9911796707
TMI Blog2019 (12) TMI 1207X X X X Extracts X X X X X X X X Extracts X X X X ..... th which we are seized of and Hon ble Karnataka High Court has held that grant of non-exclusive non transferable license in computer software with no right to sub-lease or transfer shall fall within Royalty both under DTAA as well u/s 9(1)(vi) of the 1961 Act read with explanations and shall be chargeable to incometax under the provisions of the 1961 Act. Hon ble jurisdictional High Court has affirmed the ratio of decision of Hon ble Karnataka High Court in the case of Synopsis International Old Limited, in a recent judgment in the case of Zylog Systems Limited [ 2019 (5) TMI 1209 - MADRAS HIGH COURT] . We are bound by aforesaid decision of Hon ble Jurisdictional High Court decision and Respectfully following the decision of Hon ble Madras High Court in the case of Zylog, we allow appeal of Revenue X X X X Extracts X X X X X X X X Extracts X X X X ..... as requested to furnish details of amount debited under the head "software support charges" of ₹ 18,63,35,391/- and the assessee was also requested to furnish the details of TDS done along with copy of agreement, invoices etc. The assessee furnished elaborate submissions in this regard along with copy of agreement for making such payments. Prima facie, it is seen that these payments were made by the company to M/s.Saipem, SPA, Italy, for acquiring software licenses which were used by the assessee for providing services to customers for various support functions in accounting, reporting etc. In this connection, it appears that the company had also directly purchased similar software / licenses from overseas third party vendors where it has deducted tax at source on such payments. However, when it comes to the question of making payments to its group concern, M/s.Saipem, SPA, Italy, the assessee has not deducted tax at source. On questioned as to why the amount classified as "software support charges" should not be disallowed in terms of section 40(a)(i), the assessee summarised its objections as under: "The payment made towards the purchase of soft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is pertinent to note that the above order of the ITAT covers several AYs starting from AY 2009-10 to AY 2015-16 which also includes the subject AY 2014-15. From the above order, your goodself would be able to understand that the software support charges are not in the nature of royalty payments. 3.4. The assessee's submission is duly considered: Since the department has not accepted the order and further appeal is pending, the submission made by the assessee is not acceptable. It is further submitted that Saipem India periodically submits the number of license required, to Saipem, Italy which in turn acquire these licenses and allots to the assessee. As stated earlier, the nature of software is Structure Calculation software, PDMS- 3D modeling software, P & ID Development 3D model review software etc. payment for which ordinarily attracts TDS provisions since it amounts to payment of royalty. In fact, when assessee mode similar transactions with other unrelated non-residents, it made TDS. The claim of reimbursement of expenses and eligibility of TDS provisions was examined by Karnataka High Court in CIT Vs CGI Information Systems & Management Consultants (P) Ltd, (Kar) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y under Article 13(3) of India-Italy DTAA , and provisions of Article 13(3) of India-Italy DTAA being more beneficial vis-à-vis provisions of Section 9(1)(vi) of the 1961 Act, shall apply, by holding as under: " 4.3. CIT (A)'s remarks and decision : I have carefully gone through the observation of the AO in the assessment order as mentioned above under para 4.1 and the appellant's submission before the CIT(A) under para 4.2. 4.3.1 In the relevant P.Y., the appellant made a payment for purchase of software to M/s. Saipem Spa Italy, being the parent company and the software licence was used by the appellant. The AO treated the aforesaid payment as royalty and disallowed the said payment under Section 40 (a) (i) by holding that income accrued to the non-resident payee as per Section 9(1)(vi) as TDS was not done. Before the CIT(A) the appellant's AR has contended that the aforesaid payment is not royalty. In this regard, the AR has relied on the decision of Hon'ble ITAT, Chennai in the appellant's case for the assessment year 2014- 2015 in which the Hon'ble ITAT has held that the aforesaid payment does not amount to royalty, and no TDS obligation arises. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons of Section 201(1)/(1A) of the 1961 Act by holding that these payments are not royalty payments and no income-tax was required to be deducted at source u/s 195 of the 1961 Act before making aforesaid payment to Saipem SPA, Italy . Thus, it is contended that learned CIT(A) has rightly decided the issue in favour of the assessee by following the decision of tribunal in assessee's own case for impugned ay: 2014-15 albeit the said decision was rendered in context of Section 201(1)/(1A) of the 1961 Act. The learned counsel for the assessee submitted that the assessee purchased copyrighted article and not copyright in software. The learned counsel for the assessee rely on decision of Hon'ble Madras High Court in the case of CIT v. Vinzas Solutions India Private Limited reported in (2017) 77 taxmann.com 279(Mad.). The Ld.Counsel for the assessee also brought to the notice of the Bench decision of the Hon'ble Madras High Court in the case of M/s.Zylog Systems Ltd. v. The ITO, International Taxation-II, Chennai, in TCA Nos.2184 & 2185 of 2006 , judgment dated 23.04.2019, wherein, the tax-payer was given right to use the trademark by foreign company for which payments were made by tax-pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g payment to M/s Saipem SPA, Italy, by holding that the aforesaid payments are