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TMI Blog2017 (3) TMI 1748X X X X Extracts X X X X X X X X Extracts X X X X ..... d together and are being decided by consolidated order for avoiding conflicting decisions. 2. In ITA No.2410/Mum/2007 for AY 2002-03 the assessee has raised following grounds of appeal : (1) The learned CIT(A) erred in law in holding that consideration received for software license/sub-licensed as royalty ( Ground A to D) (2) The learned CIT(A) erred in not appreciating that Satyam Computer Services Ltd and Agrotech Food Ltd had not deducted tax at source and the Department had accepted this situation without initiating any action against them(E) . (3) The learned CIT(A) failed to adjudicate upon whether the VARs constituted a PE of appellant in India. Without prejudice to the grounds is asked the assessee submits that these VARs cannot be considered PE of the assessee in India as they did not come under the control and direction of the assessee.(F) 3. Brief facts of the case are that Assessee Company is incorporated under the law of Netherlands. The assessee is wholly subsidiary of M/s i2 Technology Inc USA. The assessee obtained the exclusive right to use, develop and enjoy the Intangible property rights to the computer software from M/s i2 Te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsp; is chargeable to tax as 'Royalty' and where the software head been licensed to value-added resellers (VAR) the income would be 'Business income' since the VAR can be construed to be the PE of the assessee company. It was further argued by the ld Counsel that the learned CIT(A) also held that the consideration received by the assessee company is only for the right to use the copy right and not for copyrighted article. The Ld Commissioner (Appeals) also took the view that software itself is a 'secret process' which is used in data processing and in as such the payment is made for using such process and the payment is in the nature of royalty. The learned CIT(A) alternatively also held that software is a scientific equipment and the payment received being for use of such equipment would be construed as royalty. It was argued on behalf of assessee that income received by the assessee is not in the nature of royalty, the software license granted by it are in the nature of 'Shrink Wrapped Software' or 'Packaged Software' which does not result in royalty income for the assessee. In support of his argument they learned counsel for assessee relied upon the decision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court or in various decisions by Mumbai Tribunal. The ld. DR for the Revenue made submissions that in case the Tribunal comes to the conclusion that the issue raised in the present appeal is covered by the above referred decisions, then the assessee's case needs to be examined afresh on the fact as well as on law including the issue of process before giving the benefit of favorable decision to the assessee. The ld. DR for the Revenue referred that in Global Tally System Ltd. the Mumbai Tribunal vide order dated 20.04.2016 and Ahmedabad Tribunal in LMT Ltd. (152 ITD 873) has restored the matter back to the file of ld. CIT(A). The ld DR for the revenue also referred and relied on the decision of Hon'ble Karnataka High Court in CIT Vs Samsung Electronics Ltd. [2012] 345ITR 494. In the rejoinder argument, the ld. Sr. Counsel of assessee argued that the point of "process" was considered by Delhi Tribunal in Datamine International in para 10, 11 & 12 and in Qad Europe BV v/s. DCIT 53 ITR(T) 259. The ld. Counsel for assessee further relied upon the decision of special bench in ITO vs. Prasad Production [2010] 125 ITD 263 (Chennai) (SB). 5. We have considered the rival content ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the payment is in the nature of royalty. The ld. CIT(a) in alternative also held that software is a scientific equipment and the payment received for use of such equipment would be construed as royalty. The Hon'ble Delhi High Court in DIT vs. Infrasoft Ltd. while considering the substantial question of law, whether the consideration received by grant of license for use of software is not royalty within the meaning of Article 12(13) of DTAA between India and USA and held as under: "81. The Supreme Court in TAta Consultancy Services case' (supra) have thus laid down that Computer programs are the product of an intellectual process, but once implanted in a medium they are widely distributed to computer owners. 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 marketplace. 