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TMI Blog2013 (9) TMI 374X X X X Extracts X X X X X X X X Extracts X X X X ..... g the four appeals of M/s Lucent as they are interrelated. In the Revenue appeals issue is whether the payments made for acquiring software from No- resident companies is taxable under the provisions of IT Act. The same issue is also in the Lucent appeals. In addition issue of PE, tax credit and levy of interest were other issues in Lucent appeals. Since common issues are involved in these appeals they are heard together. 2. Briefly stated, Reliance Infocomm Ltd., now known as Reliance Communications Ltd. wanted to establish wireless telecommunications network in India. As a part of that it has entered into a Wireless Network General Terms and Conditions contract and Wireless Software contract dated 31.07.2002 with Lucent Technologies Hindustan Pvt. Ltd. (LTHPL), an Indian company of M/s. Lucent group, USA. Wireless software Assignment and Assumption agreement dated 05.08.2002 with LTHPL and Lucent Technologies GRL LLC (LTGL) USA towards supply of software required for telecom network. When Reliance placed first supply orders for software for an amount of US$11,06,56,855, it made applications under section 195(2) before DDIT-2(1) Mumbai requesting payment for purchase of software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... placed a volume containing pages 1 to 622. The cases were heard over a period of time and various clarifications sought were also placed on record. 5. For the sake of convenience, the appeal in ITA No. 837/Mum/2007 and Lucent's appeals were dealt with in detail. The arguments and findings are mutatis mutandis apply to other cases also, which will be dealt with later. ITA No. 837/Mum/2007 6. In this Revenue appeal, Revenue has raised the following grounds: - "1. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in deciding that the Assessing Officer was not justified in directing to deduct Tax at Source u/s. 195 of the I.T. Act. 2. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in holding that no income accrues to M/s. Lucent Technologies GRL LLC in India against the payment of US$ 11,06,56,855/- for the supply of software for use in the Reliance Telecom Network. 3. On the facts and in the circumstances of the case and in law, the ld. CIT(A) failed to appreciate that the payment for obtaining computer software is in the nature of 'Royalty' as defined by the DTAA and liable for taxation in India." 7. Reliance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e license to use software amounts to royalty within the meaning of section 9(1)(vi). 9. The AO also held that the software can be termed as patent or invention and also scientific work and therefore payment for the use of software would be covered under these categories also as per section 9(1)(vi). The AO also held that software can be, termed a secret formula or process. The AO further referred to the circular of Government of Singapore exempting shrink-wrap software from withholding tax as per Circular 29.12.2000. The AO referred to the US IRS Ruling and held that the payment for software even for a fixed or unlimited period would constitute royalty. The AO referred to the ruling of Australian Court wherein it was held that the amount received in respect of computer software would not be royalty if it does not give any rights in the copyright. The AO held that the software is an intellectual property and falls in the category of copyrights, patents, designs, trade marks, formula, process, commercial/scientific knowledge and therefore consideration received for the license to use the software would constitute royalty. The AO thereafter referred to definition, of royalty in Artic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Contract, together with all rights, entitlements, covenants and obligations of the Assignor under the Software Contract, including but not limited to the supply and delivery of Software to the Purchaser, and (ii) all rights, entitlements, covenants and obligations of the Assignor under Section 15 of the General Terms and Conditions, relating to Software. Assignee hereby assumes, and, agrees with all of the parties hereto, to perform, observe and be bound by each and all of the foregoing obligations and covenants of Assignor. Notwithstanding the foregoing assignment and assumption, as between Assignor and Purchaser, the parties agree that Assignor shall observe and perform and shall continue, to be bound by all of the terms and conditions of the Software Contract and all of the terms and conditions of Section 15 of the General Terms and Conditions and shall remain fully liable to Purchaser under the Contracts to the same extent as if the foregoing assignment and assumption had not occurred. Section 2. Assignee Acknowledgement. Assignee acknowledges that it is fully and completely aware of all the terms and conditions set forth in the General Terms and Conditions, including without ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This Software aids the FWS Hardware to perform Call processing & Call control and Charging. 2. FMM (Flexent Mobility Manager) Software ... This Software aids the FMM Hardware to perform the Management function. 3. UTS Software.... This Software aids the 8Th Hardware to perform the Radio Network control. Central Location The DCS Software & FMM Software are part of FWS Software and are always required as part of the Hardware. This cannot be reused. The BTS Software is applied as per the requirement. FWS and BTS Software are ordered ever/time the Hardware is ordered. FWS and BTS Software can be used only with Lucent equipment." 2.16 The AR has submitted that the appellant had placed 7 purchase orders with LTHPL for the purchase of hardware and had placed 7 purchase orders with LTGL for the supply of software. The AR has explained that the software supplied through this purchase orders was meant for the use in the hardware supplied through the purchase orders by LTHPL. The AR has filed the copy of purchase orders also to explain the software supplied is meant for the use of hardware only. The chart of purchase orders of hardware and software reads as under: H/W S/W Sr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice levels, terms and conditions set forth in any then-current Document. Commencing on the applicable Commencement Date, Vendor shall perform the Work described in the Documents. All Work provided by or for the Vendor shall comply with all relevant Applicable Laws, Applicable Permits, Specifications, and best practices. Vendor shall also ensure that all Products and Services will, as a minimum, meet the performance and design requirements, functionality and capability defined in the appropriate Standard as set forth in the Specifications. In fulfilling the obligations hereunder, Vendor and Its subcontractors and suppliers shall abide by all Applicable Laws, rules, regulations, codes including tax laws, and regulations prevailing in India and all other applicable jurisdictions." 2.18 Under the Assignment Contract, rights, entitlements, covenants and obligations of LTHPL have passed to LTGL as per section-1 of the Assignment Contract (already quoted above in para 2.14) Section-15.1 of the Wireless Network General Terms and Conditions Contract reads as under: "15.1 License Grants 15.1.1 Subject to the terms Of this Section 15, upon delivery of Software, Vendor hereby grants to Reli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bide by all the terms and conditions set forth in this Section 15 and the Vendor is informed of the same in writing by Reliance and provided further that the rights, transferred, assigned, sublicensed or granted to outsourcees, as the case may be, shall be those reasonably necessary to fulfill the commercial purposes of such transaction. The assignee or sublicensee shall not be a direct competitor of the Vendor involved in the manufacture of telecommunications equipment. 15.1.4 Except as otherwise expressly set forth in the Documents, Reliance shall use such Software only for the operation of the Wireless Reliance Network, or, In the case where the Software is purchased by or on behalf of Reliance Affiliates, for the operations of such Reliance Affiliates in the Wireless Reliance Network. The Software Licenses grant Reliance or Reliance Affiliates no right to and Reliance or Reliance Affiliates will not, sublicense such Software or modify, decompile, reverse engineer, or disassemble, or in any other manner decode Software furnished as object code for any reason. Reliance and Reliance Affiliates shall not copy the Software, including firmware except for the purposes of making a lim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly reasonable terms and such use shall be subject to an appropriate non-disclosure agreement and (c) when and if Reliance determines that it no longer needs the Software or if Reliance's Software Licenses are cancelled or finally terminated in accordance with and pursuant to the terms of this Section 15 of these General Terms, return all copes (except for any required back-up or archival copies) of such software to vendor or follow commercially reasonable written disposition instructions provided by the Vendor. If the Vendor authorizes disposition by erasure or destruction, Reliance shall remove from the medium on which Software resides all electronic evidence of the Software, both in Its original form and in all copies and derivations thereof, in such manner that prevents subsequent recovery of such original or derived Software. 15.1.6 If as contemplated in Section 15.1.3. Reliance or its Affiliate(s): (i) elects to transfer, assign or sublicense any Software in conjunction with any portion of the Wireless Reliance Network to a third party, and where such Software shall remain in place or be moved within the Territory and used for substantially the same purpose as used by Reli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce's title in the relevant portion of the Wireless Reliance Network, shall have no right to transfer, assign or sublicense, Software furnished by Vendor under the Documents without the consent of Vendor, which consent shall not be unreasonably withheld or delayed. If Reliance or such successor elects to transfer or assign any portion of the Wireless Reliance Network purchased under the Documents for which it does not, under the Documents, have the right to transfer, assign or sublicense related Software, Vendor agrees that, upon written request of the transferee or assignee as applicable, of such portion of the Wireless Reliance Network, or of Reliance or such successor, Vendor shall not unreasonably refuse or fall to grant to the transferee, assignee or sublicensee, as applicable, as license to use such Software within the Territory upon payment by the transferee of a re-licensing fee to Vendor on commercially reasonable terms. 15.1.8 The rights and obligations of Reliance under the Software Licenses, shall survive the termination of all or any portion of the Documents, regardless of the cause of term/nation, provided Reliance has met its material obligations as set forth in this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scs or cassettes in respect of songs and pictures. Hon'ble Supreme Court held that the software and the media cannot be split up since the media has a little value. Hon'ble Supreme Court has observed as under: "A software programme may consist of various commands which enable the computer to perform a designated task. The copyright in that programme may remain with the originator of the programme. But the moment copies' are made and marketed, it becomes goods, which are susceptible to sales tax. Even intellectual property, once it is put on to a media, whether it be in the form of books or canvas (In case of painting) or computer discs or cassettes, and marketed would become "goods". We see no difference between a sale of a software programme on a CD/floppy disc from a sale of music on a cassette/CD or a sale of a film as a video cassette/CD. In all such cases, the Intellectual property has been incorporated on a media for purposes of transfer. Sale is not just of the media which by itself has very little value. The software and the media cannot be split up. What the buyer purchases and pays for is not the disc or the CD. As in the case of paintings or books or music or films the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usly software is also being purchased from LTGL. The software is for the uses in the hardware purchased simultaneously. As per the Contract conditions mentioned in section-15 of the agreement appellant did not acquire any right of duplication of software except for use in its own system. 