion to draw. The copyright in Microsoft Office 2000 remains vested with Microsoft. In exercise of its right to lend or rent Microsoft Office 2000, Microsoft Corp. has authorised 10,000 different users to use Microsoft Office 2000. In other words Microsoft Corp. is exercising its right under section 14(b)(ii) viz., the right to sell or give on commercial rental or offer for sale or for commercial rental. That right has not been transferred by Microsoft to anybody and nobody purchasing a copy of Microsoft Office 2000 can again sell it or rent it out as that would be a violation of the exclusive right of selling or giving on commercial rental which vests with Microsoft Corp. under section 14(b)(ii). Another issue which arises is that if the assessee has acquired a copyright in Microsoft Office 2000 then Microsoft Corp. cannot sell in India even a single copy of Microsoft Office 2000, because the copyright itself has been transferred to the assessee (according to the Assessing Officer). If that be so,....
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....e expression "assignee" as respects the assignment of the copyright in any future work includes the legal representatives of the assignee, if the assignee dies before the work comes into existence. 19. Mode of assignment.-(1) No assignment of the copyright in any work shall be valid unless it is in writing signed by the assignor or by his duly authorised agent. [(2) The assignment of copyright in any work shall identify such work, and shall specify the rights assigned and the duration and territorial extent to such assignment. (3) The assignment of copyright in any work shall also specify the amount of royalty payable, if any, to the author or his legal heirs during the currency of the assignment and the assignment shall be subject to revision, extension or termination on terms mutually agreed upon by the parties. (4) Where the assignee does not exercise the right assigned to him under any of the other sub-sections of this section within a period of one year from the date of assignment, the assignment in respect of such rights shall be deemed to have lapsed after the expiry of the said period unless otherwise specified in the assignment. (5) I....
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....d levies sales tax, excise and custom duty on it as goods as the extract below indicates: (a) Custom Tariff Act, 1975: Tariff Item Description of Goods Software: 8524 40 11 Information Technology Software 8524 91 11 Information Technology Software on floppy disc or cartridge tape 8524 91 12 Information Technology Software on disc or on CD ROM (b) Bombay Sales Tax Act, 1959: Entry No. Description of Goods 26 Goods of incorporated or intangible character, that is to say- (5) Software packages (c) Central Excise Tariff Act, 1985: Tariff Item Description of Goods 85.24 Records, Tapes and other media for sound or other similarly recorded phenomena, including matrices and masters for the production of records. 8524.20 Software Further the controversy whether software is tangible property or intangible property has been set to rest by Supreme Court in the case of Tata Consultancy Services v. State of Andhra Pradesh [2004] 271 ITR 401, wherein it has been held that a transaction of sale of computer software packages as in the assessee's case is clearly a sale of goods within the meaning of Andhra Prade....
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....ing, that what is supplied becomes chattel. It is in respect of the drawings, designs etc. which are received that payment is made to the foreign collaborations. It is these papers or diskettes etc. containing the technological advice, which are paid for and used. The foreign collaborators part with them in lieu of money. It is, therefore, sold by them as chattel for use by the Indian importer. The drawings, designs, manuals etc. so received are goods on which customs duty could be levied." The Supreme Court again considered the question in State Bank of India v. Commissioner of Custom, Bombay, 2000 as under:- "17. The question that arises for consideration is if licence fee charged towards countrywide use of software in the second invoice could be the charges for the right to reproduction and were these added to the price actually paid or payable for the imported goods .... There is no other value of the software indicated in the agreement except the licence fee. Price is payable only for allowing SBI to use the software in a limited way at its own centres for a limited period and that is why the amount charged is called the licence fee. After five years, SBI is requir....
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....d 473. Article 461 distinguishes between corporeals and incorporeals providing: **1244 Corporeals are things that have a body whether animate or inanimate and can be felt or touched. Incorporeals are things that have no body, but are comprehended by the understanding, such as the rights of inheritance, servitude's, obligations and right of intellectual property" ..... The rights acquired by South Central Bell Telephone Co. were referred to on page 9 of the Judgment in the following terms: "During the pertinent taxing periods. Bell licensed specified switching system software programmes for use in specific central offices pursuant to license agreements confected out of state with three vendors. AT & T Technologies, Inc., Northern Telecomm and Erickson. Under these license agreements, Bell acquitted the limited right to use such switching system software programmes: the license agreements limited Bell's right to use designated switching system software to designated **1242 switches in designated telephone central offices. More particularly, the license agreements prohibited Bell's transfer of such software to any switch other than the designa....