Royalty payment u/s 9(1)(vi) of the 1961 Act and Article 13(3) of India-Italy DTAA which were subject to income-tax deduction at source u/s 195 of the 1961 Act, vide assessment order dated 17.11.2017 passed by AO u/s 143(3) read with Section 92CA(3) of the 1961 Act. The learned CIT(A) in first appeal filed by assessee has held in favour of assessee by following decision of Chennai tribunal in assessee's own case for impugned assessment year 2014-15 vide common order dated 23.10.2017 passed by tribunal in assessee's own case in ITA Nos.1862 to 1868/Mds/2017 for ay: 2009-10 to 2015-16 wherein tribunal has granted relief to the assessee in context of section 201(1)/(1A) of the 1961 Act by holding that these payments are not royalty payments and no income-tax was required to be deducted at source u/s 195 of the 1961 Act before making aforesaid payment to Saipem SPA, Italy. This appeal is filed at the instance of Revenue. Before we proceed further, it is important to mention at this stage that the assessee company is wholly owned subsidiary of Saipem SA, France . The said holding company of assessee namely Sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew regarding right to use copyrighted software between Hon'ble Karnataka High Court and Hon'ble Delhi High Court. Assessee in such a situation, in our opinion can always fall back on the judgment in their favour, so long as there is no jurisdictional High Court judgment on the issue. However, we have to see whether assessee's case falls within the same parameter of facts as they were there before Hon'ble Delhi High Court. Annex 1 of the agreement entered by the assessee with its Italian principal has been reproduced by the ld. Commissioner of Income Tax (Appeals) in its order and this is once again reproduced hereunder for brevity. ANNEX 1 Licenses' Use, Software Distribution and fees 1. LICENSE'S USE For and during the term of this Agreement, lntergraph Italy LLC. (hereinafter ,referred to as PP&M) grants to Saipem S.p.A. Headquarters in San Donato (MI) - Italy - (hereinafter. referred to as Saipem), Saipem personnel located in whatever Saipen project site (hereinafter referred to as Saipem), a personal, non-exclusive, non-transferable license for Salpern and the Affiliates included in the list of annex 2 (hereinafter referred to as Affiliates) to use the Licensed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ign or transfer such software. It was a non-exclusive and non-transferable licence. Right to make copies was only for assessee's own use and not for sale or transfer. Obviously, assessee only had a right to use copyrighted software. Assessee did not get any right in the copyright in the software. Copyright in the software continued to vest with Intergraph, Italy. Assessee was effectively given only the right to use the copyrighted software for a limited term. 13. A distinction has to be made between the acquisition of a "copyright right" and a "copyrighted article." Copyright is distinct from the material object, copyrighted. Copyright is an intangible incorporeal right in the nature of a privilege, quite independent of any material substance. Copyright or even right to use copyright is distinguishable from the sale consideration paid for a "copyrighted" article. This sale consideration is for the purchase of goods and is not royalty. The transfer of rights in or over copyright or the conferment of the right of use of copyright implies that the customer should acquire rights either in entirety or partially, co-extensive with the owner who divests h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed the decision of Special Bench in the case of Motorala Inc. vs. DCIT 95 ITD 269 and had held as under:- ''15. We have heard the rival submissions and perused the orders of the lower authorities and the material available on record. In the instant case, we find that no specific error in the order of the ld. CIT(A) could be pointed out by the ld. D.R. We find that the ld. CIT(A) has followed the decision of the Delhi Special Bench of the Tribunal in the case of Motorala Inc. Vs. DCIT 95 ITD 269. We find that following the above decision of the Mumbai 'E' Bench of the Tribunal in the case of ADIT Vs. TII Team Telecom International ITA Nos. 3939/Mum/2010 order dated 26.8.2011 has held as under: "17. It is not even revenue's case that any of these rights have been transferred by the assessee, on the facts of this case, and, for this reason, the payment for software cannot be treated as payment for use of copyright in the software. As we hold so, we may mention that in the case of Gracemac (supra), a contrary view has been taken but that conclusion is arrived at in the light of the provisions of clause (v) in Explanation 2 to Section 9(1)(vi) which also covers consideration f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e basis of which such a product operates. Same is the case with the software, when someone pays for the software, he actually pays for a product which gives certain results, and not the process of execution of instructions embedded therein. As a matter of fact, under standard terms and conditions for sale of software, the buyer of software is not even allowed to tinker with the process on the basis of which such software runs or to even work around the technical limitations of the software. In Asia Satellite Telecommunications Ltd Vs DCIT (78 TTJ 489), a coordinate bench of this Tribunal did take the view that when an assessee pays for transponder hire, he actually pays for the a process inasmuch as transponder amplifies and shifts the frequency of each signal, and, therefore, payment for use of transponder is infact a payment for process liable to be treated as 'royalty' within meanings of that expression under Explanation 2 to Section 9 (l)(vi) of the Income Tax Act. However, when this decision came up for scrutiny of Hon'ble Delhi High Court, in the case reported as Asia Satellite Telecommunications Co Ltd Vs DIT (332 ITR 340), Their Lordships, after a very erudi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany he keeps and a word may be interpreted with reference to the accompanying words. Words derive colour from the surrounding words." 