2.22 Section 9 of the I.T. Act provides for income deemed to accrue or arise in India. Section 9(1)(vi) refers to accrual of income by way of royalty. Explanation-2 to section 9(1)(vi) provides the definition of royalty which reads as under: 9. Income deemed to accrue or arise in India. (1) The following incomes shall be deemed to accrue or arise in India: (vi) in come by way of royalty payable by- (a) the Government; or (b) a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or (c) a person who is a non-resident, where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, 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 or property which are contingent on the productivity, use or disposition thereof; and (b) payments of any kind received as consideration for the Use of, or the right to use, any industrial, commercial or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of article 8." 2.25 It can clearly be seen that the definition of royalty in Article-l2(3) of the DTAA is more restrictive than what is provided in Section 9(1)(vi). 2.26 LTGL is a tax resident of USA and therefore is entitled to the benefit of DTAA over the provisions of the Income-tax Act. Consequently if the payment of software is not covered by the definition of royalty in A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the work (3) Copyright shall not subsist- (a) in any cinematograph film if a substantial part of the film is an infringement -of the copyright in any other work; (b) in any sound recording made in respect of a literary, drama tic or musical work, if in making the sound recording, copyright in such work ahs been infringed. (4) The copyright in a cinematograph film or a sound recording shall not affect the separate copyright in any work in respect of which or a substantial part of which, the film, or, as the case may be, the sound recording is made. (5) In the case of a work of architecture copyright shall subsist only in the artistic character and design and shall not extend to processes or methods of construction" 2.28 Section-13 therefore clearly provides that - the copyright shall subsist only in respect of original literary, dramatic, musical and artistic works, cinematograph films and Sound recording. It is therefore clear that the copyright is different from the work. Copyright about work is not synonymous with that work. Copy right is an incorporeal property in a work (a corporeal property). 2.29 Section-14 of the Copyright Act provides the definition of copyright whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... software provided to the appellant are the copyright of LTGL. These copies shall be held secret and software shall not be disclosed to anybody else. Agreement provides that all copies of software shall be returned to LTGL upon termination or cancellation or the agreement. Agreement also provides that the appellant shall use the software only for the operation of wireless Reliance network and shall not sublicense or modify the software. The perusal of section-15 of the agreement clearly reveals that the appellant has got a copy of software for being used in its telecom network. The appellant has got no right as envisaged in section-14 of the Copyright Act to duplicate the software, to Issue copies of software in public or to give copies of software in rent or even to reverse engineer, decompile or modify the software. The sum total of the conditions mentioned in the section-is is that LTGL has given no part of Copyright as envisaged in section-14 of the copyright to the appellant. Thus, sale of software by LTGL to the appellant cannot be said to be the transfer of the copyright to LTGL either in part or in whole. Thus, consideration paid by the appellant to LTGL for acquiring copy o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icle, namely, software was held not to be royalty, it was also held that copyright is different from the copyright article. In this case the issue of software provided to the cellular operator for setting up the cellular telephone network was covered. It was held that the software which is provided by the supplier for the use in the cellular network does not involve transfer of any part of copyright of the software but only amounts to sale of a copyrighted article, namely, the copy of computer programme. Copyright continue to remain with the supplier of the computer programme. 2.34 The Hon'ble Delhi Bench of ITAT in the case of Lotus Asia Specific ITA No.564 to 566/Del/05 order dated 28.04.2006 have also examined the same issue and have held that in the cask of a sale of shrink-wrap software being a copyright~ article, consideration received does not amount to royalty as there -is no transfer of any part of copyright in the, computed programme which continues to remain with the software supplier. 2.35 The Hon'ble ITAT Bangalore Bench in the case of Sonata Information Technologies Ltd. ITA No.1561 to 1580/Bang/2004 dated 31.01.2006 have considered the issue of payment received on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In this case Indian company was engaged in the business of providing network solution to its customers. This activity includes sale of software packages to customers. For this purpose the Indian company had imported readymade software Packages from Hewlett Packard USA. The Indian company sold these software Packages to its customers in the packed conditions Hon'ble ITAT held that the consideration received by the foreign company for the sale of software Packages to the Indian company did not amount to royalty within the meaning of Artlcle-12(3) of the Indo-US DTAA. It was held that the sale of copyrighted article is different from the transfer of the copyright in the computer software. 2.38 It is therefore very apparent from several decisions of Hon'ble ITAT that in the case of sale of copyrighted article, namely, a copy of computer programme, payment received is not royalty if there is no transfer of copyright partly or wholly. Facts obtaining in the case of appellant clearly point that no part of the copyright as envisaged by section-14 of the Copyright Act has been transferred to the appellant by LTGL. Therefore the payment for purchase of software cannot amount to royalty wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e placed on the Circular of Govt. of Singapore. 2.42 Hon'ble ITAT in the case of Sonata Information Technologies Ltd. has also considered the observations of USA in respect of acquisition of a copyrighted article as well as the observations of Australia regarding the acquisition of software. Hon'ble ITAT had held that under both US and Australia views, payments for acquisition of software being a copyrighted article do not amount to royalty but are payments only in respect of a copyrighted article. The appellant has produced the copy of Australian Taxation Office ruling TR93/12 from which it is seen that the payment received for a sale of copy of programme is only price of the sale of goods and does not amount to royalty. US observation on the copyrighted article as mentioned by the AO has also been perused by me. There is apparently no contradiction between the findings of the several benches of the ITAT and the US & Australia Tax Rulings. 2.43 The AO has also relied upon the decision of Hon'ble AAR in the ruling In P.No.30 of 1999, 238 1TR 296. I have examined this ruling. In this case no software was supplied. On the contrary a central processing facility was created which was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyalty within the meaning of Artilce-12(3) of the DTAA. It is accordingly held that the AO was not justified in directing to deduct the tax at source u/s.195. No income accrues to LTGL in India against the payment of US 1106,56,855/- for the supply of software for use in the Reliance Telecom Network. Appeal on ground No. 1 to 7 is allowed. 11. Thus the learned CIT(A) accepted Reliance contentions that what it obtained was only a copyrighted article which does not have any copyrity and section 14 of Copyright Act does not apply as Reliance does not have any right to duplicate software, to issue copies of software. Ld CIT(A) relied on the Coordinate Bench decision in the case of Samsung Electronics 276 ITR (AT) 1, Lucent Technologies Hindustan Ltd. 92 ITD 366, Motorola Special Bench Decision reported in 270 ITR (AT) 62 and other Bangalore Bench decisions on the issue. Revenue is aggrieved. 12. Learned Special Counsel's arguments centred around the fact that what the assessee has obtained is only a license, which involved a copyright under the Copyright Act and the definition of Royalty under the Income Tax Act is also applicable. The detailed submissions canbe summarised as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ince the software is in binary system, the word license is used but this is different from License of copyright contemplated in the Act. Reliance is not exploiting any license/copyright while using the software purchased. 14. Continuing the arguments, learned counsel referred to the master agreement where the contract is for supply of hardware, software and services for establishing the network. It was the submission that the software supply contract was assigned to M/s. Lucent LLC USA and the same was to ensure that the software helps in equipment usage, as the equipment can work only with the software. He referred to the purchase order placed, as is referred by the learned CIT(A) that each purchase of equipment matches with placing order for relevant software and the software is the medium/mechanism for using the hardware. Referring to clause 15 of the agreement, the arguments were that the license was given for use of non-tangible goods unlike hardware refer to various terms specified therein to submit that license is only for exclusive use by Reliance and no intellectual property right were transferred nor any copyrights were given. 15. The learned counsel referred to OECD co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dt. 14/03/12. 4) Sonata information Tech Ltd. in ITA4446/Mum/2011 dt.03/04/12. 5) Tata Consultancy Services Ltd 271 ITR 401(SC). 6) BSNL Vs Union of India 2006(2) S. T. R 161(SC) 17. The learned counsel also submitted detailed note on 'Royalties' under various treaties as the Reliance also purchased from various other Country-Resident companies. Arguments were also placed on 'goods', 'equipment' used in definitions. Lastly, it was also contended that the issue of existence of PE in the case of Lucent cannot be considered as AO has not raised the issue in his order. It was his submission that additional grounds cannot fasten liability. 18. In reply, the learned counsel for Revenue relied on the decision of NTPC to submit that Revenue can raise new ground/argument which is legal. It was his argument that the agreement was assigned to LTGL and not executed by Lucent india. He reiterated the contention that License is for use of copyright and not for copyrighted articles. He referred to the ownership and redesigning of software at the end of 10 year period to submit that software is not sold, only license to use was granted. Referring to the terms of agreement, it was submitted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld remain with Lucent. AO gave a finding that it is quite clear from the section 15 of the Wireless Network General terms and conditions Contract that the software is the property of Lucent. It has also provided in the Agreement that the applicant would not be the owner Software but would remain the licensee for the use of or the right to the copy right. It is no way to reconstitute as a sale of software. 20. Lucent argued before AO that Reliance has been granted in perpetuity irrevocable, non-exclusive, unrestricted, unlimited royalty free license to use the software for its benefit in connection with the ownership, operation and maintenance of its Wireless Reliance Network. The intellectual property rights in the software vests with the Lucent and Reliance is not permitted to transfer, assign, sub-license such software or modify, decompile, reverse engineer, or disassemble or in any other manner decode the software furnished, as object code. Reliance is also not permitted to make copies of the software except for back up purposes. The consideration received for supply of software is not in the nature of royalty since Reliance has not been granted any rights in the underlying co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are developed by the assessee to Reliance Communications Ltd (earlier known as Reliance hnfocomm). Reliance has been granted a non- transferable right. The seller has indemnified the buyer/Licensee against any breach of any intellectual property or Patent regulations in using, maintaining or transferring of the software tools. 