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....d by use of a laser light. Sanders, supra, at 241. *12 Ordinarily, at least three programme copies exist in a software transaction: (i) an original, (ii) a duplicate and (iii) the buyer's final copy on a memory device. 77 Mich. L. Rev. at 1154 n. 27. More basically, "[A] programme copy is developed at the seller's computer. To deliver a copy to the buyer, the seller duplicates the programme copy on software and transports the duplicates to the buyer's computer. The duplicate is read into the buyer's computer and copied on a memory device 77 Mich. L Rev. at 1154 n. 27. (2) South Central Bell argues that the software is merely "knowledge" or "intelligence" and as such is not corported and thus not taxable. We disagree with South Central Bell's characterization. The software at issue is not merely knowledge but rather is knowledge recorded in a physical form which has physical existence, takes up space on the tape, disc, or hard drive, makes physical things happen and can be perceived by the senses. See e.g., Crockett, supra, at 189-90. As the dissenting Judge at the court of appeal pointed out "In defining tangible 'seen' is not limited t....
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....t upon which it is recorded, be that a disk, tape hard drive or other device. Crockett, supra, at 371-72, Cowdrey, supra at 188-90. That the information can be transferred and then physically recorded on another medium and does not make computer software any different than any other type of recorded information that can be transferred to another medium such as film, video tape, audio tape, or books. *14 The court of appeal rejected the analogy of computer software to such media as motion pictures, books, video tape, audio tape etc. ...... which are taxable. Like the court of appeal the earlier jurisprudence from other states uniformly rejected the analogy to such other artistic works, finding computer software distinguishable in several respects. [FNS] More recent jurisprudence from other states, however, has recognized the appropriateness of such analogy, as have numerous commentators. [FN6]. The court of appeal distinguished the purchase of these types of storage devices, such as books, films, video and audio tapes, etc. ...... which hold stores, ideas, information and knowledge in physical form, by reasoning that the true essence of such transactions is the purchase of ....
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....ject. The software must be stored in physical form on some tangible object somewhere. Shontz, supra, at 169; Crockett, supra, at 871-72; Harris, supra, at 187 n. 149. The software was reduced to physical form and recorded on a tangible object prior to delivery to Bell and Bell maintained the software in physical form on a tangible object the computer hard drive. If Bell chooses to so store and use the software in the City of New Orleans. It must pay the use tax imposed on such tangible personal property" .... In reaching this conclusion the Court drew a distinction between the exclusive right that intellectual property known as copyright and the rights to a particular copy of the copyrighted work in the following extracts at page 16 as follows: "**1249 This distinction between the right to the software and a copy of the software was aptly articulated by a noted commentator as follows: [A] distinction is made between the intellectual property in a work and the tangible property that embodies the work ..... The exclusive rights that constitute the intellectual property known as copyright are different from rights to a particular copy of the copyrighted w....
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....be comprehended. Therefore we hold that the switching system software and the data processing software involved here is tangible personal property and thus is taxable by the City of New Orleans." In Hasbro Industries Inc. (487 A. 2d 124) Supreme Court of Rhode Island had to consider a similar provision which reads as under: "Use taxes are imposed on the storage, use or other consumption in this state of tangible personal property. G.L. 1956 (1980 Reenactment) $ 44-18-20. Section 44-18-16 defines "tangible personal property" as "property which may be seen, weighed, measured, felt, or touched or which is in any other manner perceptible to the senses"." The Court held that a software programme constituted tangible property in the following terms: "Hasbro argues that the software programme is not "perceptible to the senses" because it consists of invisible, inaudible electronic impulses that instruct the computer to display stored data in a particular manner. Thus, Hasbro concludes that the programme qualifies as intangible personal property that is not subject to the use tax. We disagree. The programme, which consists of the disk and punch cards, can b....