16. In the instant case, we find that the assessee sold copy righted software and not copyright in the software. Therefore, we do not find any good reason to interfere with the order of the ld. CIT(A). It is confirmed. Grounds of appeal taken by the Revenue are dismissed''. In a later decision dated 09.01.2014 in ITA No.1024 to 1027/Mds/2013 and 1177/Mds/2013 (supra), this Tribunal had followed above mentioned order and held as under:- ''6. This issue had already been decided by the ITAT, Chennai B-Bench in the case of Dassault Systems Simulia P. Ltd (formerly known as Abacus Engineering Pvt. Ltd) through their order dated 16th September, 2011 (2011- TII-143-ITATMAD- ITNL). After considering the issue and following the decision of ITAR, Delhi Special Bench in the case of Motorala Inc. vs. DCIT(2005-TII-10-ITAT-DEL-SBINTL), the Tribunalhas held that the payment is not in the nature of income arising or accruing in India within the meaning of Section 9(1)(vi) and therefore, no taxability arises in India on such payments. The Tribunal held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alties or fees for technical services may also be taxed in the Contracting State in which they arise, and according to the laws of that State, but if the beneficial owner of the royalties or fees for technical services is a resident of the other Contracting State the tax so charged shall not exceed 10 per cent. of the gross amount of the royalties or fees for technical services. 3. The term "royalties " as used in this article means: (a) payments of any kind received as consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use or disposition thereof; and (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment, other than paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d only for Licensee's own business as defined within the Infrasoft Licence Schedule. Without the consent of the Assessee the software cannot be loaned, rented, sold, sublicensed 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 Infrasoft's 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 provisions of this Agreement. All copyrights and intellectual property rights in and to the Software, and copies made by Licensee, are owned by or duly licensed to Infrasoft. 86. The Licensing Agreement shows that the license is non-exclusive, nontransferable and the software has to be uses in accordance with the agreement. 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 backu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enable the licensee to operate the program. The rights transferred are specific to the nature of computer programs. Copying the program onto the computer's hard drive or random access memory or making an archival copy is an essential step in utilizing the program. Therefore, rights in relation to these acts of copying, where they do no more than enable the effective operation of the program by the user, should be disregarded in analyzing the character of the transaction for tax purposes. Payments in these types of transactions would be dealt with as business income in accordance with art. 7. 89. There is a clear distinction between royalty paid on transfer of copyright rights and consideration for transfer of copyrighted articles. Right to use a copyrighted article or product with the owner retaining his copyright, is not the same thing as transferring or assigning rights in relation to the copyright. The enjoyment of some or all the rights which the copyright owner has, is necessary to invoke the royalty definition. Viewed from this angle, a non exclusive and non-transferable licence enabling the use of a copyrighted product cannot be construed as an authority to enjoy an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... software and associated support information for backup purposes with a condition that such copyright shall include Infrasoft copyright and all copies of the software shall be exclusive properties of Infrasoft. Licensee was allowed to use the software only for its own business as specifically identified and was not permitted to loan/rent/sale/sub licence or transfer the copy of software to any third party without the consent of Infrasoft. 93. The licensee has been prohibited from copying, decompiling, deassembling, or reverse engineering the software without the written consent of Infrasoft. The licence agreement between the Assessee company and its customers stipulates that all copyrights and intellectual property rights in the software and copies made by the licensee were owned by Infrasoft and only Infrasoft has the power to grant licence rights for use of the software. The licence agreement stipulates that upon termination of the agreement for any reason, the licencee shall return the software including supporting information and licence authorization device to Infrasoft. 