4.3. Whether sale of software is sale of Goods? 4.3.1 The title and proprietary notices of the software would remain with assessee. who is the owner of the programme. The Software Distribution/ Reseller Agreement makes it very clear that the software is the property of the assessee. It is also provided in the Agreement that the user would not be the owner of the Software but would remain the licensee for the use of or the right to use of the copyright. It is in no way to constitute as a sale of software. 4.3.2 The assessee has relied upon the decision of Constitutional Bench of Supreme Court in the case of Tata Consultancy Services vs. State of Andhra Pradesh (20041141 Taxman 132 (SC). In this case, Supreme Court was concerned with canned software (i.e. computer software packages off the shelf). It was concerned with sale of canned software and whether suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not applicable, as Sec.195 is not applicable to payments made for import of goods. In this regard, it is to note that 'Package Softwanes' are neither goods nor services; they are a separate 'genre by itself. i.e. intellectual property. The mere fact that customs law or sales tax law deems it to be goods for the purpose of their Act, does not change the inherent character of the 'software'. In fact, World Trade Organisation (WTO) which has been ratified by more than 140 countries, has 3 main agreements: 1. Agreement on trade of goods (GATT) 2. Agreement on trade of services (GATS) 3. Agreement on trade of intellectual property rights (TRIPS) This goes on to indicate that lPRs (Software is an IPR) are a distinct and different class than those of goods and I or services. In fact, the software may also be considered as a "process', but this aspect is discussed later. 4.3.4 Thus, as per the Income Tax Act it is clear that the payment made for the purchase of software by the user can be considered as payment for use of intellectual property and not for the purchase of goods. The only exception provided is by the second proviso to sec. 9(1) (vi), which excludes the computer software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ored or possessed. A software programme might consist of various commands which enable the computers to perform a designated task But the moment it was put on a disc and copies ware made and marketed. it became chattel exigible to sales tax. Intellectual property, once it was put on to media, whether in the form of books, canvas, computer disc or cassettes and marketed, would become goods. The Supreme Court referred to its earlier decision in Associated Cement Companies Ltd V Commission of Customs 2001 AIR (SC) 862 which it felt directly dealt with the question in issue. The question in Associated Cement Companies Ltd.'s case (supra) was whether customs duty was leviable on technical material supplied in the form of drawings, manuals and computer disc, etc. The Court observed that the Customs Act defined 'goods' to include all kinds of movable property It held that what was being taxed under the Customs Act read with Customs Tariff Act and the Customs Valuation Rules was not the intellectual input alone but goods whose value had been enhanced by the said input. The final product at the time of import was either the magazine or the encyclopaedia or the engineering drawings or disc, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be considered in the light of the questions which were before this court. A decision of this court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, the courts must carefully try to ascertain the true principle laid down by the decision of this court and to pick out words or sentences from the judgement, divorced from the context of the questions under consideration by this court, to support their reasonings..." As we have pointed out above, in Tata Consultancy Services' case (supra) the issue under consideration was whether sale of disc / floppy containing software programme amounted to sale of goods under the sales tax law of Andhra Pradesh. In fact, the issue of transfer of right to use the goods (as per expanded definition of sale) did not come up for consideration in that case. On the other hand, the issue under consideration in the present case is different. The question here is whether the consideration is paid for the use or right to use copy right in which case it will be royalty income. As is clear from the contract provisions, there is no outright transfer of copyright or sale of disc/ flop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Concept of Royalty 4.4.1 The term 'royalty' normally connotes the payment made to a person who has exclusive right over a thing for allowing another to make use of that thing which may be either physical or intellectual property or a thing. The exclusivity of the right in relation to the thing for which royalty is paid should be with the grantor of that right. Intellectual property law is that area of law, which is concerned with the protection of ideas, the expression of ideas, invention and commercial goodwill. It includes copyright law, the law of patents, breach of confidence, design law, trademark law and the law of passing-off. 4.4.2 The Karnataka High Court in the case of Citizen Watch Co. Ltd. [148 ITR 774 (Kar.) and the Calcutta High Court in the case of Davy Ashmore India Ltd. (190 ITR 626 (Cal) have also clearly held that the royalty is a payment for grant of right to use any property, the ownership of which continues to vest with the grantor. This means that only in cases where ownership of the asset in question is retained and the right to use is granted, the payment of the same will constitute royalty. 4.4.3 For the purposes of interpretation of the DTAA, one has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in India or which accrues or arises or is deemed to accrue or arise in India. The Income-tax Act, however, does not contain any definition of the term "royalty" nor is there any clear-cut source rule specifying the circumstances in which royalty income can be regarded as accruing or arising in India. Further, lump sum payments made for the supply of know-how are not chargeable to tax where such know-how is supplied from abroad and the payment therefore is made outside India even though the know-how is used in India, if no part thereof is attributable to any services rendered in India. 15.2 The Finance Act has inserted a new clause (vi) in section 9(1) of the Income-tax Act clearly specifying the circumstances in which the royalty income will be deemed to accrue or arise in India and also defining the term "royalty" 15.4 In view of the aforesaid amendment, royalty income consisting of lump sum consideration for the transfer outside India of, or the imparting of information outside India in respect of, any data, documentation, drawings or specifications relating to any patent, invention, model, design, secret formula or process or trade mark or similar property, will ordinarily ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e from a source outside India. 4.6.3 The assessee's basic argument is that the payment does not fall under the mischief of explanation 2 to section 9(1(vi) of the Act. The term Royalty' has been defined under Explanation 2 to Section 9(1)(vi) of the Act to mean: "consideration (including any lump sum consideration but excluding any consideration which would be the Income of the recipient chargeable under the head "Capital gains") for - (i) the transfer of all or any rights (including the granting of a license) In respect of a patent Invention, model, design, secret formula or process or trade mark or similar pro petty; (ii) the imparting of any information concerning the working of, or the use of, a patent, Invention, model, design, secret formula or process or trade mark or similar property; (iii) the use of any patent, invention, model, design, secret formula or process or trademark, or similar property; (iv) the imparting of any information concerning technical, Industrial, commercial or scientific knowledge, experience or skill; (iva) the use or right to use, any industrial, commercial or scientific equipment, but not including the amounts referred to in section 4488; ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , a tenant as well as subtenant pay rent. A tenant makes the payment for his right to use whereas the sub tenant pays for actual use of the house. Similar is the situation when a vendor in India acquires know-how from abroad and sells it to actual user. In this case the vendor acquires a right to use covered by clause (i) whereas the actual user pays for actual use covered by clause (iii) of the explanation. 4.6.7 Thus as per the provisions of Sec.9(1)(vi) of the income Tax Act 1961, any payment on account of Royalty made by the Resident of India to any person outside India is deemed to be income of the recipient in India, and would be deemed to be the income chargeable to income tax in India. One has now to examine whether such payments partake the character of "Royalty" as defined in the Sec.9(1)(vi) itself, As discussed above, clause (i) to (iv) are applicable In the case of intangible property and payment for its mere use is in the nature of royalty. As mentioned above, software Is not goods but an intangible property. Hence consideration paid for its use or right to use is in the nature of royalty. 4.7. Whether "process"? - 4.7.1 Alternative to the above discussion, it is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g of the term "process" as understood n Patent Laws is: * A mode, method or operation whereb~' a result or effect is produced. * a means devised for the production of a given result. * an operation 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. The program which instructs a computer to perform the desired operation often goes through a series of evolutionary steps from preliminary conception to detailed and complex expression. In this process (which varies from case to case) -a crucial stage in the conception is often the expression of the basic steps to be executed-the algorithm-in the form of a flow-chart or other logical flow diagram. Thereafter the statement of instructions in a computer language is relatively unskilled though it may be very laborious. The detailed writing will likely be in a so-called 'high level' language (such as Fortran or Cobol). giving the diagram in source code. The computer itself then converts this into operational terms of object code, by means of a separate 'system control' program. 'Computer Program' is a term that may describe a wide range of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tomated market for shares and similar securities. It analysed customer's orders to buy and sell against given criteria; those which met the criteria were then carried out. The Court of Appeal held this unpatentable under the 1977 Act. The program could be introduced into any suitable computer in any encoding language, causing data to be acted upon so as to carry out legal transactions, rather than technical production in any ordinary sense. iv. Gale's Application : new method of calculation). The applicant's essential discovery was of a method of calculating square roots in the binary functioning of a computer by eliminating division and restricting multiplication to specified binary functions. This could be given form in the electronic circuitry of a read-only memory (ROM) and the claim was to a ROM carrying the relevant controls. Aldous J. was prepared to accept the claim; but the Court of Appeal refused the application for its very apparent reference to mathematical procedures for producing numbers. The Court refused to accept in such a case that embodiment in a ROM made to program patentable, where it would not be if expressed purely in mathematical terms or was contained on a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere the shape, configuration is necessitated by the function. 4.9.2 The Second Proviso to section 9(1 )(vi) of the Act itself state as under: "Provided further that nothing contained in this clause shall apply in relation to so much of the income by way of royalty as consists of lump sum payment made by a person, who is a resident, for the transfer of all or any rights (including the granting of a license) in respect of computer software supplied by a non-resident manufacturer along with a computer or computer-based equipment under any scheme approved under the Policy on Computer Software Export, Software Development and Training, 1986 of the Government of India." 