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TMI Blog2010 (11) TMI 1021X X X X Extracts X X X X X X X X Extracts X X X X ..... are appeals filed by the Revenue directed against the order of the CIT(Appeals)-XXXI, Mumbai. As the issues arising in these appeals are common and as they relate to the same issue of purchase/use of software, from different parties, who are residents of Singapore and as all these agreements of purchase/use of software are covered by the Double Taxation Avoidance Agreement entered into by India with Singapore, for the sake of convenience they are heard together and disposed of by way of this common order. 2. The sole issue that arises for our consideration in these appeals is whether the assessee is required to withhold tax u/s 195 of the Act, for purchase/use of software from parties who are resident of Singapore. The software in question are undisputedly operational softwares, purchased for the internal use of the assessee. The assessee was granted non-exclusive , perpetual, irrevocable, 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 ESTABLISHM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lty' but only business income and is accordingly taxable in India, only if SUN has a PE." 5. The terms and conditions of purchase are brought out at para 1.5 and 1.6 of the order of the CIT(Appeals) which are extracted below for ready reference : "1.5. On the other hand, the AO has examined the issue. He has referred to Para 19 of the License Agreement and has held that the appellant has only got a license and has not purchased the software and thus the transaction does not amount to sale. I find that the AO has taken the same arguments as taken by him in respect of appeal No.CIT(A)XXXI/DDIT(IT)2(1)(IT- 303/02/03/06-07, dated 29/10/2007 in the appellant's own case. The AO has taken certain other additional arguments in this order which are the same as taken by him in his order which was the subject matter of Appeal No. CIT(A)XXXI/DDIT(IT)2(1)/IT- 407/02-03/07-08 and which arguments have been examined and dealt with by me in the said Appeal Order dt. 02.11.2007. 1.6 I have also examined the License Agreement between the Appellant and SUN. the Appellant has entered into an agreement for purchase of software with SUN. General terms and conditions of purchase are prescribed in the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... necessary for the use of the software in accordance with this agreement. Owner shall reproduce all copyright notices as provided in the original software on all copies thereof. 19.6 Owner shall not translate, reverse, engineer, modify, decompile, disassemble or create derivative works from the software, except as expressly provided under applicable law. However, tailoring of the software by use of the utilities provided in the software shall not be construed as modification of the software. 19.7 Owner shall not use the software for (1) commercial timesharing with non-affiliate third parties; (2) rental, lease, and sublicensing to non-affiliate third parties." 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ily expanding the definition of royalty in Indo-Singapure DTAA. Accordingly, I hold that my decision in the case of Appellant in Appeal No. CIT(A)XXXI/DDIT(IT)2(1)/IT-303/02-03/06-07 dated 29/10/2007 and Appeal No. CIT(A)/XXXI/DDIT(IT)2(1)IT-407/02-03/07-08 dated 02/11/2007, is squarely applicable to this case as well. Therefore, following my orders in those appeals, I hold that the payment mae by the appellant to SUN is only business income of SUN 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 Nos. 1 to 3 is allowed. 9. This Bench of the Tribunal, on similar issue, in the case of purchase of software from USA in assesee's own case in ITA Nos. 116,119,1123,1125,1126, 1127,1129,1131,1134,1181,1183,1184,1185, 1187, 1188 & 1190/Mum/2008 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... antial part thereof, namely: (a) in the case of a 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 electronic 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aras 162, 168 and 169 held as follows: 162. A conjoint reading of the terms of the supply contract and the provisions of the Copyright Act, 1957 clearly shows that the cellular operator cannot exploit the computer software commercially which is the very essence of a copyright. In other words a holder of a copyright is permitted to exploit the copyright commercially and if he is not permitted to do so then what 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a copyright should be to utilize such copyright in the manner which is otherwise protected by the respective copyright law in favour of the owner of the copyright. The use of a copyright of a copyrighted work is different from use of such work itself. The acquisition of a product, wherein the subject-matter of copyright is embedded, without right to exploir the copyright, does not amount to use or right 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 m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice shall be deemed to include an agent, nominee, or transferee of such person 11. The definition of Royalty is similar to the definition of Royalty in the Indo- US DTAA. In any event, we do not go into it, as the Special Bench of the Tribunal in the case of Motorola Inc. vs. DCIT (supra) held that section 9(1)(vii) is not attracted in 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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