94. The incorporeal right to the software i.e. copyright remains with the owner and the same was not tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Kar.) which was decided in favour of Revenue wherein under similar circumstances such payments were held to be Royalty payment by Hon'ble Karnataka High Court both under DTAA entered into by India with Ireland as well under provisions of Section 9(1)(vi) of the 1961 Act , but since Hon'ble Delhi High Court has decided the same issue in favour of the taxpayer in the case of DIT v. Infrasoft Limited(supra), the Chennai-tribunal held in favour of assessee by holding that a view in favour of the assessee is to be taken in the absence of decision of jurisdictional High Court. The Chennai tribunal also took note of the decision of Hon'ble Madras High Court in the case of CIT v. Vinzas Solutions India Private Limited reported in (2017) 392 ITR 155(Madras) while deciding in favour of the assessee.However, now Hon'ble jurisdictional High Court in a very recent decision in the case of Zylog Systems Limited v. ITO in TCA No. 2184 and 2185 of 2006, vide judgment dated 23.04.2019 ( reported in (2019) 415 ITR 311(Mad.) has affirmed the view held by Hon'ble Karanataka High Court in the case of Synopsis International Old Limited(supra), while adjudicating appeal in favour of Revenue in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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;" The aforesaid decision of Hon'ble Madras High Court in the case of Zylog is a recent judgment pronounced on 23.04.2019 and we are bound by decision of Hon'ble jurisdictional High Court affirming ratio of decision of Hon'ble Karnataka High Court in the case of Synopis(supra) which was decided in favour of Revenue . For the sake of completeness, we are reproducing the judgment of Hon'ble Karnataka High Court in the case of CIT v. Synopsis International Old Limited(supra) wherein the Hon'ble Karanataka High Court decided the issue in favour of Revenue. In this case also decided by Hon'ble Karnataka High Court the taxpayer has granted non-exclusive , non transferable licenses for internal usage with right to make copies/back up, but the Karanataka High Court after going through the amended provisions of Section 9(1)(vi) and provisions of Article 12(3) of India-Ireland DTAA applicable for Royalty held in favour of Revenue by holding that payments towards grant of license/software are taxable as Royalty b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e has not paid tax under section 9 of the Act, on the ground that the said consideration is not 'Royalty' as defined under section 9 of the Act. In support of their contention that it is not a 'Royalty', which is liable to tax, they rely principally on two judgments. First in the case of Motorola Inc. (supra). The question which was referred to the Special Bench was as under:- "Whether, on the facts and in the circumstances, the revenues earned by the appellant from supply of equipment and software to Indian Telecom Operators were taxable in India"? After referring to the arguments of the learned counsel and referring to the tax provisions of the Income-tax Act, the Special Bench of the Tribunal was of the view that "the crux of the issue is "whether the payment is for copyright or for a copyrighted article". If it is for copyright, it should be classified as royalty both under the Income-tax Act and under the DTAA and it would be taxable in the hands of the assessee on that basis. If the payment is really for a copyrighted article, then it only represents the purchase price of the article and, therefore, cannot be considered as royalty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ards commercial exploitation of this intangible property right. Those rights attached to copyright are enumerated in s. 14 of the Copyright Act, 1957. If any of these rights are parted with in favour of another so that the other person can enjoy that right in the same manner in which the owner can, it can then be said that those specific rights concerning the use of copyright have been conferred on him. ** ** ** 17.1 Passing on a right to use and facilitating the use of a product for which the owner has a copyright is not the same thing as transferring or assigning rights in relation to the copyright. The enjoyment of some or all the rights which the copyright owner has, is necessary to trigger the royalty definition. Viewed from this angle, a non-exclusive and non-transferable licence enabling the use of a copyrighted product cannot be construed as an authority to enjoy any or all the enumerated rights ingrained in a copyright Where the purpose of the licence or the transaction is only to establish access to the copyrighted product for internal business purpose, it would not be legally correct to state that the copyright itself has been transferred to any extent. It does n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ees? 2. Whether, on the facts and circumstances of the case, the applicant will not be taxable under the Double Taxation Avoidance Agreement entered into between the Government of India and the Government of United States of America with respect to the subscription fees? 3. Whether, on the facts and circumstances of the case, if the applicant is not taxable in India for the subscription fees, its customers in India will be required to withhold taxes under section 195 of the Act on subscription fees paid to the applicant? 4. Assuming that the applicant has no other taxable income in India, whether, on the facts and circumstances of the case, the applicant will be absolved from filing a tax return in India, under the provisions of section 139 of the Act with respect to the subscription fees? 17. While considering the said question, at para 3 it was held as under : - "3. Broadly, the contention of the applicant is that no tax liable to be paid on the subscription fees received from the customers in India as it does not constitute 'royalty' or fees for technical services' either under the provisions of the Income-tax Act, 1961 or the DTAA (Treaty) between Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ensee to have access to the copyrighted database rather than granting any right in or over the copyright as such. The consideration paid is for a facility made available to the licensee. The license, it must be noted is a non-exclusive license. The term 'exclusive license' confers on the licensee and persons authorized by him, to the exclusive of all other persons, including the owner of the copyright, any right comprised in the copyright in a work'. The expression 'granting of license' placed within brackets takes colour from the preceding expression 'transfer of all or any rights'. It is not used in the wider sense of granting a mere permission to do a certain thing nor does the grant of licence denude the owner of copyrights all or any or any or his rights. A license granting some rights and entitlements attached to the copyright so as to enable the licensee to commercially exploit the limited rights conferred on him is what is contemplated by the expression 'granting of license' in clause (v) of Explanation 2." 