4.9.3 It shows that when computer software is acquired along with equipment, then consideration paid for the software will not be royalty if the agreement is approved by the specified authority of the Govt of India. In other words, if the agreement is not approved then payment for acquisition of such software would be taxable. It is also important to note here that the legislation has not used the word "copyright" as used in clause (iv) of the explanation defining royalty. In this regard, circular no 621 dated 19/12119 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny computer software to a person resident in India, the provisions of sub-section (1) shall apply in relation to such royalty as if the words the agreement is approved by the Central Government or where it relates to a matter included in the industrial policy, for the time being in force, of the Government of India, the agreement is in accordance with that policy occurring in the said clause had been omitted." 4.10.2 Section 115 provides rates of tax in respect of royalty, FTS, .dividend and interest payments to non-residents. It may be noted that different wordings have been used in the subsection (IA) for books and for software. In case of books, it says payment for transfer of 'any right in respect of copyright' whereas in case of software it simply says transfer of 'any right in respect of software'. The word copyright has not been used in the case of software. Rightlyso, as discussed earlier, a book is a tanalble property whereas software is an intannible property. As per section 9(1)(vi) defining royalty, in case of Intangible property consideration for mere use of such property will be in the nature of royalty whereas in case of tangible property (other than equipment), roy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the work; (vii) to do, in relation or an adaptation of the work, any of the acts specified in relation to the work in sub-clause (i) to (vi). (b) in the case of a computer Program: (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 Program: PROVIDED that such commercial rental does not apply in respect of computer programs where the program itself is not the essential object of the rental. 4.11.3 That means the owner of the copyright in a computer software has now 8 rights instead of conventional 7 rights [ as per clause (a) of section 14 (supra) 1. Even right to sell or giving on commercial rent is included in the software. In the A.A.R. case of Factset Systems (AAR No.787 of 2008) these rights appear to be not considered, It may be worthwhile to .point out that, similar rights were also introduced in the US Copyright Act. Sec. 109A of the US Copyright Act [as amended in 1990] states: "Notwithstanding the provisions of the Sub-sec.(a), unless authorised by the owners of the copyright in the sound recording or the owner of copyright in the computer Program (inclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gible property or a copyrighted item. It comes under the know-how royalty. Similar is the case of software. Even the standardized software will fall under the category of know how royalty. 4.12.3 If it is presumed that software on carrier media disks or tapes is an copyrighted article and not an intangible property, then sale of software on a CD will not be royalty but if the same software is downloaded on internet with the permission of developer, it would not be an article. Consequently it would be in the nature of royalty. It would be a totally untenable interpretation which changes taxability of a payment for acquisition of the same property on the basis of method of delivery. Such an interpretation cannot be accepted. 4.12.4 At this juncture, it would be appropriate to borrow from the Commentaries by Eminent Authors before arriving at a finding in this matter. OECD Commentary vide para 15 states that where consideration is paid for the transfer of the full ownership, the payment can not represent a royalty and the provisions of the article are not applicable. Difficulties can arise where there are extensive but partial alienation of rights involving - - exclusive right of u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 typos of payment". 4.12.5 Several important points have been considered while coming to the conclusion that supply of software by the assessee will be chargeable to tax as Royalty. The definition of copyright as per Sec.14(b) of the Copyright Act, 1957 with regard to software has been considered. The perusal of this definition clearly indicated that in the case of computer programmes, selling or giving on hire of the software or offering for sale or for commercial rental any copy of the computer programme regardless of whether such a copy has been sold or given on hire on earlier occasion constitute the grant of a right to use copyrights. The said definition makes it clear that copy of legally obtained software constitutes grant of exercise of the copyright. Article 3(2) of the Indo-US DTAA makes it mandatory to adopt the definition of the word 'copyright' as given in the law of the state applying the provisions of the treaty and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of royalty as per Article 12(3) of Indo-USA treaty is as under - (a) payments 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, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience1 including gains derived from the alienation of any such right or property which are contingent on the productivity1 use or disposition thereof; and (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment, other than payments derived by an enterprise described in paragraph I of article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of article 8. 4.14.2 Basic structure of the term royalty in the treaty is same as in the domestic law. For instance it refers to the following categories which are also there in domestic law- i) patent, trademark, design or model, plan, s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll also be covered as the payment for use of secret process. Further, the software in general is an intellectual property and allowing its use by sale or by renting is covered by Royalty. 4.17.1 The impact of introduction of explanation 2(iva) to set 9(1)(vi) was lucidly considered by the Hon'ble ITAT, Hyderabad and it held in case of M/S Front tine soft Limited ITA no 1080-1O81/Hyd/03 held vide para 22,23,24 and 27 as below: 22. We have heard the (earned representatives of patties and record perused. The issue to be examined under consideration is whether impugned payment made to TDT against purchases of software or payment of Royalty. After elaborate discussion on the issue while deciding the first ground we find that what is taxed as royalties is the amount paid as consideration for the use or the right to use and not outright purchase or the fight to use as an asset Royalty is thus consideration for the transfer of all or any right including the granting of a license in respect of a copyright, patent, trade mark, design and modal or secret formula, the use or right to use any industrial, commercial or scientific equipment (section 9(1)(vi), explanation 2. (iva)) transfer of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and cannot be treated as royalty." (relevant headnote) 2) C.I.T. Vs Ahmedabad Mfg. & Calico Printing Co. (1983) 139 ITR 806(Guj) = (2003-TIOL-210-HC-AHM-IT) "In the case of secret processes, patents, special inventions, when right of exploitation is given by the owner of the inventions, patents etc., to a third party instead of outright sale, then for the right to exploit these inventions, secret processes, some amount may be paid and the amount paid may be correlated to the extent of exploitation. It is in this '~ sense that license agreements for the exploitation of patents, inventions, etc. are being entered into in modem commercial would and as part of such agreements, even knowledge derived from his own experience and technical know-how for the most economical and efficient user of the patents, inventions, etc. are parted with by the licensor to the license. Payments of this kind are known as royalties. This is also evident from several double taxation avoidance agreements between the Govt. of India and foreign countries such as Sweden in which the term 'Royalty' has been defined. That such payments are royalties is also evident from the definition of the word 'Royalty' in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear, unambiguous and does not suffer from any void or gap, the spirit or intention of international convention, under no circumstances, can override the express provisions of domestic law. ....... 26. With the above background of discussion now we examine the facts of the case under consideration, we find that in the impugned transactions of payment to TDT was for the use of 'True Dial Software' and not for purchases, as evident from following clauses of terms and conditions of the agreement: ....... 27. From above terms and conditions we find that the said payment was not for transfer of absolute assignment and ownership of "True Dial Software" The transaction clearly, falls under the definition of 'Royalty' as defined in section 9fl)(vi) Explanation 2 (iva). The assessee acquired only right to use of 'True Dial Software". It is 'Royalty' and royalty payment to NRI is deemed to accrue and arises in India and therefore, payment is subject to tax deducted at sources. We them fore, confirm the orders of the lower authorities. 4.17.2 Recently Karnataka High Court in CIT vs. Samsung Electronics Co. Ltd. (2009) 185 Taxman 313 (Kar) held that for the import of software the tax as 'R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt preferred the four appeals to ITAT. The grounds raised by Lucent common to all years are as under: GROUNDS OF APPEAL "1. That on the facts and circumstances of the case and in law, the Additional Director of Income Tax (International Taxation), Range-4, Mumbai ( hereinafter referred to as "the Learned AO") has erred in computing the income of the appellant of Rs.30,72,21,521 and raising a consequent tax demand of Rs.6,45,16,519 and interest demand of s.10,01,61,895 for A.Y. 2003-04, while issuing a single assessment order for A.Y. 2003-04, A.Y. 2004-05, A.Y. 2005-06 and A.Y. 2007-08 dated 19 August 2010 and thereby not accepting the Appellant's claim for refund of Rs.4,60,83,230 alongwith interest. Taxability of Income 2. On the facts and in the circumstances of the case and in law the Learned AO and the Dispute Resolution Panel (hereinafter referred to as "the DRP") have erred in holding that the amounts received by the Appellant from supply of software to Reliance Communications Limited (previously known as Reliance Infocomm Limited) (hereinafter referred to as "Reliance") are "Royalty" in nature under the provisions of the Act and under Article 12 of the Double Taxation A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the event it is held that where the receipts from supply of software to Reliance is not 'royalty' in nature, the business profits of the Appellant are to be computed on the basis of the activities of the PE in India thereby taxing the software receipt on net basis in India. 10. Without prejudice to the above, the DRP authorities have erred and consequently, the Learned AO in arbitrarily estimating that 80% of the activities are carried out by the PE in India. Further the DRP authorities have erred in estimating an extremely high net profit rate of 40% on their own surmises and conjectures and the Learned AO has erred in consequentially giving effect to the directions of the DRP authorities thereby resulting in computing the profits attributable to the PE @ 32%, which is very high as compared to the actual activities carried out in India in relation to the supply of software. 