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TMI Blog2017 (3) TMI 430X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee herein to foreign companies towards purchase of certain software for its internal use in the business of the assessee is liable to tax in India as Royalties under the provisions of sec. 9(1)(vi) of the Income tax Act read with India-USA DTAA. The assessee made applications u/s 195(2) of the Act for remitting the payments without tax deduction at source. The AO held that the payments would quality as royalty as per DTAA between India and USA and accordingly directed the assessee to deduct tax at source at applicable rates. The assessee challenged the decisions rendered by the AO by filing appeals before Ld CIT(A). In some of the cases, the Ld CIT(A) has accepted the contentions of the assessee that the payments so made constitutes business income in the hands of the recipient and the same is not taxable in India, since the recipient does not have Permanent Establishment in India. The revenue has filed the appeals in those cases, where the Ld CIT(A) has decided the issue by holding the same as not royalty, but business profits. The assessee has filed appeals, where the Ld CIT(A) has upheld the view of the AO that the payments constitute royalty. 2. In all these cases, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as provided in treaty with USA. 20. A comparison of the definition of royalty as provided under the DTAA (USA), as reproduced above, with the definition of royalty as provided under Income Tax Act shows that the same are not in paramateria with each other. The definition provided under the DTAA is the very short and restrictive definition, whereas, the definition of the royalty as provided under the Income Tax Act is a very wide and inclusive definition but the same seems to be somewhat vague also. A careful reading of the relevant provisions under the DTAA and as compared with that of the Income Tax Act, 1961, reveals that the DTAA covers only a part of the items mentioned under sub clauses (i) to (v) to Explanation 2 to section 9(1)(vi). A perusal of the definition of royalty as provided in Article 12 of DTAA reveals that it is the payment which is received as consideration for the use of or the right to use any copyright of literary, artistic, scientific work including .. ‟ (emphasis supplied by us). Hence, what is relevant is the consideration paid for the use of or the right to use any copyright . The right to use a computer software/programme has not been sp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luded in the definition and within the scope of the words right ‟ , property ‟ or information ‟ as provided under clauses (b) and (c) to section 9(1)(vi) . The term computer software ‟ has not been included in the meaning and scope of the term literary work ‟ under clause (v) to Explanation 2. It is also pertinent to mention here that the consideration paid for computer software ‟ has not been specifically included under the definition of royalty under the DTAA. 21. Under the circumstances, it cannot be said that the definition of royalty as under the Income Tax Act is in paramateria with that under the DTAA. Since the definition provided under the royalty in the DTAA is more beneficial to the assessee, hence as per the provisions of section 90, the definition of royalty as provided under DTAA is to be taken. So far as the reliance of the Ld. D.R. on the decision of the Hon ble Madras High Court in the case of Vrizon Communication Singapore (supra) and of the Mumbai Tribunal in the case of Viacom 18 Media Pvt. Ltd. (supra) is concerned, we find that the said decisions have been rendered in context of some other item r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ates prior to such amendment. That an amendment to a treaty must be brought about by an agreement between the parties. Unilateral amendments to treaties are therefore categorically prohibited. Even the Parliament is not competent to effect amendments to international instruments. As held by the Hon ble Supreme Court in Azadi Bachao Andolan (2003) 263 ITR 607, these treaties are creations of a different process subject to negotiations by sovereign nations. While relying on the decision of the Hon ble Madras High Court, in CIT vs VR. S.RM. Firms Ors, the Hon ble Delhi High Court has held that the tax treaties are considered to be mini legislation containing in themselves all the relevant aspects or features which are at variance with the general taxation laws of the respective countries. The Parliament is not equipped with the power to, through domestic law, change the terms of a treaty. Amendments to domestic law cannot be read into treaty provisions without amending the treaty itself. It is fallacious to assume that any change made to domestic law to rectify a situation of mistaken interpretation can spontaneously further their case in an international treaty. Therefore, mere ame ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve cited decisions, we proceed to examine as to the consideration paid by the assessee for the purchase of the software can be covered within the scope of the definition of royalty as provided under the DTAA. 24. As discussed in earlier paras of this order, that though the definition of royalty under DTAA not only covers the payment made as a consideration for the use of, or the right to use, any copyright of a literary work but also for certain other rights/items such as any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, scientific equipment etc. However, the Ld. DR has neither stressed nor has advanced any argument as to that software falls in any of the above mentioned other categories. All the contentions of the revenue are concentrated on the point that software is covered under the term copy right in a literary work and thus included in the definition of royalty as provided under the DTAAs of India with the other countries as detailed in the table above. It has been submitted by the ld. DR that the definition of Literary