9.1 ..... The expression 'exclusive right' in the opening part of section 14 is very important and it qualifies all th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utside India; .................................. [Provided further that nothing contained in this clause shall apply in relation to so much of the income by way of royalty as consists of lump sum payment made by a person, who is a resident, for the transfer of all or any rights (including the granting of a licence) in respect of computer software supplied by a non-resident manufacturer along with a computer or computer-based equipment under any scheme approved under the Policy on Computer Software Export, Software Development and Training, 1986 of the Government of India] Explanation 2 - For the purposes of this clause, "royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for- (v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution of exhibition of cinematogra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ords, one of the tests to be applied is whether the consideration : paid would fall within the definition of capital gains. If the consideration paid do not fall within the definition of capital gains and do not fall within the second proviso, then the said consideration would be 'Royalty' for the purpose of this clause, as defined in Explanation 2. 22. Similarly, clause (v) deals with copyright, literary, artistic or scientific work and the consideration for the transaction of all or any rights (including granting of licence) in respect of any copyright, literary, artistic or scientific work as 'Royalty'. Similarly, what is excluded from the definition of Royalty' are consideration for the sale, distribution or exhibition of cinematographic films. Whereas, it expressly states the rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv). (iva) and (v) also constitutes 'Royalty'. For the purpose of this provision, any rights includes granting of a licence, it should be in respect of any copyright. It is not a right in copyright. Therefore, the words "in respect of assumes importance for the proper underst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quot; includes "'charges in respect of stations, sidings, wharves, depots, warehouses, cranes and other similar matters, and of any service rendered thereat". Thus two classes of charges are included in the definition. The first is "charges in respect of stations, sidings, wharves, depots, warehouses, cranes and other similar matters." The second is "charges in respect of any services rendered thereat". Whether or not therefore any services have been rendered "threat" that is, at the stations sidings, wharves, depots, warehouses, cranes and other similar matters the other class of terminals in respect of these stations, sidings, wharves, depots, warehouses, cranes and similar other matters remain. A further question thus arises as regards the interpretation of the phrase "in respect of". Does it mean charges for the mere provision and maintenance of stations, sidings, depots, wharves, warehouses, cranes and other similar matters are the terminals or does it contemplate charges only for use of sidings, stations, wharves depots, warehouses, cranes and other similar matters? The words "in respect of" are wide enough to pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficulty of distinguishing in a particular case as to which of these things had been used or whether any of them had been used at all. Innumerable people corry goods over the Railways and many of them for the purpose of the carriage make use of the stations, sidings, wharves, depots, warehouses, cranes and other similar matters, while many do not. Though at first sight it might seem unreasonable that those who had not used would have to pay the same charge as those who had made use of these, it is obvious " that the interminable disputes that would arise between the Railway Administration and the Railway users, if the fact of user of stations, sidings and other things mentioned had to determine the amount payable, would be unhelpful not only to the Railway Administration but also to the using public. The sensible, way was therefore to make a charge leviable for the mere provision of these things irrespective of whether any use was made thereof. That was the reason way such wide words "in respect of was used. We are therefore of opinion that the words "in respect of" used in section 3(14) mean for the provision of and not "for the user of." 24. The Hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... work done in such employment." 25. The High Court Patna in the case of CIT v. Chunnilal Rameshwar Lal AIR 1968 Pat. 364 held as under : "It is well known that the expression "in respect of is of wider connotation than the word "in" or "on". Hence, a class of municipal tax, though not a tax on the premises or buildings, may nevertheless be a tax in respect of the premises or building used for the business. Hence, the payment of the impugned amount of ₹ 125 as professional tax under section 150A read with (section 82(1)(ff) of the Municipal Act is in substance a municipal tax in respect of the business premises, and is covered by clause (ix) of sub-section (2) of section 10 of the Income-tax Act. The assessee is entitled to get allowance for the same under section 10(1) of the Indian Income-tax Act, 1922. The Appellate Tribunal was right in giving allowance to the assessee for a sum of ₹ 125 paid by him under the Bihar and Orissa Municipal Act, 1922." 