11. Without prejudice to the above, the DRP authorities have erred in not appreciating that all the critical activities in relation to the sale of software were carried on by the Appellant outside of Indian and all risks resided outside of India and the Learned AO has erred in consequentially giving effect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing reopening he referred to page 193 of the paper book and subsequent filing of ROI to submit that detailed objections are not dealt with by DRP. However there is no ground raised on the issue in appeal before us. 23.2 With reference to the issue of Royalty, he relied on the various decisions to support that the sale of software cannot be considered as Royalty. The learned counsel referred to the agreements before DRP to submit that the assessee, Lucent, sold only software to run the equipment and referred to the scope of work in the agreement (Clause 3.1). He referred to various terms to submit that the sale and supply was outside India, only goods were supplied at unit prices on fixed price basis and there is no separate license fee and this software is specified for running the equipment (equipment specific) and so part of supply of Network agreement. He referred to the main General Terms and Conditions and Assignment agreement to stress that the Lucent was acting for supply of hardware and software for Network establishment and the products are only sold. He relied on the decision of the Special Bench of ITAT in Motorola 95 ITD 269 (Del) wherein it was considered that supply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... K Sudhakar S Shanbagh Vs ITO 241 ITR 865 ( Bom). It was the submission that the Lucent cannot claim any benefit which was not claimed by filing ROI in time. 24.2 With reference to the arguments on Royalty, Ld. Counsel relied on the submission made in Revenue appeal. It was the submission that the decision of Special Bench in the case of Motorola does not apply as the software was not supplied along with hardware, but separately by separate purchase orders from a different company, so the factual position is different. He reiterated the same arguments on use of copyright/use of equipment/ intangible equipment, etc. 24.3 With reference to the issue of PE, he reiterated the AO's arguments and referred to 'assignment agreement', clause 7.3.2 for commissioning of software and Indian company is responsible for installing and commissioning of the software along with hardware, so agency PE exists. He relied on the orders on the issue of attribution of profits and levy of interest. 25. We have heard the contentions in detail and perused the paper books, various case law placed on record. There is no dispute with reference to the fact that Reliance purchased various equipments for establi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra Pradesh 271 ITR 401, all other judicial precedents raised before us were also examined and considered by the Hon'ble Special Bench of the ITAT, Delhi in the case of Motorola Inc., Ericsson Radio Systems and Nokia Corporation, 95 ITD 269 (Del). Therefore, we are not extracting the detailed submissions as we have already extracted the orders of the CIT(A), which accepted Reliance's contentions and order of the AO in the case of Lucent for the Revenue's stand. The Hon'ble Special Bench of the ITAT examined various contentions and held that those assessee companies were leading suppliers of the said communication equipments comprising both hardware and software. Software could not be effective without hardware, which was also supplied together. The Special bench of the ITAT on those facts was of the view that the crux of the issue is "whether the payment is for copyright or for a copyrighted article". If it is for copyright, it should be classified as royalty both under the Income-tax Act and under the DTAA and it would be taxable in the hands of the assessee on that basis. If the payment is really for a copyrighted article, then it only represents the purchase price of the article ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quipment and there is no separate sale of software. Software was integral part of supply of equipment for Tele-communications in those cases. It is generally called embedded software. 29. The facts in the present case of supply of software to Reliance are that the software was supplied separately and not alongwith the equipments, eventhough the software was stated to be specific for certain equipments supplied by LTGL. The fact that there is separate agreement for supply of software not only with Lucent, USA but also from various other non-resident companies, for use in the Reliance Network by virtue of separate agreements do indicate that software is not supplied alongwith hardware. As seen from the copies of agreements placed on record, some agreements are only for purchase of license/ granting of license only. But majority of agreements are standard in their format, which was discussed by Ld CIT(A) in the case of agreement with Lucent. It was admitted that the software works on the hardware, but the supply was not integral part of purchase of equipment required/ nor embedded software. Therefore, the facts as stated before the Special Bench of ITAT and Hon'ble Delhi High Court a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial information embedded in the software/computer programme. Therefore, it falls within the mischief of Explanation (2) of clause (vi) of sub-section (1) of section 9 of the Act and there is a liability to pay the tax. For the purpose of section 9 which deals with income deemed to accrue or arise in India, under clauses (v), (vi) and (vii) of sub-section (1), such income shall be included in the total income of the non-resident, whether or not (i) the non-resident has a residence or place of business or business connection in India, (ii) the non-resident has rendered services in India. Therefore, the object is to levy tax on the income of a non-resident, if it has accrued or arisen in India and one such income is the income from royalty. All the appeals are allowed. Impugned orders passed by the Income Tax Appellate Tribunal, Bangalore Bench, is hereby set aside. The order passed by the Commissioner of Income Tax (Appeals) affirming the order passed by the Assistant Commissioner of Income tax, Circle 19 (1), Bangalore, with modification is restored." 31. The Karnataka Hon'ble High Court in a batch of appeals, in the case of Samsung electronics and Other case( 345 ITR494 Kar) , o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pyrighted article is not acceptable. The amount paid to the supplier for supply of the "shrink-wrapped" software is not the price of the CD alone nor software alone nor the price of license granted. It is a combination of all. In substance unless a license was granted permitting the end user to copy and download the software, the CD would not be helpful to the end user; (ii) The provisions of the Double Taxation Avoidance Agreements (DTAA) prevail over the provisions of the Income-tax Act, 1961, if the provisions of the DTAA are more beneficial to the assessee. The definition of "royalty" is restrictive in the DTAA whereas the definition of "royalty" under the Act is broader in its content. (iii) Under the DTAA with the U. S. A., the necessary ingredient to be satisfied to find out whether the payment would amount to "royalty" is that it is received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work. A literary work is entitled to copyright. In India, section 2(o) of the Copyright Act, 1957, defines "literary work" as including computer programmes, tables and compilations including computer database. Therefore, "computer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight in a copyrighted article. In view of the language employed in sub-clause (v) to Explanation 2, the question is not whether what is transferred is a right in a copyright or a copyrighted article. The real question is whether the consideration paid to the owner or a licensor of a copyright, for permission to use the software/computer programme is a consideration for transfer of any right in respect of a copyright and falls within the mischief of the definition of 'Royalty'. This is clear from the wordings in section 9 of the Act, which reads as under :- "(1) The following incomes shall be deemed to accrue or arise in India:- (vi) income by way of royalty payable by- .................................. (b) a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried, on by such person outside India or for the purposes of making or earning any income from any source outside India; .................................. [Provided further that nothing contained in this clause shall apply in relation to so much of the income by way of royalty as consists ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rpose of the said section, the computer software supplied by a non-resident to a resident falls within the definition of 'Royalty'. If the case falls under the proviso it is out of the definition of the 'Royalty'. Therefore, it is clear that the consideration paid for supply of a software by a non-resident to a resident is a software (sic. royalty) unless it falls within the section proviso. 21. Therefore, any computer software sold on the shelf falls under the; second proviso and the consideration paid thereon falls within the mischief of 'Royalty' as defined in the said proviso. It is in this background, we have to look into clause (v) of Explanation 2. Under Explanation 2, for the purpose of clause (v), 'Royalty' means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains"). In other words, one of the tests to be applied is whether the consideration : paid would fall within the definition of capital gains. If the consideration paid do not fall within the definition of capital gains and do not fall within the second proviso, then the said consideration would be 'Roya ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly imply, unless where the construction of those words is. either by the preamble or by the context of the words in question controlled or altered. In this context it is necessary to know the meaning of the words "in respect of used in the aforesaid provision. In fact this phrase has been the subject matter of interpretation by the Apex Court as well as the High Court. 23. The Apex Court in the case of Shahdara (Delhi) Saharanpur Light Railway Co. Ltd. v. Upper Doab Sugar Mills Ltd. and anotehr, reported in AIR 1960 Page 695, held as under:- "We do not propose, however, to rest our decision on this narrow question of haulage from the station platform to point A, as in our view the assumption made above as regards the definition of terminals in S. 3(14) is not justified. The definition as has already been stated is in these words. "Terminals" includes "'charges in respect of stations, sidings, wharves, depots, warehouses, cranes and other similar matters, and of any service rendered thereat". Thus two classes of charges are included in the definition. The first is "charges in respect of stations, sidings, wharves, depots, warehouses, cranes and other similar matters." The second ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion must have been that the terminals leviable would not depend on how many of these things would be used. It is also worth noticing that the user of a depot, warehouse and cranes would necessarily mean some service rendered "threat". If terminals did not include charges in respect of the provisions of depots, warehouses, cranes unless these were used, there would be no need of including these in the first portion as they would be covered by the second part of the definition viz., "of any services rendered threat". For from being there any reason to cut down, the consequence of the generality of language used viz., "in respect of, there is thus good ground for thinking that the legislature used this language deliberately to cut across the difficulty of distinguishing in a particular case as to which of these things had been used or whether any of them had been used at all. Innumerable people corry goods over the Railways and many of them for the purpose of the carriage make use of the stations, sidings, wharves, depots, warehouses, cranes and other similar matters, while many do not. Though at first sight it might seem unreasonable that those who had not used would have to pay the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be entitled to claim lay-off compensation, but he will not lose his right of reinstatement when the lay-off ends. The compensation for lay-off is, therefore, paid in respect of a period when no work is done and when in fact there is no liability on the employer to provide work and on the employee to do work. It is not paid as additional remuneration for work done previously. It cannot, therefore, be said to be attributable to the employment of a worker or to the work done by him. It is made payable in order to mitigate or reduce the hardship caused by reason of unemployment or temporary loss of employment. Consequently, it cannot be said to be a payment "in respect of employment or work done in such employment." 