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TMI Blog2018 (5) TMI 1807X X X X Extracts X X X X X X X X Extracts X X X X ..... ne of the agreements, it can be seen that there is any kind of assignment of copyright. In view of the OECD commentary also such a consideration received on the sale of copyrighted software product without any kind of transfer or assigning of fully or partially copyright therein to the end user does not amount to royalty. Such guideline of OECD can well be taken note of, since the treaty which is subject matter of consideration is India-Ireland treaty, which is based on OECD Model Convention, therefore, the interpretation of the term ‘royalty’ as given in the OECD Model Convention have some pervasive value. In any case, we have already held that in terms of Section 14 of the Copyright Act, none of the rights enshrined therein have been parted with the assessee in favour of the assessee or the end customer inasmuch as they can enjoy the right in the same manner in which the assessee can; and no such specific right concerning the use of copyright have been conferred by the assessee to these persons or end user. Assessee has not been given any of the authority to do any of the act as contemplated in various sub clauses of Section 14. Thus, under the Indian copyright Act also, there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of computer software (Adobe products) outside of North America including India. Since, it is a tax resident of Ireland, therefore, assessee has claimed beneficial treaty provision of India-Ireland DTAA. The assessee had entered into non exclusive distribution agreements with Indian companies, namely, Ingram Micro India Private Limited; and Redington (India) Limited, wherein they have been appointed as distributor to distribute Adobe products in India. These products are delivered by the assessee to the Indian Distributors 'ex-warehouse' from the warehousing facility of the assessee outside India. For the Assessment Year 2008-09, the assessee has filed its return of income on 31st March, 2010 declaring 'Nil' income from the consideration paid by the Indian distributors to the assessee towards the purchase of Adobe products on the ground that the same is not taxable in India either as business income in absence of PE or as a 'royalty' under Article 12 of the Treaty. The arrangement and conduct between the assessee and the Indian distributor has been stated to be on principle to principle basis. The Assessing Officer in the course of draft assessment proceedings sought explanatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lf without allowing any right to use the copyright in the product and the same is not covered within the scope and definition of "royalty". Strong reliance was placed on the definition of 'copyright' as given in Section 14 of 'Indian Copyright Act, 1957' and also placed reliance on Article 12 of OECD Model Tax Convention. Apart from that, various decisions were also relied upon which have been incorporated in the impugned assessment order. It was further submitted that the receipts from supply of software by the assessee does not qualify royalty because; "The software distribution agreement entered into by Adobe Ireland does not grant the distributor/ end user any right in the copyright (which remains with Adobe Ireland), but merely a copy of the computer program i e. a copyrighted article/ a shrink wrap product. This is evident from the following clause of the attached agreement between Adobe Ireland and Ingram: "Software Products means copies of the Software and the User Documentation supplied to Distributor as shrink wrap or TLP products for the categories of Adobe Software listed in the License Fee Lists that are supplied by Adobe to Distributor pursuant to this Agreement. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Products or the Trade Marks. • The Indian distributor acts only as a channel/ intermediary between the owner/ exclusive right holder, to circulate copies to public which are not in circulation (i.e., not sold to public earlier) and the Indian distributor by itself does not have the 'right to issue copies'. In view of the above, it is evident that the software distribution agreement entered into by Adobe Ireland does not grant the Indian distributors/ customers in India with any right in the copyright (which remains with Adobe Ireland), but merely a copy of the computer program i.e. a copyrighted article/ a shrink wrapped product. Accordingly, no portion of the payment for sale of software by Adobe Ireland to Indian distributors can be construed to be in the nature of 'royalty' and subject to tax in India." 5. The learned Assessing Officer rejected the assessee's contention on following grounds:- * Firstly, software is a license and is not sold and there is a distinction between sale and license and the payment is for the use of 'copyright'. Even otherwise also alienation is not reckoned as licensing and same still falls under the definition of 'royalty' und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wned has not been patent, there is no denial of the fact that it is essentially an invention. The development of such software requires highly technical manpower, with highly sophisticated infrastructure and huge investments. Similarly the software can also be considered as a scientific work. Therefore, the software can also be said to be information developed out of scientific experience. (iii) The payment is also qualified for the use of secret formula or process. The software of Adobe when installed in a computer responds to every instruction in a specific way. It recognizes the command and as per its programming yields