82. The Supreme Court has further held that a software programme may consist of various commands which enable the computer to perform a designated task. The copyright in that programme may remain with the originator of the programme. But the moment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can be transferred to another medium such as film, video tape, audio tape, or books. It is now common knowledge that books, music, and even movies or other audio/visual combinations can be copied from one medium to another. They are also all available on computer in such forms as floppy disc, tape, and CD-ROM. Such movies, books, music, etc. can all be delivered by and/or copied from one medium to another, including electrical impulses with the use of a modem. Assuming there is sufficient memory space available in the computer hard disc drive such movies, books, music, etc. can also be recorded into the permanent memory of the computer. That the information, knowledge, story, or idea, physically manifested in recorded form, can be transferred from one medium to another does not affect the nature of that physical manifestation as corporeal, or tangible. Likewise, that the software can be transferred from one type of physical recordation, e.g., tape, to another type, e.g., disk or hard drive, does not alter the nature of the software, it still has corporeal qualities and is inextricably intertwined with a corporeal object. The software must be stored in physical form on some tangible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n consent.' The Licensee's rights shall not be restricted by this Clause 2(h) to the extent that local law grants Licensee a rig~( to do so for the purpose of achieving interoperability with other software and in addition thereto Infrasoft undertakes to make information relating to interoperability available. to Licensee subject to such reasonable conditions as Infrasoft may from time to time impose including a reasonable fee for doing so. To ensure Licensee receives the appropriate information, Licensee must first give Infrasoft sufficient details of its objectives and the other software concerned. Requests for the appropriate information should be directed to the Vice President Technical of Infrasoft. 3. LICENCE FEES, PAYMENT AND TAXES (a) Licensee shall pay Infrasoft a licence fee for the use of the Software as agreed in the order. Infrasoft confirms that where the Licensee has purchased the Software through an authorised reseller of the Software the Licensee shall owe no license fees to Infrasoft where the Licensee has made payment of the licence fees to the authorised reseller. (b) All licence fees are exclusive of and net of any taxes, dutie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly integral to the use of copyrighted product. The right to make a backup copy purely as a temporary protection against loss, destruction or damage has been held by the Delhi High Court in Nokia Networks OY (supra) as not amounting to acquiring a copyright in the software." 99. In view of the above we accordingly hold that what has been transferred is not copyright or the right to use copyright but a limited right to use the copyrighted material and does not give rise to any royalty Income. Further, the Co-ordinate Bench of Mumbai Tribunal in DIT vs. Reliance Industries Ltd. (2016) 69 taxman.com 311(Mum Trib.) while considering the issue related with purchase of different type of software from resident of different countries wherein, India has tax treaty/DTAA held as under: "41. ...... 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 C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... restrictions on the rights in works of foreign authors first published in India wherein it has been provided that if a foreign country does not give adequate protection to the works of the Indian authors, the Central Government may direct that such of the provisions of the Act as confer copyright on works first published in India of the foreign authors shall not apply. So if a foreign country recognizes the copyrights of the Indian authors in their copyrighted work, the India also allows the copyright to the foreign authors on reciprocal basis. So a foreign author can claim the copyright in 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the work for the purpose of which it is being purchased and doing of such other acts including making of copy for protection from damage or loss cannot, in any case, said to be any infringement of copyright whether or not any license in this respect has been granted by the author/owner of the work. The right to use or for use of the product accrues to the purchaser by the operation of the statute and as held by the Hon'ble Delhi High Court in the case of Infrasoft Ltd.' (supra), the same would amount to the sale of a goods and the acts done such as downloading of the same to the computer or making backup 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 v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding software, cinematograph films...'. Similarly, the DTAA Turkmenistan also defines 'Royalties' in Article 12 to mean : 'payments of any kind received as consideration for the use of or the right to use any copyright of literary, artistic or scientific work, ..... computer software, any patent, trademark...'. It is thus clear 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. Since Article 13(3)(a) of the DTAA with UK does not contain any consideration for the use of or the right to use any 'computer software', the same cannot be imported into it. 47. The above analysis 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 legislatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onal Old Ltd. (supra), though, a view in favour of the Revenue has been taken, but the Hon'ble Delhi High Court in the case of DIT vs. Infrasoft Ltd.' (supra), which is a latter decision, has discussed the Samsung case also and has taken the view in favour of the assessee. The Hon'ble Delhi High court has taken the identical view favouring the assessee in the case of DIT vs Nokia Network' (supra) and in the case of DIT vs. Ericson A.B.' (supra) also. The