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TMI Blog2014 (12) TMI 430X X X X Extracts X X X X X X X X Extracts X X X X ..... n the hard disk of the designated computer and taking back up copy would itself amount to copyright work under Section 14(1) of the Copyright Act and licence is granted to use the software by making copies, which work, but for the licence granted would have constituted infringement of copyright and licencee is in possession of the legal copy of the software under the licence and payment made in that regard would constitute 'royalty' for imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill as per clause (iv) of Explanation 2 to Section 9(1)(vi) of the Act - agreements with foreign countries DTAA would override the provisions of the Act - there is obligation on the part of the respondents to deduct tax at source u/s 195 of the Act - the nature of software technology availed, invoice raised specifically quoting only licence and right of usage embedded supports the case of the revenue. Transactions relating to sale of goods – Held that:- The present case involves only a licence pertaining to ‘shrink wrap software’ - There is no material to prove any ‘goods’ element in the ‘2003 Microsoft licensing for 270 sets of MS O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yalty u/s 9(1)(vi) and under Indo Denmark Double Taxation Avoidance Agreement dated 25.9.1989 (DTAA), it ought to have deducted TDS u/s 195 of the Act. Per Revenue, the assessee should have also filed an application u/s 195(2) (3) of the Act as per case law Transmission Corporation of A.P. Ltd vs CIT 239 ITR 587 (SC). It quotes case law of [2012] 345 ITR 494 (Karn) CIT vs Samsung Electronics Co. Ltd., [2012] 28 taxmann.com 162 (Kar.) CIT vs Synopsis International Old Ltd., [2010] 192 Taxman 80 CIT vs Sonata Information Technology Ltd, [2014] 146 ITD 460(Pune) Cummins Inc vs DDIT, [2014] 98 DTR (Mumbai)(Trib) 66 DDIT vs Reliance Infocom Ltd, [2012] 343 ITR 304 (AAR) ACCLERYS KK In re, and Civil Writ Petition Nos.3811 and 18886 of 2009 dated 24.8.2010 Infotech Software Dealers Association vs Union of India etc.(Madras) to pray for acceptance of the appeal. 4. The assessee supports the CIT(A) s order deleting the aforesaid demands. It submits to have made the payments only for purchase of standardized software wherein no royalty element was involved. The assessee states that the payment made to its Denmark group concern is on cost-to-cost basis which does not give rise to an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d entity provided 2003 Microsoft licensing for 270 sets of MS Office, Windows and Cals and invoiced a sum of US $ 72,449. The assessee remitted this payment without deducting any TDS. The Assessing Officer proposed to treat assessee as the assessee in default u/s 201(1) of the Act. 6. The assessee stated that its remittance made did not in any way comprise an income component being incurred towards acquiring and sharing of the software licence. It pleaded that there was no royalty element involved as no copyrights under the said law were involved. The case was classified as of mere right to use the copyrighted software. Per assessee, it had only purchased a standardized software liable in the nature of goods per Customs and Excise laws and Sales-tax laws. It quoted the DTAA to contend that the payment was made for use of a copyrighted article only and not in lieu of a copyright itself. In the end, the assessee referred to OECD Model Convention to emphasize that its case contained a transfer granting only limited rights to reproduce the computer programs hard drive. 7. The Assessing Officer was not impressed with the aforesaid explanation tendered. He observed that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use the software and has not permitted the buyer to commercially exploit the software. The transaction was nearly one of sale of goods. I have also perused the correspondence dated 23.1.2003 addressed to the appellant with regard to Microsoft licences cost sharing. It is clearly stated that a global enterprise arrangement with M/s Microsoft USA for providing various software licences and software assurances including upgrades for the regular office applications including the operating system in respect of India. Accordingly the proportionate cost of the Microsoft licences and software assurances would be invoiced to the appellant being its share. The invoice also describes the payment to be made for 270 seats of MS Office, Windows and Cals of 2003 Microsoft. I have also perused the relied upon orders in the case of Sonata Information Technology Ltd Vs. Additional CIT dated 31.1.2006 of the ITAT Bangalore, Samsung Electronic Company Ltd Vs. ITO 94 ITD 91. I am of the considered view that in the instant case what the appellant had acquired is a readymade off the shelf computer program for being used in its business. No right was granted to the appellant to utilize the copyright of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uthority, the assessee s acquisition of licence to use this software is covered by clauses (i) and (v) transfer of all or any rights (including granting of a licence) under explanation 2 of section 9(1)(vi) of the Act. The CIT(A) observes that the assessee had only been granted licence to use the software and not for commercial exploitation. He treats the transaction to be merely sales of goods . The cost sharing formula is also referred to. Reliance is placed on the tribunal s decisions in Samsung Electronics Co. Ltd and Sonata Information Technology Ltd. cases(supra). The lower appellate order concludes that it is a case of acquisition of the readymade off-the-shelf computer programme wherein no right is granted to utilize the copy right and merely involves a purchase of copy of a copyrighted article. 