the desired result and reflects the same on the output devices. This argument is further strengthen from the fact that cost of the medium viz., computer discs, floppy etc.., on which the programme is written is negligible as compared to the overall price of software. Had it not been a secret programming, anybody could have written these types of programs and sold it at a very low price as compared to the price of the Adobe software. (iv) The assessee's main argument is that there is a clear distinction between acquisition of copyright in the computer progra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... License Agreement' or "EULA' means Adobe's current Software Product End User License agreement(s) for the relevant Software Product that is included with each Software Product generally in electronic form as part of a product installer. (iii) "Intellectual Property" means all intellectual property rights, similar and/or neighboring rights and sui generis rights inter alia, database protection, of whatever nature anywhere in the world and all rights pertaining thereto including but not limited to all present and future title to and/or interests therein, whether recorded or registered in any manner or otherwise, including without prejudice to the foregoing generality, trade-marks and service marks and applications there for, patents and patent applications, copyright, designs, design rights both registered and unregistered, design right applications, trade secrets, know-how, information, data source codes and object codes, technology, specifications of materials, formulae and processes, production methods, discoveries, specifications, diagrams, research, methods of formulation, results of tests and field trials and composites of materials. (iv) "License Fee" means the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ihe Territory; provide technical support in the Territory, and to enter into arrangements or agreements with third parties inducing but not limited to End Users, Dealers, OEMs, systems integrators or VARs in connection with the Software Products in the Territory. Eligibility and Distribution Rights: Without prejudice to the provisions of Clause 2 2 (Nature of Appointment), Adobe grants Distributor a non-exclusive, non-transferable license to distribute the Software Products in the Territory, and Distributor acknowledges that each Software Product, including each TLP Product, is to be licensed to End Users in accordance with the terms and conditions of its current EULA The terms of the EULA are not negotiable and shall not be amended or modified for any End User Distributor shall distribute the software Products solely in the form and packaging in which they were obtained from Adobe. Distributor shall not alter the design or contents of any Software Product, or remove any item or document from the Software Product package, without Adobe's prior written approval In addition, Distributor agrees to distribute Software Products that are "Collections" intact and not to separate any of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore holding that both registered under the domestic law as well as the treaty. The said amount is to be taxed as royalty:- (i) The Software is licensed not sold. (ii) The license is for use of the software. (iii) The End User pays both for the software as also the Disk in which the software is enshrined. Larger part of the license fee is for the software. (iv) The End User; can use the software only if it binds itself to the terms and conditions prescribed as per the End User Licensing Agreement (EULA). (v) On acceptance of EULA, the End User can use the software but he can use the software only after he is granted "Activation Code". Unless Activation Code is given, the computer programme cannot be used. (vi) As a result of entire exercise, End User can make use of the software which is protected by the Intellectual Property Rights." 10. Before us learned counsel for the assessee, Mr. Ravi Sharma, at the outset submitted that the issue under consideration has to be seen in the context of treaty provisions which overrides the provisions of the Act. Here in this case, the main issue in question is a sale of copyright product by the assessee to the Indian Distributo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itself without allowing any right in the copyright product. After referring to the Section 14 of the 'Copyright Act' and various exceptions carved out in Section 56 of the said Act, he submitted that none of the activities as enshrined in various clauses of Section 14 would apply. Thereafter, he referred to paragraphs 12 to 14 of OECD Model Tax Convention of 2010 and also UN Model commentary of Article 12, especially as given in paragraph 3 clause (12) and (13) and submitted that even under these commentaries; the nature of payment received by the assessee would not be treated as 'royalty'. The relevant extracts of the said commentaries were also filed before us. Thus, he submitted that now in the wake of plethora of judgment including that of the Hon'ble Jurisdictional High Court, the said payment cannot be treated as royalty, and therefore, same cannot be brought to tax in India. 