Hon'ble Bombay High Court in the case of The Addl. Commissioner of Sales Tax vs. M/s Ankit International, Sales Tax Appeal No.9 of 2011 vide order dated 15 September, 2011 while relying upon the decisions of the Hon'ble Supreme Court in The Commissioner of Income Tax V. Vegetable Product Ltd. (1973) 88 ITR 192 and in Mauri 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 anothe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hrink wrapped software would not fall in the definition of royalty. Even the above view of the assessee has been subsequently confirmed by the various decisions of the Tribunal in the own case of the assessee. He, bringing our attention to the orders dated 29.10.2010 (supra) and 26.11.2010 (supra) and also various other orders in the case of assessees in the earlier assessment years has contended that the different benches of the Tribunal have upheld the findings in relation to the interpretation of the provisions of section 9(1)(vi) made by the first appellate authority [CIT(A)] which has been summed up in the following points: (a) It is now established law that Computer software after being put on to a media then sold, becomes goods like any other Audio Cassette or painting on canvas or a book and that the Assessing Officer is wrong in holding that Computer software media, continues to be an intellectual property right and that the Assessing Officer was wrong in treating this computer software as a "Patent" or as "Invention' the payment cannot be termed as "Royalty". (b)That the definition of the term 'Royalty' in article 12(3) of the Indo-US DTAA is restricti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the country prior to the insertion of Explanation 4 in the said provision. By the introduction of the said Explanation 4, computer software has been specifically included in the definition of right, property or information' which was never assumed to have been included by any court of law prior to the insertion of Explanation 4 vide amendment of Act of 2012. The Hon'ble Supreme Court in the case of Sedco Forex International Drill INC. & Others vs. Commissioner of Income Tax & another' (supra) has held that if an explanation added to a provision changes the law, then it is not to be presumed to be retrospective irrespective of the fact that the phrase used are it is declared' or for the removal of doubts'. As it is an admitted position that in the earlier years, not only the various High Courts but also the Tribunal in the cases of the assessee has taken a view that the consideration paid for the purchase of the software cannot be treated as royalty; the assessee was, thus, under the bonafide belief that no TDS/withholding of tax was required to be done in respect to said purchases. The assessee had no reason to believe or to foresee a subsequent event vide which the definition of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of appeal raised before him. It was further argued in alternative that M/s Satyam and Compaq are well established company in the field of software services and question of their dependent upon the assessee does not arise. On the other hand the ld DR for the revenue submitted that he has no objection if this ground of appeal is restored to the file of Ld CIT(A) for adjudication on merit. 7. We have considered the contentions of the ld representatives of the parties. We have noticed that ld CIT(A) has not adjudicate the ground of appeal despite specific ground of appeal raised by assessee. Hence, we deem it appropriate to restore this ground of appeal to the file of ld CIT(A) to decide the issue afresh in accordance with law. Needless to say that the ld CIT(A) shall grant opportunity of hearing to the assessee before passing the order. In the result this ground of appeal is allowed for statistical purpose. ITA No. 1718/Mum/2008 for AY 2004-05 8. The assessee has raised identical grounds of appeal as raised in appeal for AY 2002-03. The facts for the assessment year under consideration are also similar. We have already allowed the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the other hand the ld DR for the revenue supported the order of AO. 12. Along with this appeal, we have also heard the appeal against the quantum assessment ( vide ITA No. 2410/Mum/2007 )wherein we have granted full relief to the assessee as holding that consideration received for software licence/sublicence is not royalty. As in the quantum assessment, the treatment of the income has been reversed; consequently the disallowance in the assessment order is deleted. Thus, the appeal filed by Revenue even on merit left no merit for further consideration. Because, as the order on the basis of which the penalty was levied has been set-aside by us. Even otherwise the penalty was levied by AO on account of different treatment besides claimed by the assessee. It is the settled law that mere disallowance of claim which is based on bonafide belief cannot be a basis for levy of penalty. There is no specific allegation or finding by AO the that assessee has intentionally and deliberately furnished the inaccurate particular or concealed the income. Hence, appeal filed by the Revenue is dismissed. 13. In the result, appeal filed by assessee for AYs 2002-03, 2004-05 are allo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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