work as provided under the domestic law vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istinct parties who could discuss all the terms of such agreement between them. The rights assigned by the author/owner of the software would be very specific in their scope, indicating clearly to the purchaser the actions that he/she is permitted to perform in relation to the software embedded in such discs. Software contracts, like many other transactions, are governed by the common law principles as embodied in the Indian Contract Act. Contracts can be in the nature of sale or assignment/license. If the computer software is considered as a 'goods', the Sale of Goods Act, 1930 will have relevance in the formation and execution of the sale contract. In context of copyright law, a license is a permission to do an act, that, when the doing of the same without permission, would be unlawful. In Software Licences, the copyright owner retains substantial rights and greater ability to control the use of software. Licence may have provisions relating to the persons who may use the programme, the number of copies that can be made, warranty, limitation of liability, distribution of the software, etc. These are generally biased towards the licensor. Now, the question before us is as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e granted to the licensee permitting him to download the computer programme and storing it in computer for its own use is only incidental to the facility extended to the licensee to make use of the copyrighted product for his internal business purposes. The said process is necessary to make the program functional and to have access to it. Apart from such incidental facility, the licensee has no right to deal with the product just as the owner would be in a position to do. The Hon ble Delhi High Court has observed that in such a case there is no transfer of any right in respect of copyright to the assessee and it is a case of transfer of a copyrighted article. The payment is for a copyrighted article and represents the purchase price of an article and cannot be considered as royalty. The Hon ble Delhi High Court has further held that what is transferred is neither can be right in the software nor the use of the copyright in the software, but is the right to use copyrighted material or article which is clearly distinct from the rights in a copyright and the same does not give rise to any royalty income and would be the business income of the non-resident. The Hon ble Delhi High Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ys Corporation (925) F 2d 670 (3rd Cir 1991), held that a computer program may be copyrightable as intellectual property, does not alter the fact that once in the form of a floppy disc or other medium, the program is tangible, movable and available in the market place. In such a case, the intellectual property has been incorporated on a media for purposes of transfer. The software and the media cannot be split up. In Associated Cements Co. Ltd. vs. Commissioner of Customs, AIR 2001 SC 862, the Hon ble Supreme Court examined whether the drawings and license could be considered as goods . The Hon ble Supreme Court held that all tangible, movable articles are goods for charge of custom duties under section 12 read with section 2(22)(e) of the Customs Act, 1962, irrespective of what the article may be or may contain. It may be that what the importer wanted and paid for was technical advice or information technology, an intangible asset, but the moment the information or advice is put on media, whether paper or cassette or diskette or any other thing, that what is supplied, it becomes chattel. The Hon ble Supreme Court, thus, held that the intellectual property such as drawings, l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcial right like copy right, right to practice some profession or noncompeting right etc.; Once incorporated on a media, it become goods and cannot be to be said to be copy right in itself; however a copy right can be created in respect of such computer software/ideas expressed on a media. Further the copyright doesn t protect the idea itself but only protects the way or the manner in which such ideas are expressed. 31. In the case in hand, the software has been embedded in a disk. The assessee/purchaser after paying the price of the disk, is supposed to have right to use that goods/disc. On the completion of the sale, the property in such a goods passes to the buyer and the buyer has every right of fair use of the said product and subject to the conditions mentioned in the sale agreement which in fact are restrictions or limitations to the effect that the buyer will not misuse the product which may amount to infringe of copyright in the product. So what the buyer purchases is the copyrighted product and he is entitled to fair use of the product. The restriction or the terms mentioned in the agreement are the conditions of sale restricting misuse and cannot be said to be lic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed article or the work, may not be infringed. The purchaser gets the right to use the product/diskette along with the property in the good in the shape of work embedded or written in it when the sale is complete i.e. when such diskette/COD ROM is delivered by the seller to the purchaser in lieu of the consideration paid to him. Thus what is restricted by the so called agreement or commonly used software license is that the user will not infringe the copyrights of the owner of the work in the product. The purchaser is always entitled to fair use of the work which he has purchased. The terms of agreements in case of software are thus the conditions of the sale of the product. 