12. On the other hand, learned CIT-DR, Shri T.M. Shiv Kumar strongly relying upon the order of the Assessing Officer as well as the DRP, submitted that the treaty between India and Ireland is dated 20th February, 2002 and now there is an amendment in Section 9(1)(vi), by Finance Act 2012, with retro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ution. "End User License Agreement" or "HULA" means Adobe's current Software Product End User license agreement for the relevant Software Product that is included with each Software Product generally in electronic form as part of a product installer. ............. "Intellectual Property" means all intellectual property rights, similar and/or neighboring rights and sui generis rights inter alia, database protection, of whatever nature anywhere in the world and all rights pertaining thereto including but not limited to all present and future title to and/or interests therein, whether recorded or registered in any manner or otherwise, including without prejudice to the foregoing generality, trademarks and service marks and applications therefore, patents and patent applications, copyright, designs, design rights both registered and unregistered, design right applications, trade secrets, know-how, information, data, source codes and object codes, technology, specifications of materials, formulae and processes, production methods, discoveries, specifications, diagrams, research, methods of formulation, results of tests and field trials and composites of materials. .......... ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Software Products in the Territory. 2.3 List of Software Products, future Adobe Software Products may be added to the License Fee List and Adobe shall use reasonable efforts to notify' Distributor within thirty (30) days of any such addition. Adobe reserves the right to discontinue the distribution or availability of any Software Product upon thirty (30) days prior notice to Distributor. If Adobe discontinues a Software Product so that it becomes an End of Life Software Product, Adobe shall provide Distributor with thirty (30) days prior notice. Returns of such End of lifc Software Products shall be governed by Clause 5.9 (New Versions). Notices by Adobe under this Clause 2.3 (List of Software Products) maybe made by Adobe's on-line sales portal at http://partners.adobe.com or similar partner communication web sites, by fax or via email. 2.4 Distribution under License. Distributor agrees to use commercially reasonable efforts to: distribute tire Software Products under license in the Territory on a continuing basis, conduct its business in a manner that favourably reflects upon the Software Products and Adobe, and comply with good business practices and all laws and regul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his restriction, if Adobe makes Education Versions of the Software Products available to Distributor, such products are to be distributed to Educational Establishments only. Distributor shall not supply Education Versions of the Software Products to customers who are not Educational Establishments, or to customers who will distribute such products to customers who are not Educational Establishments. Distributor is obligated to advise Dealers and other customers of this restriction. 3.2 Restrictions on Copying and Decompiling. DISTRIBUTOR AGREES NOT TO TRANSLATE THE SOFTWARE INTO ANOTHER COMPUTER LANGUAGE, IN WHOLE OR IN PART. Distributor shall not make copies or make media translations of the Software Products including, without limitation, the User Documentation, in whole or in part without Adobe's prior written approval, Distributor that if, for any reason, it comes into possession of any source code, or portion thereof, for any Adobe product, not generally provided by Adobe as a part of a Software Product, it shall not use or disclose such source code and it shall immediately deliver nil copies of such source code to Adobe, Nothing contained in this Agreement shall be Interpr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oduct can be reckoned as "royalty" under the India-Ireland DTAA? The relevant paragraph 3(a) of Article 12 of the said treaty reads as under:- "3(a) 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 or films or tapes for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process or for the use of or the right to use industrial, commercial or scientific equipment, other than an aircraft, or for information concerning industrial, commercial or scientific experience." 16. The main emphasis is on payment 'for the use of or right to use any copyright of various nature, which connotes an exclusive right to use any 'copyright' in an article which is in the nature of the terms defined therein and said use of copyright has to be given to the end user. The concept of 'copyright' first of all needs to be discerned. In a famous treatise on copyright, Copinger and Skones James on copyright (1999 Edn.) has defined copyright as; 'Copyright gives the owner of the copyright in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g of copyright - For the purpose of this Act, "copyright" means the exclusive right to the provisions of this Act, to do or authorize 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 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 my 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 given on commercial rental or offer for sale or for commercial rental any copy of the computer programme; Provided that such commercial rental does not appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... right; or when any person- (i) makes for sale or hire, or sells or lets for hire, or by way of trade displays or offers for sale or hire, or (ii) distributes either for the purpose of trade or to such an extent as to affect prejudicially the owner of the copyright, or (iii) by way of trade exhibits in public, or (iv) imports into India, any infringing copies of the work: Provided that nothing in sub-clause (iv) shall apply to the import of one copy of any work for the private and domestic use of the importer. Explanation - For the purposes of this Section, the reproduction of a literary, dramatic, musical or artistic work in the form of a cinematograph film shall be deemed to be an "infringing copy" ............ 