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TMI Blog2012 (9) TMI 752X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. The order passed by the learned Commissioner of Income-tax (Appeals)-IV, Bangalore [ CIT(A) ] is bad in law and on facts. 2. The learned CIT(A) has erred in law and on facts in upholding the view of the Deputy Director of Incometax (International Taxation)-1(1), Bangalore ( AO ) that the Appellant ought to deduct taxes at source under section 195 of the Income-tax Act, 1961 ( Act ) on payments made by the Appellant to Mercury Interactive (UK) Limited ( Mercury UK ) for purchase of software and support services. 3. The learned CIT(A) has erred in laws and on facts in concluding that impugned payment made by the Appellant to Mercury UK constitutes royalty in accordance with section 9(1)(vi) of the Act, without appreciating the arguments put forth by the Appellant. 4. The learned CIT(A) has erred in law and on facts in not appreciating the arguments/reliance placed by the Appellant on various judicial precedents in arriving at the above conclusion to hold that such payments is royalty under the Act/relevant India UK Tax Treaty. 5. Based on the above, the CIT(A) has erred in law and on facts in upholding the view of the AO in treating the Appellant as an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The assessee carried the matter to the ld. CIT(Appeals) and admitted that the Hon ble Karnataka High Court in the case of M/s. Samsung Electronics as reported in 320 ITR 209 has held the issue against the assessee, still it was stated that the Hon ble Supreme Court in the case of M/s. GE Technology Centre v. CIT reported at 327 ITR 456 has set aside the Hon ble Karnataka High Court judgment again for reconsideration. 7. The ld. CIT(Appeals) after considering the submissions of the assessee confirmed the action of the Assessing Officer by observing that in the case of M/s. Samsung Electronics, it has been held that payment made towards shrink-wrapped software was liable for withholding tax. He further observed that unless the Hon ble High Court reverses its judgment, it was obligatory on the part of the lower authorities to follow the judgment of the Hon ble jurisdictional High Court. The ld. CIT(A) also observed that the Hon ble Supreme Court though on a limited issue of chargeability remanded back the matter, still the ruling of the Hon ble jurisdictional High Court on the issue of payments towards shrinkwrapped software being liable for withholding the tax has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roprietary rights provided by the non-resident. However, what is granted under the said licence is only a licence to use the software for internal business without having any right for making any alteration or reverse engineering or creating sub-licences. What is transferred under the said licence is the licence to use the software and copyright continue to be with the non-resident as per the agreement. Even as per the agreement entered into with the other distributors as also the enduser licence agreement, it is clear that the distributor would get exclusive non-transferable licence within the territory for which he is appointed and he has got right to distribute via resellers the Software, upon payment of the licenses set forth in Exhibit A to the agreement only to End Users pursuant to a valid Actuate shrinkwrap or other Actuate license agreement and except as expressly set forth in the said agreement, distributor may not rent, lease, loan, sell or otherwise distribute the Software the Documentation or any derivative works based upon the Software or Documentation in whole or in part. Distributor shall not reverse engineer, decompile, or otherwise attempt to derive or modi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o transfer of copyright or any part thereof under the agreements entered into by the respondent with the non-resident supplier of software cannot be accepted. 21. It is further contended by the learned senior counsel appearing for the respondents that in view of the fact that what is supplied by the non-resident to the respondent in India is only a shrink wrapped software/off-the-shelf software, which is not customised to suit the needs of the respondent, the said software is to be treated as goods and there is sale of the software and copy of the software. Therefore, the question of paying any royalty would not arise. In support of the said contention, the learned senior counsel appearing for the respondents has strongly relied upon the decision of the Hon'ble Supreme Court in Tata Consultancy Services' case (supra) (hereinafter referred to as the TCS's case), wherein the Hon'ble Supreme Court was considering the question as to whether the canned software sold by the appellants can be termed to be goods and as such assessable to sales tax under the Andhra Pradesh General Sales Tax Act, 1957. Having regard to the broad definition of 'goods' under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayment is for the sale of computer software, wherein the income would be from the business and in the absence of any permanent establishment of the non-resident supplier, there is no obligation on the part of the payee to make deduction under Section 195(1) of the Act. 23. It is well settled that in the absence of any definition of 'copyright' in the Income Tax Act or DTAA with the respective Countries, in view of clause 3 of the DTAA, reference is to be made to the respective law regarding definition of 'Copyright', namely, Copyright Act, 1957, in India, wherein it is clearly stated that literary work includes computer programmes, tables and compilations including computer [databases]. Section 16 of the Copyright Act, 1957 states that no person shall be entitled to copyright or any similar right in any work, whether published or unpublished, otherwise than under and in accordance with the provisions of the said Act or of any other law for the time being in force, but nothing in this section shall be construed as abrogating any right or jurisdiction to restrain a breach of trust or confidence. Section 14 of the said Act dealing with meaning of 'Copyrigh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (e) in the case of a sound recording,- (i) to make any other sound recording embodying it; (ii) to sell or give on hire, on offer for sale or hire, any copy of the sound recording regardless of whether such copy has been sold or given on hire on earlier occasions; (iii) to communicate the sound recording to the public. Explanation .- For the purposes of this section, a copy which has been sold once shall be deemed to be a copy already in circulation. It may also be noted that under Section 51 of the Act dealing with When Copyright infringed states that Copyright in a work shall be deemed to be infringed - when any person, without a licence granted by the owner of the Copyright or the Registrar of Copyrights under the Act or in contravention of the conditions of a licence so granted or of any condition imposed by a competent authority under the Act: does anything, the exclusive right to do which is by the Act conferred upon the owner of the Copyright. Section 52 of the Act dealing with Certain acts not to be infringement of copyright states that the following acts shall not constitute an infringement of copyright, namely- xxxx ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 40(a)(i) of the Act and the order of the High Court reads as follows :- What is found, as a matter of fact, is that the assessee has been purchasing the software from Microsoft and sold it further in Indian market by no stretch of imagination, it would be termed as royalty. Therefore, the contention of the learned senior counsel appearing for the respondents that there is no transfer of any part of copyright or copyright under the impugned agreements or licenses cannot be accepted. Accordingly, we hold that right to make a copy of the software and use it for internal business by making copy of the same and storing the same in the hard disk of the designated computer and taking back up copy would itself amount to copyright work under Section 14(1) of the Act and licence is granted to use the software by making copies, which work, but for the licence granted would have constituted infringement of copyright and licencee is in possession of the legal copy of the software under the licence. Therefore, the contention of the learned senior counsel appearing for the respondents that there is no transfer of any part of copyright or copyright and transaction only involves sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icle 12(3) of the DTAA and even as per the provisions of 9(1)(vi) of the Act as the definition of 'royalty' under clause 9(1)(vi) of the Act is broader than the definition of 'royalty' under the DTAA as the right that is transferred in the present case is the transfer of copyright including the right to make copy of software for internal business, and payment made in that regard would constitute 'royalty' for imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill as per clause (iv) of Explanation 2 to Section 9(1)(vi) of the Act. In any view of the matter, in view of the provisions of Section 90 of the Act, agreements with foreign countries DTAA would override the provisions of the Act. Once it is held that payment made by the respondents to the non-resident Companies would amount to 'royalty' within the meaning of Article 12 of the DTAA with the respective country, it is clear that the payment made by the respondents to the non-resident supplier would amount to royalty. In view of the said finding, it is clear that there is obligation on the part of the respondents to deduct tax ..... X X X X Extracts X X X X X X X X Extracts X X X X
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