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....lt problems but is a matter of considerable importance in view of the rapid development of computer technology in recent years and the extent of transfers of such technology across national borders. In 1992, the Commentary was amended to describe the principles by which such classification should be made. Paragraphs 12 to 17 were further amended in 2000 to refine the analysis by which business profits are distinguished from royalties in computer software transactions. In most cases, the revised analysis will not result in a different outcome. 12.1 Software may be described as a programme, or series of programmes, containing instructions for a computer required either for the operational processes of the computer itself (operational software) or for the accomplishment of other tasks (application software). It can be transferred through a variety of media, for example in writing or electronically, on a magnetic tape or disk, or on a laser disk or CD-Rom. It may be standardized with a wide range of applications or be tailormade for single users. It can be transferred as an integral part of computer hardware or in an independent form available for use on a variety of hardware.....
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...., constitute an infringement of copyright. Examples of such arrangements include licenses to reproduce and distribute to the public software incorporating the copyrighted programme, or to modify and publicly display the programme. In these circumstances, the payments are for the right to use the copyright in the programme (i.e., to exploit the rights that would otherwise be the sole prerogative of the copyright holder). It should be noted that where a software payment is properly to be regarded as a royalty there may be difficulties in applying the copyright provisions of the Article to software payments since paragraph 2 requires that software be classified as a literary, artistic or scientific work. None of these categories seems entirely apt. The copyright laws of many countries deal with this problem by specifically classifying software as a literary or scientific work. For other countries treatment as a scientific work might be the most realistic approach. Countries for which it is not possible to attach software to any of those categories might be justified in adopting in their bilateral treaties an amended version of paragraph 2 which either omits all references to the natur....
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...."enterprise licenses", or "network licences". Although these arrangements permit the making of multiple copies of the programme, such rights are generally limited to those necessary for the purpose of enabling the operation of the programme on the licensee's computers or network, and reproduction for any other purpose is not permitted under the license. Payments under such arrangements will in most cases be dealt with as business profits in accordance with Article 7. 14.3 Another type of transaction involving the transfer of computer software is the more unusual case where a software house or computer programmer agrees to supply information about the ideas and principles underlying the programme, such as logic, algorithms or progl1tmming languages or techniques. In these cases, the payments may be characterised as royalties to the extent that they represent consideration for the use of, or the right to use, secret formulas or for information concerning industrial, commercial or scientific experience which cannot be separately copyrighted. This contrasts with the ordinary case in which a programme copy is acquired for operation by the end user. 15. Where consid....
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....ectronically download digital products may give rise to use of copyright by the customer, e.g.) because a right to make one or more copies of the digital content is granted under the contract. Where the consideration is essentially for something other than for the use of, or right to use, rights in the copyright (such as to acquire other types of contractual rights, data or services), and the use of copyright is limited to such rights as are required to enable downloading, storage and operation on the customer's computer, network or other storage, performance or display device, such use of copyright should not affect the analysis of the character of the payment for purposes of applying the definition of "royalties". 17.3 This is the case for transactions that permit the customer (which may be an enterprise) to electronically download digital products (such as software, images, sounds or text) for that customer's own use or enjoyment. In these transactions, the payment is essentially for the acquisition of data transmitted in the form of a digital signal and therefore does not constitute royalties but falls within Article 7 or Article 13, as the case may be. To the ....
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....ing, on a magnetic tape or disc, or on a laser disc. It may be standardised with a wide range of applications or be tailor-made for single users. It can be transferred as an integral part of computer hardware or in an independent form available for use on a variety of hardware. The rights in computer software are a form of intellectual property. Research into the practices of OECD Member countries has established that all but one protect software rights either explicitly or implicitly under Copyright Law. Transfers of rights occur in many different ways ranging from the alienation of the entire rights to the sale of a product which is subject to restrictions on the use to which it is put. The consideration paid can also take numerous forms. These factors may make it difficult to determine where the boundary lies between software payments that are properly to be regarded as royalties and other types of payment." [Para 12] "Three situations are considered. The first is of payments made where less than the full rights in software are transferred. In a partial transfer of rights the consideration is likely to represent a royalty only in very limited circumstances. One such cas....