52(a) xx xx xx xx xx xx xx xx (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 utilize 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 utilize the computer programme for the purpose for which it was sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entitled to any right comprised in the copyright, the assignee as respects the rights so assigned and the assignor as respects the rights not assigned, shall be treated for the purposes of this Act as the owner of copyright and the provisions of this Act shall have effect accordingly. (3) In this section, the expression "assignee" as respects the assignment of the copyright in any future work includes the legal representatives of the assignee, if the assignee dies before the work comes into existence. 19. Mode of assignment: (1) No assignment of the copyright in any work shall be valid unless it is in writing signed by the assignor or by his duly authorised agent. (2) The assignment of copyright in any work shall identify such work, and shall specify the rights assigned and the duration and territorial extent to such assignment. (3) The assignment of copyright in any work shall also specify the amount of royalty payable, if any, to the author or his legal heirs during the currency of the assignment and the assignment shall be subject to revision, extension or termination on terms mutually agreed upon by the parties. (4) Where the assignee does not exercise the ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndardised with a wide range of applications or be tailor-made for single users. It can be transferred as an integral part of computer hardware or in an independent from available for use on a variety of hardware. 12.2 The character of payments received in transactions involving the transfer of computer software depends on the nature of the rights that the transferee acquires under the particular arrangement regarding the use and exploitation of the program. The rights in computer programs are a form of intellectual property. Research into the practices of OECD member countries has established that all but one protects rights in computer programs either explicitly or implicitly under copyright law. Although the term "computer software" is commonly used to describe both the program in which the intellectual property rights (copyright) subsist and the medium on which it is embodied, the copyright law of most OECD member countries recognises a distinction between the copyright in the program and software which incorporates a copy of the copyrighted program. Transfers of rights in relation to software occur in many different ways ranging from the alienation of the entire rights in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to any of those categories might be justified in adopting in their bilateral treaties an amended version of paragraph 2 which either omits all references to the nature of the copyrights or refers specifically to software. 14. In other types of transactions, the rights acquired in relation to the copyright are limited to those necessary to enable the user to operate the program, for example, where the transferee is granted limited rights to reproduce the program. This would be the common situation in transactions for the acquisition of a program copy. The rights transferred in these cases are specific to the nature of computer programs. They allow the user to copy the program, for example onto the user's computer hard drive or for archival purposes. In this context, it is important to note that the protection afforded in relation to computer programs under copyright law may differ from country to country. In some countries the act of copying the program onto the hard drive or random access memory of a computer would, without a license, constitute a breach of copyright However, the copyright laws of many countries automatically grant this right to the owner of software which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rdinary case in which a program copy is acquired for operation by the end user. 15. Where consideration is paid for the transfer of the full ownership of the rights in the copyright, the payment cannot represent a royalty and the provisions of the Article are not applicable. Difficulties can arise where there are extensive but partial alienation of rights involving: * exclusive right of use during a specific period or in a limited geographical area; * additional consideration related to usage; * consideration in the form of a substantial lump sum payment. 16. Each case will depend on its particular facts but in general such payments are likely to be commercial income within Article 7 or a capital gains matter within Article 13 rather than royalties within Article 12. That follows from the fact that where the ownership of rights has been alienated in full or in part, the consideration cannot be for the use of the rights. The essential character of the transaction as an alienation cannot be altered by the form of the consideration, the payment of the consideration in instalments or, in the view of most countries, by the fact that the payments are related to a contingen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent. Only one copy of the software is being supplied for each site. The licensee is permitted to make only one copy of the software and associated support information and that also for backup purposes. • It is also stipulated that the copy so made shall include Infrasoft's copyright and other proprietary notices. All copies of the software are the exclusive property of Infrasoft. The