26. The Apex Court in the case of Union of India v. Vijay Chand Jain AIR 1977 SC 1302 held as under:- "4. The contravention alleged is of section 4(1) which prohibits, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eans attributable to" If it is given a wider meaning "relating to or with reference to", it has been used in the sense of being 'connected with'. Whether it is a fiscal legislation or any legislation for that matter, the golden rule of interpretation equally applies to all of them. i.e., the words in a statute should be given its literal meaning. In respect of fiscal legislation those words should be strictly construed. If those words are capable of two meanings that meaning which is beneficial to an assessee should be given. However, when the meaning of the words used are clear, unambiguous, merely because it is a fiscal legislation, the meaning cannot be narrowed down and it cannot be interpreted so as to give benefit to the assessee only. Then it would be re-writing the section, under the guise of interpreting a fiscal legislation, which is totally impermissible in law. When the legislature has advisedly used the words 'in respect of', the intention is clear and manifest. The said phrase being capable of a broader meaning, the same is used in the section to bring within the tax net all the incomes from the transfer of all or any of the rights in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight,' the emphasis is on the word 'exclusive'." The expression 'copyright' is not defined in the Income-tax Act. It must be understood in accordance with the law governing copyright in India viz., Copyright Act, 1957. In State of Madras v. Gannon Dunkerley & Co. AIR 1958 SC 560 the Supreme Court held that the expression 'sale of goods' in Entry 48 of List II (VII Schedule) of the Govt. of India Act is a nomen juris and shall be construed in its legal sense. The legal sense can only be what it has in the law relating to sale of goods and therefore the said expression shall bear the same meaning as it has in Indian Sale of Goods Act. When the term is not defined in the taxation law (I.T. Act), the definition' in the law governing the subject-matter can be adopted, if there is no basic difference between the statutory definition and the ordinary legal concept. 29. The copyright Act, also do not define the word copyright in the definition section 2. However, Section 14, gives the meaning of "copyright". This section was substituted for the previous one by the Copyright (Amendment) Act of 1994. Section 14 insofar as it is relevant is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch it would not ordinarily be applicable. Even when the definition clause uses words of very wide connotation a line may have to be drawn so as to exclude categories obviously not intended to be included. 31. When a word has been defined in the interpretation clause, prima facie that definition governs whenever that word is used in the body of the statute. If Parliament in a statutory enactment defines its terms whether by enlarging or by restricting the ordinary meaning of a word or expression, it must intended that, in the absence of a clear indication to the contrary, those terms as defined shall govern what is proposed, authorised or done under or by reference to that enactment. But, where the context makes the definition given in the interpretation clause inapplicable, a defined word when used in the body of the statute may have to be given a meaning different from that contained in the interpretation clause. All definitions given in an interpretation clause are therefore normally enacted subject to the qualification "unless there is anything repugnant in the subject or context, or unless the context otherwise requires". Even in the absence of an express qualificat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ord as used in the Act, when there is nothing in the context or the subject matter to the contrary to be applied to some things to which it would not ordinarily be applicable. Therefore, while understanding the meaning of the word 'royalty' used in the Income-tax Act as defined in Explanation (2) to section 9(1) of the Income-tax Act the meaning assigned to the word 'copyright' cannot be literally superimposed in that provision. It has to be understood in the context in which it is used as well as it has to be understood in the ordinary, popular and natural sense in which it is understood. Moreover the Copyright Act is concerned with protection of an intellectual property right which is vested in the owner of the copyright and prevention of its infringement. That is why while defining the meaning of the word 'copyright' it is defined as meaning 'exclusive right' to reproduce the work in any material form including the storing of it in any medium by electronic means or to issue copies of the work to the public pot being copies already in circulation or to sell or give on commercial rental or other than for sale or for commercial rental any copy of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not necessary that there should be transfer of exclusive right in copyright, it is sufficient if there is transfer of any interest, in the right, and also a licence and consideration paid for grant of a licence constitutes royalty for the purpose of the said clause in the Income-tax Act. It is in this background, the discussion whether the payment is for a copyright or for a copyright article would be totally irrelevant. He crux of the issue is whether any consideration is paid for any right, or for granting of licence in respect of a copyright. The word 'in respect of gives a broader meaning. It has been used in the sense of being connected with. When the legislature has advisedly used the words 'in respect of'. The intention is clear and manifest. The said phrase being capable of a broader meaning, the same is used in the section to bring within the tax net all the incomes from the transfer of all or any of the rights in respect of the copyright. 