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TMI Blog2012 (4) TMI 678X X X X Extracts X X X X X X X X Extracts X X X X ..... account of distribution of software product as Royalty u/s 9(i)(vi) of the Income-tax Act, 1961 (Act) read with Article 12 of Double Taxation Avoidance Agreement between India and USA (Treaty). 3. That on the facts and in the circumstances of the case, the learned CIT(A) erred in not appreciating that the aforesaid receipt of ₹ 24,04,22,581/- represents merely proceeds on account of distribution of products, and is not for any transfer of intellectual property right contained in the copy right of the software. 3. That on the facts and in the circumstances of the case, the learned CIT(A) has erred in not appreciating that BEA retains ownership over the copyright in the software and BEA Systems India does not have any right to commercially exploit the copyright in the software. 4. The learned AO erred in initiating penalty proceedings u/s 271(c) of the Act. 3. From the above grounds, it is gathered that the only grievance of the assessee relates to the action of the learned CIT(A) in confirming the view expressed by the AO in holding that the payment of ₹ 24,04,22,581/- received from M/s B.E.A Systems India Pvt. Ltd., on account of distribution of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de to non-resident required deduction u/s 195 of the Act. He further observed that still in the case of M/s Samsung Electronics Co. Ltd. Ors. (cited Supra) it was held that payment made towards Shrink Wrapped Software was liable for with holding tax. The learned CIT(A) categorically stated that it was obligatory on the part of the lower authorities to follow the order of the jurisdictional high court unless the said judgment is reversed. The learned CIT(A) by following the judgment of the Hon ble Jurisdictional High Court in the case of M/s Samsung Electronis Co. Ltd. Ors. held that the payment made for purchase of Shrink Wrapped Software by Indian company to the assessee amounted to royalty and the AO was correct in treating the same as royalty. Accordingly, the assessment order passed by the AO was confirmed. 8. Now the assessee is in appeal before us. 9. The learned counsel for the assessee reiterated the submissions made before the authorities below but could not controvert this submission of the learned DR that this issue has been covered against the assessee by the judgment of the Hon ble Jurisdictional High Court dated 15/10/2010 in I.T.A Nos.2008/2005 Others ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greement entered into with the other distributors as also the end-user licence agreement, it is clear that the distributor would get exclusive non-transferable licence within the territory for which he is appointed and he has got right to distribute via resellers the Software, upon payment of the licenses set forth in Exhibit A to the agreement only to End Users pursuant to a valid Actuate shrinkwrap or other Actuate license agreement and except as expressly set forth in the said agreement, distributor may not rent, lease, loan, sell or otherwise distribute the Software the Documentation or any derivative works based upon the Software or Documentation in whole or in part. Distributor shall not reverse engineer, decompile, or otherwise attempt to derive or modify the source code for the Software. Distributor shall have no rights to the Software other than the rights expressly set forth in the agreement. Distributor shall not modify or copy any part of the Software or Documentation. Distributor may not use sub-distributors for further distribution of the Software and Documentation without the prior consent of Actuate. What is charged is the licence fee to be paid by the Distributor o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e respondent, the said software is to be treated as goods and there is sale of the software and copy of the software. Therefore, the question of paying any royalty would not arise. In support of the said contention, the learned senior counsel appearing for the respondents has strongly relied upon the decision of the Hon'ble Supreme Court in Tata Consultancy Services' case (supra) (hereinafter referred to as the TCS's case), wherein the Hon'ble Supreme Court was considering the question as to whether the canned software sold by the appellants can be termed to be goods and as such assessable to sales tax under the Andhra Pradesh General Sales Tax Act, 1957. Having regard to the broad definition of 'goods' under Section 2(h) of the said Act and also the provisions of Article 366(12) of the Constitution of India, the Hon'ble Supreme Court was pleased to answer the said question for determination by holding that once the 'information' or 'knowledge' is transformed into physical existence and recorded in physical form, it is corporeal property. The physical recording of the software is not an incorporeal right to be comprehended and according ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eference is to be made to the respective law regarding definition of 'Copyright', namely, Copyright Act, 1957, in India, wherein it is clearly stated that literary work includes computer programmes, tables and compilations including computer [databases]. Section 16 of the Copyright Act, 1957 states that no person shall be entitled to copyright or any similar right in any work, whether published or unpublished, otherwise than under and in accordance with the provisions of the said Act or of any other law for the time being in force, but nothing in this section shall be construed as abrogating any right or jurisdiction to restrain a breach of trust or confidence. Section 14 of the said Act dealing with meaning of 'Copyright' reads as follows:- 14. Meaning of Copyright. - For the purposes of this Act, copyright means the exclusive right subject to the provisions of this Act, to do or authorise the doing of any of the following acts in respect of a work or any substantial 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 st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t under Section 51 of the Act dealing with When Copyright infringed states that Copyright in a work shall be deemed to be infringed - when any person, without a licence granted by the owner of the Copyright or the Registrar of Copyrights under the Act or in contravention of the conditions of a licence so granted or of any condition imposed by a competent authority under the Act: does anything, the exclusive right to do which is by the Act conferred upon the owner of the Copyright. Section 52 of the Act dealing with Certain acts not to be infringement of copyright states that the following acts shall not constitute an infringement of copyright, namely- xxxx (aa) the making of copies or adaptation of a computer programme by the lawful possessor of a copy of such computer programme, from such copy. (i) in order to utilise the computer programme for the purpose for which it was supplied; or (ii) to make back-up copies purely as a temporary protection against loss, destruction or damage in order only to utilise the computer programme for the purpose for which it was supplied. 24. It is clear from the above said provisions of the Copyright Act that the righ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... right to make a copy of the software and use it for internal business by making copy of the same and storing the same in the hard disk of the designated computer and taking back up copy would itself amount to copyright work under Section 14(1) of the Act and licence is granted to use the software by making copies, which work, but for the licence granted would have constituted infringement of copyright and licencee is in possession of the legal copy of the software under the licence. Therefore, the contention of the learned senior counsel appearing for the respondents that there is no transfer of any part of copyright or copyright and transaction only involves sale of copy of the copyright software cannot be accepted. It is also to be noted that what is supplied is the copy of the software of which the respondent-supplier continues to be the owner of the copyright and what is granted under the licence is only right to copy the software as per the terms of the agreement, which, but for the licence would amount to infringement of copyright and in view of the licence granted, the same would not amount to infringement under Section 52 of the Copyright Act as referred to above. Therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge, experience or skill as per clause (iv) of Explanation 2 to Section 9(1)(vi) of the Act. In any view of the matter, in view of the provisions of Section 90 of the Act, agreements with foreign countries DTAA would override the provisions of the Act. Once it is held that payment made by the respondents to the non-resident Companies would amount to 'royalty' within the meaning of Article 12 of the DTAA with the respective country, it is clear that the payment made by the respondents to the non-resident supplier would amount to royalty. In view of the said finding, it is clear that there is obligation on the part of the respondents to deduct tax at source under Section 195 of the Act and consequences would follow as held by the Hon'ble Supreme Court while remanding these appeals to this Court. Accordingly, we answer the substantial question of law in favour of the revenue and against the assessee by holding that on facts and circumstances of the case, the ITAT was not justified in holding that the amount(s) paid by the respondent(s) to the foreign software Suppliers was not 'royalty' and that the same did not give rise to any 'income' taxable in India and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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