Software includes a licence authorisation device, which restricts the use of the Software. The software is to be used only for Licensees own business as defined within the Infrasoft Licence Schedule. Without the consent of the assessee the software cannot be loaned, rented, sold, sub-licensed or transferred to any third party or used by any parent, subsidiary or affiliated entity of Licensee or used for the operation of a service bureau or for data processing. • The Licensee is further restricted from making copies, decompile, disassemble or reverse-engineer the Software without Infrasofts written consent. The software contains a mechanism which Infrasoft may activate to deny the licensee use of the Software in the event that the Licensee is in breach of payment terms or any other p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he copyright owner has, is necessary to invoke the royalty definition. • Viewed from this angle, a non-exclusive and nontransferable licence enabling the use of a copyrighted product cannot be construed as an authority to enjoy any or all of the enumerated rights ingrained in Article 12 of DTAA. Where the purpose of the licence or the transaction is only to restrict use of the copyrighted product for internal business purpose, it would not be legally correct to state that the copyright itself or right to use copyright has been transferred to any extent. • The parting of intellectual property rights inherent in and attached to the software product in favour of the licensee/customer is what is contemplated by the Treaty. Merely authorizing or enabling a customer to have the benefit of data or instructions contained therein without any further right to deal with them independently does not, amount to transfer of rights in relation to copyright or conferment of the right of using the copyright. • The transfer of rights in or over copyright or the conferment of the right of use of copyright implies that the transferee/licensee should acquire rights either in enti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e licence agreement stipulates that upon termination of the agreement for any reason, the licensee shall return the software including supporting information and licence authorization device to Infrasoft. • The incorporeal right to the software, i.e., copyright remains with the owner and the same was not transferred by the assessee. The right to use a copyright in a programme is totally different from the right to use a programme embedded in a cassette or a CD which may be a software and the payment made for the same cannot be said to be received as consideration for the use of or right to use of any copyright to bring it within the definition of royalty as given in the DTAA. • What the licensee has acquired is only a copy of the copyright article whereas the copyright remains with the owner and the licensees have acquired a computer programme for being used in their business and no right is granted to them to utilize the copyright of a computer programme and, thus, the payment for the same is not in the nature of royalty. • It is not necessary to examine the effect of subsequent amendment to section 9(1)(vi) and also whether amount received for use of softw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at payment made to the assessee was in the nature of royalty either under the Income- Tax Act or under the DTAA. We have to keep in mind what was sold by the assessee to the Indian customers was a GSM which consisted both of the hardware as well as the software, therefore, the Tribunal is right in holding that it was not permissible for the Revenue to assess the same under two different articles. The software that was loaded on the hardware did not have any independent existence. The software supply is an integral part of the GSM mobile telephone system and is used by the cellular operator for providing the cellular services to its customers. There could not be any independent use of such software. The software is embodied in the system and the revenue accepts that it could not he used independently. This software merely facilitates the functioning of the equipment and is an integral part thereof. On these facts, it would be useful to refer 10 the judgment of the Supreme Court in TATA Consultancy Services v. State of Andhra Pradesh [2004] 271 11 R 401 (SC), wherein the Apex Court held that software which is incorporated on a media would be goods and, therefore, liable to sales tax. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in a medium are widely distributed to computer owners. An analogy can be drawn to a compact disc recording of an orchestral rendition. The music is produced by the artistry of musicians and in itself is not a "good," but when transferred to a laser-readable disc becomes a readily merchantable commodity. Similarly, when a professor delivers a lecture, it is not a good, but, when transcribed as a book, it becomes a good. 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, moveable and available in the marketplace. The fact that some programs may be tailored for specific purposes need not alter their status as "goods" because the Code definition includes "specially manufactured goods." 56. A fortiorari when the assessee supplies the software 'which is incorporated on a CD, it has supplied tangible property and the payment made by the cellular operator for acquiring such property cannot be regarded as a payment by way of royalty.' 6. This Court also noticed that the 1TAT had in addition relied upon other judgment of this Court i.e. DIT v. Nokia Ne ..... X X X X Extracts X X X X X X X X Extracts X X X X
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