11. At this stage, we deem it appropriate to refer to the relevant provisions dealing with the concept of royalty in the Act. Section 9 of the Act applies in case of a non-resident recipient whose income accrued or arising in India is deemed as taxable unless otherwise provided. Section 9(1)(vi) deals with royalty sums. The assessee, being a resident entity comes within th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icle 5 of this DTAA does not help the assessee as operation of Articles 1 2 is only excluded when the beneficiary of the royalty is resident of the other Contracting state. Thus, we observe that the DTAA clauses support the Revenue qua taxability of the royalty element in India. 13. In view of the aforesaid facts, relevant statutory provisions and contradicting stands of the parties, the issue which arises for our consideration is as to whether the assessee s act of acquiring 2003 Microsoft licensing for 270 sets of MS Office, Windows and Cals amounts to payment of royalty or not? In order to get a clarity on the issue, we deem it fit to analyse the case law submitted by the parties as under: (A) The Revenue s list of judgments:- (i) CIT vs Samsung Electronics Co. Ltd. (supra). The payment in this case was made for a shrink wrap software alike in the present case. The assessee was in the business of development of computer software. It had paid for a licence. The hon'ble Karnataka high court observed that section 2 of the Copyright Act defined literary work to include computer programmes, tables and compilation including computer software data base. The ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty . It has been categorically held that for attaining or obtaining a licence, an exclusive right is not required. (iii) CIT vs Sonata Information Technology Ltd (supra). We find that this judicial precedent interprets ambit and scope of section 195 of the Act. Since we are right now concerned with only section 9(1)(vi), the same is not discussed at length. (iv) Cummins Inc vs DDIT (supra). The assessee was a US based Company. It had entered into an agreement of non-exclusive user right with the software firm Oracle. It had granted user rights of this Oracle software to its two Indian subsidiaries alike the present case wherein the Denish entity has acted at the behest of the assessee. A co-ordinate bench of the 'tribunal' after taking into consideration explanation 4 to section 9(1)(vi) and by following case law of Samsung Electronics Co. Ltd holds it as a case of payment of royalty by the said two subsidiaries. (v) DDIT vs Reliance Infocom Ltd(supra). In this case, a co-ordinate Bench of the Mumbai 'tribunal' holds that a licence to use a copyright belonging to a non-resident even when he technology service provider continues to be owner of the copy rig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the other fiscal statues. So, applicability thereof is not discussed. (iii) CIT vs Dynamic Vertical Software Pvt. Ltd (supra). In this case, the assessee had purchased software from Microsoft and sold in open market. This is yet another case of a principal-toprincipal relationship. The hon'ble Delhi high court has held that for purchasing software, the assessee had not paid any royalty sum liable to be assessed under the provisions of the Act. The facts of this case law are not akin to those involved in the present case. (iv) DIT vs Nokia Networks (supra). The issue in this judgment pertained to accrual of income in India on principal-toprincipal basis. The hon'ble Delhi high court held that no royalty had arisen in case of off-the-shore purchases outside India as supplies were made overseas. We have already made it clear in narration of facts that the assessee has paid for licence only in India and the software has also been delivered in India. Therefore, this case law is distinguished. (v) DIT vs Ericsson A.B(supra). In this case, the assessee had supplied sim cards to cellular operators in India. The hon'ble Delhi high court treated the sim cards ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... material to prove any goods element in the 2003 Microsoft licensing for 270 sets of MS Office, Windows and Cals . The CIT(A) s view does not refer neither to any statutory provision nor evidence on record. 16. The CIT(A) s next finding is that the assessee has merely followed a cost sharing formula. In our view, this factor is also immaterial. We deem it fit to observe that cost sharing formula or any other method is only an internal arrangement. In determining royalty payment, we have to refer to facts of the case vis- -vis the statutory provision. Since the said conditions therein are satisfied, we hold that this formula in itself cannot defeat applicability of the TDS provision. Coming to the CIT(A) s view that the assessee had merely acquired off-the-shelf computer programme, we find that the case law of Samsung Electronics Co. Ltd(supra) squarely supports the Revenue s case. 17. The last finding of the CIT(A) is that there was no right granted to utilize copyright and the assessee had merely purchased copy of the copyrighted article. We deem it fit to observe that whatsoever may be the medium or mode of acquiring the licenced right, the fact remains that the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X
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