33. In the IT Act, computer software is defined in Expln. 3 to s. 9(l)(vi) to mean any computer programme recorded on any disk, tape, perforated media or other information storage devices and includes any such programme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es storing the work in any medium by electronic means. Copying includes the making of copies which are transient or some other use of the work. Since in virtually every case the operation of a program in a computer involves the copying of the program within the computer, this will constitute reproduction. Whenever an object program is run on a computer, it is thereby copied; and whenever a source program is compiled in a computer, it is thereby copied or adapted. A software licence can, therefore, be legitimately considered to be a copyright licence. A major difficulty arising out of the licence clause for users is that it will almost invariably restrict the licensee from transferring the software to any third party. This may result in difficulties if, for example, the licensee wishes to transfer his computer operations to a facilities management company the transfer will require the consent of the licensor and will provide an opportunity for the charging of an additional fee. Licences have up to how normally prohibited any copying of the program, except as necessary for use. This had the consequence that the user could not make backup copies of the program for security purposes, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion between the Government of the Republic of India and the Government of Ireland and therefore, the said transaction for the said years are governed by the provisions of the Income-tax Act. However, DTAA was entered into on 11.1.2002 within two countries desiring to conclude a convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains and with a view to promoting economic co-operation between the two countries. This convention shall apply to persons who are residents of one or both of the contracting states. Article 2 dealt with taxes covered and one such tax has covered in India is the Income-tax Act. Article 3 is the general definitions. Article 4 states about the residents. What is a permanent establishment is defined in Article 5 Article 6 deals with income from immovable property, Article, deals with Business profits, Article 8 deals with shipping and air transport, Article 9 deals with associated enterprises. Dividends are covered under Article 10, whereas interest is covered under Article 11 and Article 12 deals with royalties and fees for technical services. The relevant portion reads as under: ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al services, whether he is a resident of a Contracting State or not has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for technical services was incurred, and such royalties or fees for technical services shall be deemed to arise in the State in which the permanent establishment or fixed base is situated. (6) Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties or fees for technical services, having regard to the use, right or information for which they are paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this article shall apply only to the last mentioned amount In such case the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention. 38. It was contended that once India is a party to this agreement, the definition of the royalties contained in Article 12 would have the effect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39; is defined in section 2, clause (j). It confers on the licensee and persons authorised by him, to the exclusion of all, other persons, including the owner of the copyright, any right comprised in the copyright in a work. A non-exclusive licence is the grant of authority to do a particular thing with no right of exclusion whatsoever. It never conveys, by itself, an interest in property. It merely enables a person to do that which he could not otherwise do, except unlawfully. 42. The owner of the copyright in any existing work may grant any interest in the right by licence in writing signed by him or by his duly authorised agent. Copyright is different from the material object which is the subject of the copyright. So, a transfer of the material object does not necessarily involve a transfer of the copyright. The copyright in a book, picture or other work is disconnected and distinct from the general property in the material book, picture or other object. Hence, the sale or other transfer of the material object does not, of itself, constitute a transfer of the copyright therein. An assignment carries with it the whole interest in the thing assigned, including the right of reass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement Between Synopsys International Limited Unit 1, Blanchardstown Corporate Park Blanchardstown, Dublin 15 Ireland And Athena, Semiconductors Private Limited No. 1081, 12th Main Indiranagar Bangalore - 560 038, India 1.3 "confidential information" means (i) the Licensed Product, in object and source code form, and any related technology, idea, algorithm or information contained therein, including without limitation Design Techniques, and any trade secrets related to any of the foregoing. (ii) Synopsys's proprietary knowledge database product SolvNet; (iii) Designs; (iv) either party's product plans, costs, prices and names; non-published financial information; marketing plans; business opportunities; personnel; research; development or know-how; (v) any information designated by the disclosing party as confidential in writing, or, if disclosed orally, designated as confidential at the time of disclosure and deduced to writing and designated as confidential in writing within thirty (30 days; and (vi) the terms and conditions of this Agreement; provided, however the "Confidential Information" will not include information t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ftware program(s), exclusive of Design Ware, which are licensed by License in object code form and identified in the applicable License Key, including any Bug Fix Release and Minor Enhancement Releases provided by Synopsys pursuant to the terms of the Support Agreement and this Agreement and any Software Upgrade which may be licensed by Synopsys to Licensee. 