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TMI Blog2010 (11) TMI 1022X X X X Extracts X X X X X X X X Extracts X X X X ..... , royalty free, worldwide license to use the number of copies of the software enumerated in the agreement solely for internal operation, including use of software for ASP Services and web housing services. The parties from whom the assessee acquired the software do not have a "PERMANENT ESTABLISHMENT" in India. 3. The assessee purchased the software for Gas Hydrate for O&G Division from M/s SBR Softwafe Inc., Canada. 4. The learned CIT(Appeals) in order dated 30-10-2007, has considered an agreement for purchase with M/s DBR Software Inc., Canada. The facts are brought out at para 1.1 to 1.3 of his order which are extracted below for ready reference : "1.1 M/s Reliance Industries Limited (appellant), is a public limited company. The appellant has entered into an agreement with M/s DBR Software Inc., Canada (DBR) for purchase of 'Equi-phase HYDRATE' Software designed to predict incipient gas / liquid hydrate formation conditions for multi component hydrocarbon systems in the absence of hydrate inhibitors. The said software is to be used by the appellant's Oil & Gas Division. The Appellant placed purchase order no. 2001-GENL-EI-GGS- 114-MC dated 30/04/2002 with DBR Software Inc., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... righted by DBR or its third party suppliers. Licensee License confers no title or ownership in the software and is not a sale of any rights in the software. DBR's third party suppliers may protect their rights in the event of any violation of these License Terms. "4. WARRANTY & LIABILITY 4.1 DBR warrants that the Licensed Software will perform in accordance with the product description contained in the Program Description attached hereto as Schedule "B". If the software does not perform according to the Schedule "B" and DBR shall replace the software or refund the software price if the non-performance is reported by LICENSEE within one year from the date of delivery or commissioning. 4.2 DBR warrants to the Licensee that it is the absolute and beneficial owner of the Licensed Material, which is the subject of this agreement, and that it has the right to grant the License to the Licensee. DBR shall indemnify and hold the Licensee, its employees and agents harmless from any loss, damage or liability for infringements of any patent, trade mark or copyright with respect to the use of the items delivered hereunder, provided that DBR is promptly notified in writing of any suit or cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n any central processing unit located at the installation Location listed on Schedule A. B. License Grant Terms Applicable for Evaluation Use: 1.1 If Licensee use of the software is for the purpose of evaluating whether to purchase a license for the software. License is subject to the remaining terms of this agreement ad hereby granted a nonexclusive license to use the software during a single evaluation period of thirty (30) days (or such other limited evaluation period as may be designed by DB$)." 6. The general terms and conditions of agreement of purchase can be summarized as under: i) The assessee is not entitled to use the software for ASP Services on behalf of third party. ii) The assessee has no right to use, copy, duplicate or display the software except as specifically provided in the agreement. iii) The assessee cannot make more copies of the software than what is specified in the agreement. iv) The assessee cannot provide access to the software to any one, other than assessee's employees, contractors or consultants under a written contract by which all of them would be bound by the terms and conditions as are applicable to the assessee on purchase of softwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, following my order in that appeal, I hold that the payment made by the appellant to M/s DBR is only business income of M/s DBR and not royalty. In the absence of any PE in India, business profit is not taxable in India as per Article-5 & 7 of DTAA. In view of this appeal on ground No.1 to 7 is allowed." 9. This Bench of the Tribunal, on similar issue, in the case of purchase of software from USA vide its order dated 29th Oct., 2010 has held as follows "12. The Bangalore Bench of the Tribunal in the case of Samsung Electronic Company Ltd. vs. ITO reported in 276 ITR (AT) 1 held as follows : " Held, allowing the appeals, that the provisions of the Income-tax Act would be applicable to the extent they were more beneficial to the assessee. Otherwise, the provisions of the Double Taxation Avoidance Agreement had to be followed. Therefore, the provisions of the Double Taxation Avoidance Agreement had to be followed for the purpose of deciding the issue whether payments made by the assessee was royalty or not. The primary condition for bringing within the definition of "royalty" in the Double Taxation Avoidance Agreement is payments of any kind received as consideration