2006 (1) TMI 167 - AT - Income Tax

Liability to deduct tax u/s 195 - Payment for purchase of software - No PE in India - copyrighted article - whether the payments made by the appellant for distribution of the software acquired from the Vendors can at all be considered to be the payment made in respect of 'Royalty' within the meaning of Explanation 2 to section 9(1)(vi) - HELD THAT - As far as computer programmes are concerned, the right to sell or give on 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 u/s 14(b)(ii) and not a transfer of the right u/s 14(b)(ii). This distinction has been lost sight of by the Assessing Officer. It is, therefore, clear that none of the exclusive rights in a work have been transferred to the appellant. The exclusive rights in a work are the reproduction right, distribution right, rental or lending right etc. These rights have not been transferred to the appellant. What all the appellant is doing is using the software and/or acting as a distributor of the software. This brings up the question as to whether there is a distinction between the transfer of a copyright per se and a copyrighted article. 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 (11) TMI 11 - SUPREME COURT , 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 Pradesh General Sales Tax Act, 1957. It will be seen that independent of the question under the Copyright Act under Indian Statutory Law, the Supreme Court has concluded that software on media is goods and a similar view holding that software on media or otherwise is goods has been reached in the USA by the Supreme Court of Louisiana and the Supreme Court of Rhode Island. Even the CBDT in its Notification No. 452 (243 ITR 0O25A) directed that software or articles and things for the purposes of section 35 of the Act. Once it is established that the transactions under the Distributor Agreements are transaction of purchase of goods/software products, Circular No. 23, of the CBDT comes into picture which clarifies that when a non-resident entity supplies goods from outside India on FOB basis then the profits on such sale do not accrue or arise in India and accordingly such profits are not liable to tax in India under the Act. This clarification has been reiterated in recent CBDT Circular. Thus, for the detailed reasons stated, it is held that what the assessee has acquired a copyright is misplaced. What the appellant has acquired is copyrighted article, which partakes the character of purchase and sale of goods. Therefore no tax needs to be deducted u/s 195 of the Income-tax Act. These appeals are accordingly allowed. In the result all the appeals are allowed.

Issues Involved:
1. Whether payments made by the assessee for the purchase of software from foreign entities constitute 'royalty' under section 9(1)(vi) of the Income-tax Act, 1961.
2. Whether the assessee is liable to deduct tax at source under section 195 of the Income-tax Act on such payments.
3. Whether the payments made for software are for the acquisition of copyrighted articles or for the transfer of copyright itself.

Issue-wise Detailed Analysis:

1. Nature of Payments for Software:
The primary issue is whether the payments made by the assessee for software constitute 'royalty' under section 9(1)(vi) of the Income-tax Act. The Tribunal previously held in the assessee's own case that the payments for software are not for acquiring any copyright but for the use of a copyrighted article. This view aligns with the decision in Tata Consultancy Services, where the Supreme Court held that software is considered goods. The Tribunal reiterated that the payments are for the purchase and sale of goods, not royalties.

2. Liability to Deduct Tax at Source:
The Tribunal examined whether the assessee was liable to deduct tax at source under section 195. The Assessing Officer had previously held the assessee in default under section 201 for failing to deduct tax on similar payments. However, the Tribunal found that since the software payments are for goods and not royalties, section 195 does not apply. The Tribunal emphasized that the payees had no permanent establishment in India, and thus, no income is deemed to accrue or arise in India.

3. Distinction Between Copyright and Copyrighted Articles:
The Tribunal analyzed whether the payments were for the acquisition of copyrighted articles or the transfer of copyright. The agreements between the assessee and the software vendors indicated that the copyright remained with the vendors, and the assessee only acquired the right to distribute the copyrighted material. The Tribunal clarified that the rights to reproduce, distribute, or rent the software were not transferred to the assessee. The payments were for the use of copyrighted articles, not for acquiring any rights in the copyright itself.

Legal Interpretations and Precedents:
The Tribunal referred to various legal precedents and statutory interpretations to support its conclusions. It cited the OECD and UN Model Commentaries, which distinguish between payments for the use of copyrighted articles and payments for the use of copyright. The Tribunal also considered rulings from the US and Australia, which supported the view that software payments are not royalties but payments for copyrighted articles.

Conclusion:
The Tribunal concluded that the payments made by the assessee for software do not constitute royalties under section 9(1)(vi) of the Income-tax Act. Consequently, the assessee is not liable to deduct tax at source under section 195. The appeals were allowed in favor of the assessee, affirming that the payments were for the purchase of goods (copyrighted articles) and not for the transfer of copyright.

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