33. Further, a question, which needs to be examined whether the statutory rights of the purchaser/user of the software can be curtailed or done away with by the terms of such licenses/agreements. A License Agreement, in spite of the fact that it may fulfill all the requirements of a valid contract, such an agreement may not be enforceable, if, its stipulations conflict with the law governed in the country where such licenses are intended to be enforced, or if it is an unconscionable or unreasonable bargai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. It doesn t in any manner gives any inference that the seller/licensor has given/licensed the copyright in the software. It may also be pointed out here that whether such an license agreement is signed or not by the licensee/purchaser, still the owner of the product will have the copyrights in such a product, as are defined and explained under the Indian Copyright Act; even the registration of the product or the work under the Copyright Act is not compulsory. The owner of the work is deemed to be protected in relation to the copyrights in the work but the fair use of the product/work cannot be denied and any clause in such agreement should be deemed to be void as against the principle of fair use of the product. 34. Further, to determine whether a copyright in a work is infringed or not or would be deemed to be infringed or not, the most important test is to find out whether the use is likely to harm the potential market or the value of the copyrighted work. When it is not the allegation of the owner/purchaser of the work that the purchaser/user was reproducing the work and distributing it so as to affect his potential market in exercising the reproduction right, then it ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al object of the rental. 36. A perusal of the above provisions of the copyright Act reveals that the computer software is included in the definition of literary work and is covered under the purview and scope of copyright. The exclusive rights to do or authorize the doing of certain acts as mentioned in clause (a) and clause (b) of section 14 vests in the owner of the work such as to reproduce the work, to issue copies, to make translation or adaptation, to sell or give on commercial rental in respect of a work. The internal use of the work for the purpose it has been purchased does not constitute right to use the copy right in work. Our above view also finds support from certain other provisions of the Copyright Act, which we discuss in the following paras. 37. Section 51 of the copyright Act deals as to when the copyright is infringed, which, for the sake of convenience, is reproduced as under: CHAPTER XI Infringement of Copyright 51. When copyright infringed. -Copyright in a work shall be deemed to be infringed- (a) when any person, without a licence granted by the owner of the copyright or the Registrar of Copyrights under this A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es by a lawful possessor of a computer programme provided that such information is not otherwise readily available; (ac) the observation, study or test of functioning of the computer programme in order to determine the ideas and principles which underline any elements of the programme while performing such acts necessary for the functions for which the computer programme was supplied; (ad) the making of copies or adaptation of the computer programme from a personally legally obtained copy for non-commercial personal use; 39. The proviso to section 57 of the Act is also relevant. The said section 57 of the Act of 1957 is also reproduced as under: ― 57. [Author s special rights. (1) Independently of the author s copyright and even after the assignment either wholly or partially of the said copyright, the author of a work shall have the right- (a) to claim authorship of the work; and (b) to restrain or claim damages in respect of any distortion, mutilation, modification or other act in relation to the said work which is done before the expiration of the term of copyright if such distortion, mutilation, modification or other act would be prejud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nfringed copy of the work for private and domestic work of the importer has been excluded from the scope of infringement of Copyright under the Act. 41. It is also pertinent to mention here that the Income Tax Act does not specifically include the computer software ‟ in the term literary work ‟ and under such circumstances, if we apply the provisions of Income Tax to define the scope of Literary Work ‟ , then perhaps the computer software ‟ will be out of the scope of the term royalty as defined under the DTAA. However, if we apply the Copyright Act, then the computer software ‟ will have to be included in the term literary work ‟ but to constitute royalty ‟ under the treaty, the consideration should have been paid for the use of or the right to use the copyright in the literary work ‟ and not the literary work ‟ itself. 42. Further, when we read the definition of copyright and literary work as provided in the Copyright Act, 1957, it is also important to note down that what constitutes infringement of copyright and what are the exceptions to it. If the software purchased by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a product, if India has a treaty with that country or if India and that other country are signatories of the certain international treaties or conventions e.g. Berne convention to which India is a signatory. Under such circumstances, in respect of works done in foreign countries or by foreign authors, the copyright does not automatically flow or extended to them. The rights of the foreign author are to be examined in the light of the Copyright Act and the relevant treaty or the convention, if any, signed by India with that country to which the foreign author belongs. The copyright in a foreign product thus does not flow automatically or impliedly, so far as the Indian copyright laws are concerned. 