25. The High Court Patna in the case of Commissioner of income tax vs. Chunnilal Rameshwar Lal, reported in AIR 1968 Patna page 364 held as under : "It is well known that the expression "in respect of is of wider connotation than the word "in" or "on". Hence, a class of municipal tax, though not a tax on the premises or buildings, may nevertheless be a tax in respect of the premises or building used for the business. Hence, the payment of the impugned amount of Rs. 125 as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay be converted and can be reached even where the deposits are in a bank, it is not reasonable to think that the sale proceeds in Indian currency of any foreign exchange would be outside the scope of section 23(1B) and therefore not liable to be confiscated. In our opinion the High Court was wrong in quashing the order of confiscation which we consider valid and lawful" 27. The words "in respect of" denotes the intention of the Parliament to give a broader meaning. The words 'in respect of admit of a wide connotation, than the word "in" or "on". The expression "in respect of" "means attributable to" If it is given a wider meaning "relating to or with reference to", it has been used in the sense of being 'connected with'. Whether it is a fiscal legislation or any legislation for that matter, the golden rule of interpretation equally applies to all of them. i.e., the words in a statute should be given its literal meaning. In respect of fiscal legislation those words should be strictly construed. If those words are capable of two meanings that meaning which is beneficial to an assessee should be given. However, when the meaning of the words used are clear, unambiguous, merely because ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... However, Section 14, gives the meaning of "copyright". This section was substituted for the previous one by the Copyright (Amendment) Act of 1994. Section 14 insofar as it is relevant is extracted hereunder: "14. For the purposes of this Act "copyright" means the exclusive right subject to the provisions of this Act, to do or authorize the doing of any of the following acts in respect of a work or any substantial part thereof namely: (a) in the case of 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 electronics 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 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-clause (i) to (vi)." 30. The object of a definition is to avoid the necessity of frequent repetitions in des ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... repugnant in the subject or context, or unless the context otherwise requires". Even in the absence of an express qualification to that effect such a qualifications is always implied. However, it is incumbent on those who contend that the definition given in the interpretation clause does not apply to a particular section to show that the context in fact so requires. 32. In this background it is pertinent to note the opening words of section 14. It expressly state that "for the purposes of this Act". The intention of the parliament in expressing the meaning of the word in that manner and not defining the said term in the definition section cannot be lost sight of. Further, the legislature has chosen to employ the word 'means' in defining the meaning of the word 'copyright' which again makes the intention very clear that the said meaning to the word "copyright" is restrictive and exhaustive. Then the further words, 'exclusive right subject to the provisions of this Act' further imposes a rider on the meaning of the word 'copyright'. Though the word used is "exclusive right", in section 30 of the Act, the Parliament has provided what are the rights which the owners of a copyright m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... puter programme. The reproduction which is sought to be prohibited by the Act but for which the owner of the copyright could be put to an enormous loss. The said definition does not deal with the ordinary meaning of the word 'copyright' which includes the right to use the work. It is a negative right. If is not a right to do something but rather a right to restrict others from doing certain acts. It is in this context the word 'exclusive' has to be understood. When in the Act itself after using the word exclusive right in section 14, when it comes to the question of licence of a copyright, if need not necessarily be an exclusive right, but any interest in the right, the word exclusive has to be restricted firstly to the Act itself and secondly to situations which fall outside the scope of section 30 of the Act. Therefore, the expression 'copyright' used in the Act cannot be the same as used in the Income-tax Act. In the Income-tax Act, when the legislature advisedly used the word 'in respect of a copyright' it cannot be construed as a right in the copyright and assign the meaning assigned in the Copyright Act to the second explanation, line language in Explanation (2) explicitly ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lds good for the purposes of second proviso to s. 9(1)(vi), the ordinary meaning and understanding of computer software is no different. Computer programme as such is not defined under the I.T. Act. However, Computer programme is defined in the Copyright Act as follows: "Computer programme means a set of instructions expressed in words, codes, schemes or in any other form including a machine readable medium, capable of causing a computer to perform a particular task or achieve a particular result." 34. It is also worth mentioning that some routines may be written in assembly code, essentially a set of memories for object code which another program translates directly into that code. This is normally done when the programmer needs to drive the hardware directly, or where speed is required, as it gives very precise control over the program's operation. Once all sections are complete, they are fitted together to produce a complete version in source code, i.e., in human- readable form that gives the user as little information as possible about the details of the program (thus reducing the danger of copying), the source code is used as input for another program, the compiler. This com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ltimately, what the end-user, who pays the consideration requires is, the benefit of the user of the intellectual property, whether for his personal use or for commercial use. Merely because the end-user is not permitted to make commercial use of a copyrighted article by means of re-production of copyrighted article, it would not take the case out of the provision. The user may be for personal use or for commercial use. The essence of the copyright is the usefulness of intellectual property embedded in such copyright. One of the ways of exploiting a copyright is by re-production for commercial use. But that is not the only use to which a copyright could be made use of. It could be used for their personal use and that is the reason why consideration is stipulated even for such personal use. Though the rights that are transferred in such a transaction may be limited as compared to transfer of a copyright for commercial use. In particular, a software or a computer programme is such a sophisticated goods that it may be sold of the shelf, it may be sold looking into the needs of the customer, it may be even prepared keeping the requirement of end-user in mind. In all these cases copyrig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e copyright in any existing work may grant any interest in the right by licence in writing signed by him or by his duly authorised agent. Copyright is different from the material object which is the subject of the copyright. So, a transfer of the material object does not necessarily involve a transfer of the copyright. 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. An assignment carries with it the whole interest in the thing assigned, including the right of reassign, while a licence is personal and not assignable without the grantor's consent. An exclusive licence is a leave to do a thing, and a contract not to give leave to anybody else to do the same thing, It confers no interest, or property in the thing but only makes an action lawful, which, without it, would have been unlawful. 43. A licence is a permission to do something that would otherwise be unlawful. The question arises, therefore, as to what legal permission is granted by a software licence. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s proprietary knowledge database product SolvNet; (iii) Designs; (iv) either party's product plans, costs, prices and names; non-published financial information; marketing plans; business opportunities; personnel; research; development or know-how; (v) any information designated by the disclosing party as confidential in writing, or, if disclosed orally, designated as confidential at the time of disclosure and deduced to writing and designated as confidential in writing within thirty (30 days; and (vi) the terms and conditions of this Agreement; provided, however the "Confidential Information" will not include information that; (a) is or becomes generally known or available by publication, commercial use or otherwise through no fault to the receiving party; (b) is known and has been reduced to tangible form by the receiving party at the time of disclosure and is not subject to restriction; (c) is independently developed by the receiving party without use of the disclosing party's Confidential Information; (d) is lawfully obtained from a third party who has the right to make such disclosure or; (e) is released for publication by the disclosing party in writing 1.4 "Design" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tantial performance improvements, architectural changes or new features and/or functionality to the "Licensed Product for which Synopsys may charge a separate license fee. 1.20 "Use Area" means the Key Server(s), Client(s) and End-User(s) all located within the same five (5) mile radius. Grant of rights 2.1 Software License Synopsys hereby giants Licensee a non-exclusive, non- transferable license, without right of sub-license, of use the Licensed Software and Design Techniques only: (i) in the quantity authorized by a License Key; (ii) in accordance with the Documentation; and (iii) in the Use area. Licensee may make a reasonable number of copies of the licensed Software for backup and/or archival purposes only. 2.1.1 Term of License The term of the license granted herein shall be continuous until non- renewal of the Support Agreement, (unless the license is sooner terminated in accordance with section 8 of this Agreement), whereupon Licensee shall be granted a twenty-(20) year key to use the Licensed Software at the last supported level, provided that if Licensee and Synopsys have agreed that Licensee may obtain time- based licenses for the Licensed Products, as indicated in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the provisions of Regulation 6(2), 6 (3) and 7 of the EC (Legal Protection of Computer Programs) Regulations 1993, copy, adapt, decompile, disassemble, reverse engineer or attempt to reconstruct, identify or discover any source code, underlying ideas, underlying user interface techniques or algorithms of the Licensed product by any means whatever, or disclose any of the foregoing; (ii) distribute, lease, lend, use for timesharing, service bureau, and/or application service provider purposes the Licensed Product; (iii) use the Licensed Product for the benefit of third parties, or allow third parties to use the Licensed Product; (iv) modify, incorporate into or with other software, or create a derivative work of any part of the Licensed Product; (v) disclose the results of any benchmarking of the Licensed Product (whether or not obtained with Synopsys' assistance) to third parties; (vi) use the Licensed Product to develop or enhance any product that competes with a Licensed product; or (vii) employ the Licensed product in, or in the development of, life critical applications or in any other application where failure of the Licensed Product or any results from the use there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ynopsys the license fees, plus applicable taxes as set forth below, in accordance with the payment terms specified in the applicable Synopsys quotation and/or invoice. 