for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d recording in respect of the work; (v) to make any translation of the work; (vi) to make any adaptation of the work; (vii) to do, in relation to a translation or an adaptation of the work, any of the acts specified in relation to the work in sub-clauses (i) to (vi); (b) in the case of a computer programme,- (i) to do any of the acts specified in Cl. (a); (ii) to sell or give on commercial rental for sale or for commercial rental any copy of the computer programme; Provided that such commercial rental does not apply in respect of computer programmes where the programme itself is not the essential object of the rental, (c) in the case of an artistic work,- (i) to reproduce the work in any material form including depiction in three dimensions of a two dimensional work or in two-dimensions of a three-dimensional work; (ii) to communicate the work to the public; (iii) to issue copies of the work to the public not being copies already in circulation; (iv) to include the work in any cinematograph film; (v) to make any adaptation of the work; (vi) to do in relation to an adaptation of the work any of the acts specified in relation to the work in sub-clause (i) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t he has acquired cannot be considered as a copyright. In that case, it can only be said that he has acquired a copyrighted article. A small example may clarify the position. The purchaser of a book on income-tax acquires only a copyrighted article. On the other hand, a recording company which has recorded a vocalist has acquired the copyright in the music rendered and is, therefore, permitted to exploit the recording commercially. In this case the music recording company has not merely acquired a copyrighted article in the form of a recording, but has actually acquired a copyright to reproduce the music and exploit the same commercially. In the present case what JTM or any other cellular operator has acquired under the supply contract is only the copyrighted software, which is an article by itself and not any copyright therein. 168. The actual regulations bring out the distinction very clearly between the copyright right and a copyrighted article. They also specify the four rights which, if acquired by the transferee, constitute him the owner of a copyright right. They are: (a) The right to make copies of the computer programme for purposes of distribution to the public by s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to use the copyright of such literary/artistic/scientific i.e., copyrighted work [para 6]. Further, as per clause 13.1 of the OECD model commentary, payments made for acquisition of partial rights in copyright would represent a royalty where the consideration is for the right to use the programmes in a manner that would, without such license, constitute an infringement of the copyright. In other words, the payment can constitute royalty only if the transferor grants to the transferee the right to use the copyright of the product. If, on the other hand, the use of the programmes by the transferee (by acquiring a copy of such programme) is in a manner which does not constitute infringement of the copyright, the payment therefor would not amount to royalty. Therefore, under the OECD model commentary also payments for acquiring a copy of a computer programme would not be treated as payments for right to use the copyright in the computer programmes. Accordingly such payments are to be considered s commercial income under article 7 and not as royalty under article 12 of the India-USA DTAA [paras 6.2 and 6.3]. Further, the computer programme may be copyright as intellectual property do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such cases, where there is a transfer of copywrited Article and not a transfer of the copy write itself. On facts we conclude that what is transferred in this case is a copywrited Article only. Hence sec.9(1)(vii) is not attracted. 12 Applying the propositions to the facts of the case, we uphold the order of the first appellate authority wherein it is held that : a) It is now established law that Computer software after being put on to a media and then sold, becomes goods like any other Audio Cassette or painting on canvas or a book and that the AO is wrong in holding that Computer software on a media, continues to be an intellectual property right. b) That the assessee has purchased a copyrighted article and not the copyright itself. There is no transfer of any part of copyright. c) The present computer software cannot be treated as a patent or an invention. 13. In view of the above discussion, we respectfully follow the decision of the Special Bench of the Tribunal in the case of Motorola Inc. (supra) and hold that the software supplied was a copy righted article and not a copy right and that the payment received by the assessee in respect of the software cannot be consid ..... X X X X Extracts X X X X X X X X Extracts X X X X
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