44. Hence, while interpreting the definition of royalty as provided in the DTAA, it is to be seen as to what has been purchased by the assessee i.e. whether the copyright itself has been purchased or what the assessee has purchased is only a copyrighted work . It is also required to be analysed as to whether the use of such right would amount to infringement of copyright if a license or permission in this respect is not given by the owner; and when assessee has purchased a copyri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ackup copies etc. would be the necessary acts for enabling the use of the product and would not amount to the transfer of copyright therein, but only the transfer of the copyrighted product and thus will not be covered under the definition of royalty under DTAA. The consideration, thus, paid will be the business income of the non-resident and taxable in accordance with the provisions of DTAA. We may clarify here that even in cases where the owner of the copyrighted work may restrict the use of or right to use the work by way of certain terms of the license/software agreement, the validity or the enforceability of the same may be subject matter in other laws such as Indian Contract Act 1872 , Sale of goods Act 1930 or the Consumer Protection Act 1986 etc., but, the same in any way can not be said to grant of or infringement of copyright in the light of specific statutory provisions of Copyright Act 1957. 46. While finalizing this order, we have come across a recent decision of the Co-ordinate Delhi Bench of the Tribunal in the case of Datamine International Ltd. vs. ADIT in ITA No.5651/Del/2010 vide order dated 14.03.16 on the identical issue wherein the definition of royalty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s made by the Tribunal (supra) of various tax treaties of India with other countries clinches the issue. Even at the cost of repetition, we deem it proper to refer to the observations of the Hon ble Delhi High Court in the case DIT Vs New Skies Satellite BV, (supra), that an international instrument affected between two sovereign states is the result of the negotiations by those sovereign nations which in itself is considered to be mini legislation containing in it all the relevant aspects or features which may be at variance with the general taxation laws of the respective countries and the same are to be read as such. We, therefore, fully agree with the observations of the co-ordinate bench of the Tribunal in the case of Datamine International Ltd. vs. ADIT (supra) that wherever the Government of India intended to include consideration for the use of software as 'Royalties', it explicitly provided so in the DTAA with the concerned country viz. Malaysia, Kazakhstan and Turkmenistan. We find that in the cases before us, in the DTAA of India with respective countries (names mentioned in the chart given above), the definition of royalty in none of the respective treaties spec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uri Yeast India Pvt. Ltd. V. State of U.P. (2008) 14 VST 259(SC) : (2008) 5 S.C.C. 680 has held that, if two views in regard to the interpretation of a provision are possible, the Court would be justified in adopting that construction which favours the assessee. Reliance can also be placed in this regard on the decision of Hon ble Supreme Court in Bihar State Electricity Board and another vs. M/s. Usha Martin Industries and another : (1997) 5 SCC 289. We accordingly adopt the construction in favour of the assessee. 5. We notice that the co-ordinate bench of tribunal has decided an identical issue in the case of M/s Baan Global B V (supra) has considered an identical issue and rendered its decision as under:- 10. We have heard the rival submissions, perused the relevant finding given in the impugned order and also the various decisions, cited before us. The sole issue involved before us is, whether the payment received by the assessee on sale of computer software product is to be treated as income by way of royalty or business income. In case, if it is a business income, then admittedly, assessee being a non-resident company with no permanent establishment in India, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of right to exploit the copyright in the computer software. These facts have not been controverted by the department and, therefore, what has been incorporated and stated by the CIT(A) in his order is reckoned as admitted facts. 11. Now, on these facts, we have to decide, whether the payment received by the assessee can be reckoned as royalty within the terms of article 12(4) of DTAA. Before that, the relevant paragraph of Article 12 dealing with the definition of royalty reads as under:- 4. 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 . From the plain reading of the article it can be inferred that, it refers to 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 subclauses (i) to (vi); (b) in the case of a computer programme,- (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 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 wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce, cannot be considered as a royalty within the meaning of Article 12(4) of the DTAA, as the same is consideration for sale of copyrighted product and not to use of any copyright. 12. One of the issue which was raised by the Ld. DR before us is that, the Explanation 4 to section 9(1)(vi) which has been with brought by Finance Act 2012 with retrospective effect in section 9(1)(vi), therefore, the meaning and definition of royalty as given therein should be read into the DTAA. We are unable to appreciate this contention of the Ld. DR because the retrospective amendment brought into statute with effect from 01.06.1976 cannot be read into the DTAA, because the treaty has not been correspondingly amended in line with new enlarged definition of royalty . The alteration in the provisions of the Act cannot be per se read into the treaty unless there is a corresponding negotiation between the two sovereign nations to amend the specific provision of royalty in the same line. The limitation clause cannot be read into the treaty for applying the provisions of domestic law like in Article 7 in some of the treaties, where domestic laws are made applicable. Here in this case, the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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