5.3 Delivery. Upon the acceptance of an order by Synopsys and the satisfaction of all Synopsys prerequisites prior to delivery, Synopsys shall deliver to Licensee, at Synopsys expense, the Licensed Product, License Key and/or Documentation, as appropriate. 6. Support Services Support services shall be provided by Synopsys under the terms and conditions set forth herein and of the Support Agreement. 7. Confidentiality Each party will protect the other's Confidential Information from unauthorised dissemination and use with the same degree of care that each such party uses to protect its own like information. Neither party will use the other's Confidential Information for purposes other than those necessary to directly further the purposes of this Agreement. Neither party will disclose to third parties the other's Confidential Information without the prior written consent of the other party. 8. Termination of License 8.1 Termination. Either party has the right to terminate this Agreement if the other party breach ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... control and authority over the defense or settlement thereof; and (iii) all available information, assistance and authority to settle and/or defend any such claim or action. 13.3 Assignment. This Agreement may not be assigned by Licensee without the prior written consent of Synopsys. 13.6 Independent Contractors. The relationship of Synopsys and licensee established by this Agreement is that of independent contractors, and nothing contained in this Agreement shall be construed (i) to give either party the power to direct or control the day-to-day activities of the other or (ii) to constitute the parties as partners, joint ventures, co-owners or otherwise as participants in a joint a common undertaking. 13.9. Injunctive relief. The parties agree that a material breach of this Agreement adversely entitled affecting Synopsys' Intellectual Property Rights in the Licensed Product, Design Techniques or Documentation would cause irreparable injury to Synopsys for which monetary damages would not be an adequate remedy and Synopsys shall be to equitable relief in addition to any remedies it may have hereunder or at law." 45. As is clear from the description of the agreement it is an e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ub- section (1), such income shall be included in the total income of the non- resident, whether or not (i) the non-resident has a residence or place of business or business connection in India, (ii) the non-resident has rendered services in India. Therefore, the object is to levy tax on the income of a non-resident, if it has accrued or arisen in India and one such income is the income from royalty 35. Expressing similar view, the Hon'ble High Court of Karnataka has held similarly in the case of Samsung( supra) as under: (para 20) Having regard to the above said definition of "royalty", we have to con-sider the contents of software licence agreement entered into by the non-resident with Samsung Electronics and also the respondents in the case represented by Sri Ganesh, learned senior counsel and Sri Aravind Dattar, wherein it is a case of purchase, sale or distribution or otherwise of the off-the-shelf software. It is described as a "software licence agreement", wherein it is averred that customer accepts an individual, non- transferable and non-exclusive licence to use the licensed software program(s) on the terms and conditions enumerated in the agreement. It is further averre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the agreement to use and distribute such copies. Actuate represents that it has the right to enter into the agreement and grant the licences provided therein and confidentiality is protected. Therefore, on reading the contents of the respective agreement entered into by the respondents with the non-resident, it is clear that under the agreement, what is transferred is only a licence to use the copyright belonging to the non-resident subject to the terms and conditions of the agreement, as referred to above, and the non- resident supplier continues to be the owner of the copyright and all other intellectual property rights. It is well settled that copyright is a negative right. It is an umbrella of many rights and licence is granted for making use of the copyright in respect of shrink wrapped software/off-the-shelf software under the respective agreement, which authorizes the end user, i.e., the customer to make use of the copyright software contained in the said software, which is purchased off the shelf or imported as shrink wrapped software and the same would amount to transfer of part of the copyright and transfer of right to use the copyright for internal business as per th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee for acquiring the software could not be termed royalty payments and, therefore, no deduction of tax was necessary and, consequently, section 195 was not applicable. On appeal to the High Court : Held, allowing the appeals, that the supply of software from the USA to the assessee was an independent transaction. The hardware utilised by the assessee was received from Taiwan. Only after receipt of both the software and the hardware, had they been integrated by the assessee in India and thereafter supplied to the Department of Telecommunications as an end product in terms of the assessee's independent contract. Therefore, the finding recorded by the Tribunal was erroneous. Consequently, the payments made by the assessee amounted to royalty and were liable to be taxed in India under section 9(1)(vi) read with the Double Taxation Avoidance Agreement. Order of the Appellate Tribunal in Lucent Technologies Hindustan Ltd. v. ITO [2004] 270 ITR (AT) 62 (Bang) set aside. 38. In the light of the above principles laid down by the Hon'ble Karnataka High Court, that too in group case itself on same terms of agreement as that of with Reliance for supply of software, we are inclined to foll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he term "royalties" as used in this Article means payment of any kind received as a consideration for the use of or the right to use, any copyright of literary, artistic or scientific work including cinematograph films and films or tapes for radio or television broadcasting, any patent, trade mark design or model, plan, secret formula or process or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. 4. Sweden: Article 12(3)(a) 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, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. 5. Singapore: Article 12(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 literary, artistic or scientific work, including cinematograph film, or films or tapes used ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r processes or consist of the development and transfer of a technical plan or design; but that term does not include payments or credits relating to services mentioned in sub-paragraphs (d) and (g) that are made; h. for services that are ancillary and subsidiary, and inextricably and essentially linked, to a sale of property; i. for services that are ancillary and subsidiary to the rental of ships, aircraft containers or other equipment used in connection with the operation of ships or aircraft in international traffic; j. received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematographic films or films or tapes for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process or for the use of or the right to use industrial, commercial or scientific equipment, other than an aircraft, or for information concerning industrial, commercial or scientific experience; 9. Canada: Chapter III Article 12(3) The term "royalties' as used in this Article means: a. payment of any kind received as a consideration for the use of, or the right to use, any copyright of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived as a consideration for the use or the right to use any copyright of literary, artistic or scientific work whereas in the Income-tax Act, royalty means consideration for the transfer of all or any rights including the granting of a licence. Therefore, under the DTAA to constitute royalty there need not be any transfer of or any rights in respect of any copyright. It is sufficient if consideration is received for use of or the right to use any copyright. Therefore, if the definition of royalty in the DTAA is taken into consideration it is not necessary there should be a transfer of any exclusive right. A mere right to use or the use of a copyright falls within the mischief of Explanation (2) to clause (v) of sub-section (1) of section 9 and is liable to tax. Therefore, we do not see any substance in the said contention. Further the Ho'ble High Court in the case of Samsung electronics also considered similarly as under: In view of the abovesaid observations and the contents of the DTAA with different countries, wherein the definition of "royalty" is common in all the agreements, it is necessary to reproduce the said definition of 'royalty' in article 12 of the DTAA, which reads ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... software for use, he also sells or licenses the right to use the copyright embedded therein. If a software is used without being lawfully acquired either by purchase or by license, that would amount to an infringement of the copyright because of the copyright embedded in the software. The software is a literary work and the copyright of the creator over the software is an important and commercially valuable right. So, whenever a software is assigned or licensed for use, there is involved an assignment of the right to use the embedded copyright in the software or a license to use the embedded copyright, the intellectual property right in the software. It is not possible to divorce the software from the intellectual property right of the creator of the software embedded therein. Even the right to sell or give on rental, would amount to a copyright and would be a right to be dealt with as a copyright. The definition of "royalty" in the Income-tax Act, 1961 is, consideration for the transfer of all or any rights (including the granting of a license) in respect of a patent, innovation, model, design, secret formula or process or trade mark or similar property. Consideration for grant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r electronic manifestation of a programme, but also the use of or the right to use the copyright embedded therein. That apart, article 12(3) of the DTAA defines royalties as payments, whether periodical or not and, however, described or computed, as consideration for "the use of, or the right to use any copyright, patent, design or model, plan, secret formula or process, trade mark or other like property or right". The definition is wider than that contained in the Act. It also ropes in payment of consideration for the use of a copyright in addition to the consideration paid for the right to use a copyright, covered by the definition in the Act. Consideration paid for use of a copyrighted software is also payment for use of the copyright embedded in the software. There cannot be a use of software, over which exists a copyright, without a use of the copyright therein. The payment for such use can only be royalty. The sale or licensing for use of a copyrighted software amounts to the grant of a right to use a copyright. P. No. 30 of 1999, In re [1999] 238 ITR 296 (AAR) relied on a ruling by the Authority is based on the facts involved in the application leading to that ruling. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act, whether the payments received by the applicant from the distributor for the Citrix subscription advantage programme were in the nature of "fees for technical services" within the meaning of the term in Explanation 2 to clause (vii) of section 9(1) of the Act, whether the payment received by the applicant from the distributor for the Citrix subscription advantage programme, was in the nature of "royalty" within the meaning of the term in article 12 of the DTAA and in the light of the declaration provided by the applicant that it did not have a permanent establishment in India in terms of article 5 of the DTAA, whether the payment received by the applicant was chargeable to tax in India and would the receipts by the applicant from the distributor suffer withholding tax under section 195 of the Income-tax Act, 1961, and at what rate. The Authority on the stated facts, ruled : (i) That the payments received by the applicant from the distributor for sales of the software products were in the nature of royalty within the meaning of section 9(1)(vi) of the Income-tax Act, 1961. (ii) That the payments concerned would be royalty as defined in article 12 of the DTAA between In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. 