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....e use of the rights. The essential character of the transaction as an alienation cannot be altered by the form of the consideration, the payment of the consideration in instalments or, in the view of most countries, by the fact that the payments are related to a contingency." [Para 16] "The third situation is where software payments are made under mixed contracts. Examples of such contracts include sales of computer hardware with built-in software and concessions of the right to use software combined with the provision of services. The methods set out in paragraph 11 above for dealing with similar problems in relation to patent royalties and know-how are equally applicable to computer software. Where necessary the total amount of the consideration payable under a contract should be broken down on the basis of the information contained in the contract or by means of a reasonable apportionment with the appropriate tax treatment being applied to each apportioned part." [Para 17] "The suggestions made above regarding mixed contracts could also be applied in regard to certain performances by artists and, in particular, in regard to an orchestral concert given by a cond....
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....hard disk or other non-temporary media. 3. Analysis and conclusions.-The Group found that this category of transaction raised the fundamental characterisation issue discussed in paragraphs 13 to 15 of section 3 above, i.e., the distinction between business profits and the part of the treaty definition of "royalties" dealing with payments for the use of, or the right to use, a copyright. It concluded that in the case of transactions that permit the customer to electronically download digitised products (such as software, images, sounds or text) for the customer's own use or enjoyment, the payment is made to acquire data transmitted in the form of a digital signal. Since this constitutes the essential consideration for the payment, that payment cannot be considered as royalties as a payment made for the use or the right to use a copyright so as to constitute a royalty. To the extent that the act of copying the digital signal onto the customer's hard disk or other non temporary media (including transfers to other storage, performance or display devices) constitutes the use of a copyright under the relevant law and contractual arrangements, this is merely an incidental....
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....n software and other digital information licenses: Definition - The customer receives the right to use software or other digital products for a period of time that is less than the useful life of the product. The product is either downloaded electronically or delivered on a tangible medium such as a CD. All copies of the digital product are deleted or become unusable upon termination of the license. 7. Analysis and conclusions.-The Group unanimously concluded that, under the GECD Model as currently worded, that transaction should be treated exactly as transactions falling under categories 1 or 2 so that the payment to the commercial provider of the limited duration digital product would fall under Article 7 (Business Profits). 8. Also, if a particular convention includes a definition of royalties that covers "payments for the use of, or the right to use, industrial, commercial or scientific equipment", the Group concluded that such payments cannot be considered as payments "for the use of, or the right to use, industrial, commercial or scientific equipment" for the reasons set out in paragraphs 25 and 26 of section 3 above. Category 6: Single-use....
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....ommentaries in relation to particular interpretation. This principle has been expressly spelt out both under UN Model Commentary as well as OECD Model Commentary. In this connection, UN Model Commentary, in its clauses 34 and 36 to introduction, observes as under: "34. The rationale of the preparation of bilateral tax conventions was cogently expressed by the Fiscal Committee of the League of Nations in the following terms: 'The existence of model draft treaties... has proved of real use ... in helping to solve many of the technical difficulties which arise in [the negotiation of tax treaties]. This procedure has the dual merit that, on the one hand, insofar as the model constitutes the basis of bilateral agreements, it creates automatically an uniformity of practice and legislation, while, on the other hand, inasmuch as it may be modified in any bilateral agreement reached, it is sufficiently elastic to be adapted to the different conditions obtaining in different countries or pairs of countries.' 35. * * * 36. If the negotiating parties decide to use in a treaty wording suggested in the United Nations Model Convention, it is to be....
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....rs shows that the Commentaries have been cited in the published decisions of the courts of the great majority of Member countries. In many decisions, the Commentaries have been extensively quoted and analysed and have frequently played a key role in the Judge's deliberations. The Committee expects this trend to continue as the world-wide network of tax treaties continues to grow and as the Commentaries gain even more widespread acceptance as an important interpretative reference. 30. Observations on the Commentaries have sometimes been inserted at the request of Member countries that are unable to concur in the interpretation given in the Commentary on the Article concerned. These observations thus do not express any disagreement with the text of the Convention, but usefully indicate the way in which those countries will apply the provisions of the Article in question." 6.12 The Assessing Officer had further referred to certain rulings from US, Australia and Singapore Authorities in respect of software imports. These are dealt with below: Singapore The Assessing Officer has extracted from a Circular dated 29-12-2000 under which the Government of Si....