203 Taxman 621 (Kar) it was held that 'G; had maintained a database and it had granted online access of the same to the assessee, therefore, the payment made by the assessee for license to use the database maintained by G was to be treated as Royalty. 46. It is clear that under various agreements, what is transferred is only a licence to use the copyright belonging to the non-resident, subject to the terms and conditions of the agreement, as referred to above, and the non- resident supplier continues to be the owner of the copyright and all other intellectual property rights. It is well settled that copyright is a negative right. It is an umbrella of many rights and licence is granted for making use of the copyright in respect of shrink wrapped software/off-the-shelf software under the respective agreement, which authorizes the end user, i.e., the customer to make use of the copyright software contained in the said software, which is purchased off the shelf or imported as shrink wrapped software. The same would amount to transfer of part of the copyright and transfer of right to use the copyright for internal business as per the terms and conditions of the agreement. Therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 06/05 for software license and amount paid is classified as License fee. In addition to licencing of software Logo and Trade marks of Wave were also specified (ITA No 5475/M/08). 8. Ulticom Inc, USA (PB 1113-1154) vide agreement dt 07/09/03 for software licenses and associated services (ITA Nos 4283/M/08, 4244/M/08, 4247/M/08, 4306/M/08, 4877/M/07, 4905/M/07, 4910/M/07). 9. Motorola Inc, USA (PB 1113-1154) vide various purchase orders with annexure specifying software License. (ITA Nos 4878/M/07, 4904/M/07, 4247/M/08, 4306/M/08, 4877/M/07, 4908/M/07, 4675/M/07). 10. Mantra Communications Inc, USA (PB 784-793) vide purchase orders dt. 30/11/01 specifying software License for source code license also. (ITA Nos 729/M/09). 11. Green Hills Software Inc, USA (PB 1660-1667) vide agreement dt. 14/12/05 specifying software License and management agreement. (ITA Nos 5072/M/08). 12. Venturi Wireless Inc, USA (PB 241-289) vide agreement dt. 23/11/05 specifying License and Annual maintenance agreement. (ITA Nos 5082/M/08, 5075/M/08). 48. The agreement with M/s Neura Communications Inc USA ( PB 214- 240) vide agreement dt. 19/10/2005 is termed as Purchase and Reselling agreement, terms of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the direction of the AO to deduct tax under section 195. 50. Consequently, In all the Revenue appeals against Reliance, (except ITA No.5374 and ITA No.6093 which are separately dealt later) orders of the CIT(A) are set aside and orders of the AO are restored. ITA Nos.7001 to 7004/ M/10. Lucent Technologies GRL LLC 51. These appeals pertain to Lucent Technologies, GRL LLC. As briefly stated above, the issue in these appeals is with reference to the taxability of the amounts received from supply of software to Reliance. The AO held the same as royalty in nature and in the alternate, also considered that there is a PE in India and so the business profits are attributable to the PE. Along with the above two issues there are issues on non-granting of TDS credited, levy of interest also. 52. The issue of royalty was considered above in detail and consequent to the findings therein, it is considered that amounts paid by Reliance for supply of software under a licence agreement is to be considered as royalty under the provisions of the Act and also under DTAA and liable to tax in India. Accordingly, the grounds raised by Lucent from Ground No.2 to 5 are rejected. 53. The next issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no business connection in India except supply of software. It was also further submitted that no service personnel came to India so as to come under Service PE. The ld. Counsel for the assessee also relied on Article-5 of the DTAA and decision of co-ordinate Bench in the case of Western Union Financial Services Inc. vs. ADIT (104 ITD 34)(Del.) to submit that mere use of software for the purpose of business in India need not lead to an agency PE as assessee was not rendering any service in India nor LTHPL is authorized to deal with outsiders on behalf of assessee Lucent. Further, it was submitted that the co-ordinate Bench in the case of Lucent Technologies International Inc. vs. DCIT, Non-resident Circle (28 SOT 98) considered the facts in the case to hold that there is a service PE in that case. It was submitted that mere existence of a PE to a group company does not lead to a finding that the assessee also as a PE in India. It was further submitted that AO's reliance on a document i.e., subsequent restructured agreement for payment by the group companies does not indicate that any one of them is authorized to enter into contract on behalf of the assessee Lucent and further, agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quisite hardware and the software for the completion of the turnkey project. Similarly, if LTIL did not comply with its duties of commissioning, installation, testing and bringing up to operational stage the turnkey project, such responsibility would rest on the shoulders of the assess. There was no dispute in that the assessee had completed part of its contract, i.e., the supply of the hardware and the software. The installation, commissioning, testing and bringing up to operational state of the hardware and the software supplied by the assessee had been undertaken by the Indian Subsidiary, LTIL. For said purpose, LTIL had also taken the assistance of the employees of the affiliates of the assessee. Thus, the parent company, being the assessee had made personnel available to the LTIL, the subsidiary in form of the employees of the affiliates of the assessee at certain remuneration. Further, a perusal of the agreement between Escotel and the assessee clearly showed that the warranty provided by the assessee-company was in relation to the defects in the hardware. That warranty clause in identical form was also found in the agreement entered into between Escotel and LTIL. Normally, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso installation and that company is an Indian company. After entering into an agreement supply of software was assigned to the assessee Lucent by way of the Tripartite agreement between Reliance and LTHPL and assessee Lucent. Eventhough, installation was on Indian company there is no evidence of either deputing personnel of assessee Lucent to India nor there is any evidence in the record for invoking Service PE as in other case. Moreover for invoking Agency PE , facts do not support AO's contentions. The agreement entered is an independent agreement, entered on principle to principle basis and nowhere the Indian company has authorized or has undertaken any responsibility of the assessee Lucent. On the facts of the case we are of the opinion that there do not exist any PE, more so of agency PE. It is also not the case of the Revenue that the assessee deputed its personnel to India so as to invoke Service PE as per Indo-US DTAA. In view of the above, we hold that there is no PE to the assessee company in India and as there is neither any office in India nor it has any business connection in India nor carried out any business activities in India. Assessee's company is a standalone le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en been questioned. The only reason that had prompted the Assessing Officer to decline the credit in respect of the TDS certificates was that 'R' Ltd. had been refunded taxes which were deducted by 'R' Ltd. and which were deposited with the Government of India. [Para 7] It was also an undisputed position that such a refund to tax deductor, as had been granted in the instant case, was not prescribed under the scheme of the Act but appeared to be an administrative exercise. Department could not point out any provisions of law under which such a refund could be made particularly as TDS certificates were already issued by the tax deductor, and no fault was found in the certificates so issued. [Para 8] The rights were granted to the person, from whose income taxes were so deducted and who is issued the tax deduction certificate in the prescribed manner, by the statute and those rights could not be abridged by an administrative action on the part of the revenue authorities and particularly when the person, whose rights were being sought to be abridged, was not even a party to the administrative exercise or was known of refund being granted to 'R' 'Ltd. Refund granted to 'R' Ltd. By rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sons. Since the amount was covered by TDS question of levy u/s. 234B does not arise. Issue of 234A and 234D are consequential in nature. Therefore does not require any adjudication. Accordingly, ground No.14 and 16 are rejected and ground No.15 is allowed. 61. Ground No.17 is with respect to penalty. The assessee is contesting the initiation of penalty proceedings u/s. 271(1)(c). There is no right of appeal on initiation of proceedings and since proceedings are not yet finalized, it is little pre-mature to contest. This ground does not require any adjudication. 62. In the result, four appeals of Lucent are partly allowed. ITA No.5374/M/07 and ITA No.6093/ M/ 08. 63. The issue in these two appeals of the Revenue is with reference to the payments made to M/s. New Skies Satellite N.V., Hague, Netherland for purchase of satellite Band width capacity, as per agreement dated 12.12.2002, subsequently amended on 18.12.2002. Reliance approached Assessing Officer for making payment without deduction of tax. Assessing Officer examined the issue and held that the payment being made was royalty and tax was required to be deducted at source. After deducting the tax, Reliance approached ld. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcumstances of the case and in law, the ld. CIIT(A) failed to appreciate that the payment for the purchase of software is in the nature of "Royalty" which is liable for taxation in India. 3. The appellant prays that the order of the ld. CIT(A) on the above grounds be set aside and that of the AO restored." 64. These two cases were also argued along with other group cases. On this set of facts, the issue is not purchase of software but purchase of bandwidth for providing transponder capacity to telecommunication companies. The case was decided by Special Bench of ITAT, in New Skies Satellite N.V. vs. ADIT (Intl. taxation) in 319 ITR (AT) 269 (Del.)(SB), wherein it was held that service rendered amounts to royalty. The facts and decision of the Special Bench of the ITAT is as under :- The assessees were non-resident satellite companies and earned income from telecasting companies in India for providing them transponder capacity. The assessee were engaged in operating telecommunication satellites which were called geostationary satellites and were placed at the distance of around 36,000 kms. From the equator. A satellite could typically consist of 20 to 30 trnasponders, each operat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovided by the satellite companies to the telecasting companies whereby the telecasting companies were enable to telecast their programmes by uplinking and downlinking the same with the help of that process. The time of telecast and the nature of programme, all depended upon the telecasting companies and, thus, they were using that process. The term "secret" appearing in the phrase " secret formula or process" in Explanation 2 to section 9(1) (vi) and in the relevant article of the Double Taxation Avoidance Agreement does not qualify the work "process". Therefore, to fall within the meaning of royalty as envisaged in these provisions, it is not necessary that the services rendered must be through "secret process" only. The consideration received by the assessee for the use of the "process" in transponder, even if it was not protected, would be covered within the definition of "royalty" as the provisions do not specify the process to be protected. Even services rendered through simple process will be covered within the meaning of royalty. The payments received by the assessee from their customers were on account of use of process involved in the transponder and they amounted to royal ..... X X X X Extracts X X X X X X X X Extracts X X X X
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