1.18 "Minor Enhancement Release" means an embodiment of the Licensed Product that delivers minor improvement, incremental features or enhancements of existing features, and/or functionality to the Licensed Product. 1.19 "Software Upgrade" means an embodiment of the Licensed Product that delivers substantial performance improvements, architectural changes or new features and/or functionality to the "Licensed Product for which Synopsys may charge a separate license fee. 1.20 "Use Area" means the Key Server(s), Client(s) and End-User(s) all located within the same five (5) mile radius. Grant of rights 2.1 Software License Synopsys hereby giants Licensee a non-exclusive, non-transferable license, without right of sub-license, of use the Licensed Software and Design Techniques only: (i) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the purpose of deciding whether to purchase a license for such Licensed Product from Synopsys; (ii) the tern of the Evaluation License will be as specified in the applicable License key; and (iii) Section 9 is amended such that the Licensed Products is provided "AS IS" 2.7 Proprietary Notices. Licensee must reproduce and include the copyright notice and any other notices that appear on the original copy of the Licensed Product and Documentation on any copies may thereof by Licensee in any media. 2.8 License Restrictions. Licensee acknowledges that the scope of the licenses granted hereunder do not permit Licensee {and Licensee shall not allow any third party to: (i) save as expressly permitted by and in accordance with the provisions of Regulation 6(2), 6(3) and 7 of the EC (Legal Protection of Computer Programs) Regulations 1993, copy, adapt, decompile, disassemble, reverse engineer or attempt to reconstruct, identify or discover any source code, underlying ideas, underlying user interface techniques or algorithms of the Licensed product by any means whatever, or disclose any of the foregoing; (ii) distribute, lease, lend, use for timesharing, service burea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discretion. Licensee's receipt and use of all Licensed Product and Documentation shall be governed by: (i) the terms and conditions of this Agreements; and (ii) any Agreement Supplement(s) which are executed by both parties. Nothing contained in any purchase order, purchase order acknowledgment, or invoice shall in any way modify such terms or add any additional terms or conditions; provided, however, that such standard variable terms as price, quantity, delivery data, shipping instructions and the like, as well as tax exempt status, if applicable shall be specified on each purchase order or acknowledgment Licensee's purchase order will include, the licensee fee and payment terms as set forth in the applicable Synopsys quotation. Licensee agrees to pay Synopsys the license fees, plus applicable taxes as set forth below, in accordance with the payment terms specified in the applicable Synopsys quotation and/or invoice. 5.3 Delivery. Upon the acceptance of an order by Synopsys and the satisfaction of all Synopsys prerequisites prior to delivery, Synopsys shall deliver to Licensee, at Synopsys expense, the Licensed Product, License Key and/or Documentation, as appropriat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ees, at its own expense, to defend or, at its option, to settle, any claim or action brought against Licensee to the extent it is based on a claim that the Licensed Software as sued within the scope of this Agreement infringes or violates any United States or European patent, copyright, trademark, trade secret or other proprietary light of a third party, and Synopsys will indemnify and hold Licensee harmless from and against any damages, costs and fees reasonably incurred (including reasonable attorneys' fees) that are attributable to such claim or action and which are assessed against Licensee in a final judgment. Licensee agrees that Synopsys shall be release from the foregoing obligation unless licensee provides Synopsys with: (i) prompt written notification of the claim or action; (ii) sole control and authority over the defense or settlement thereof; and (iii) all available information, assistance and authority to settle and/or defend any such claim or action. 13.3 Assignment. This Agreement may not be assigned by Licensee without the prior written consent of Synopsys. 13.6 Independent Contractors. The relationship of Synopsys and licensee established by this Agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the user of the confidential information embedded in the software/computer programme. Therefore, it falls within the mischief of Explanation (2) of clause (vi) of sub-section (1) of section 9 of the Act and there is a liability to pay the tax. 46. If there was any doubt regarding the taxability of this income the parliament by Finance Act, 2010 has substituted the explanation to section 9 which gives a clear intention of the legislature insofar as the liability of tax under this provision is concerned. A perusal of the said explanation makes it clear that as there was a doubt earlier, they want to remove the doubts by introducing this explanation. By the explanation they have declared that for the purpose of section 9 which deals with income deemed to accrue or arise in India, under clauses (v), (vi) and (vii) of subsection (1), such income shall be included in the total income of the non-resident, whether or not (i) the non-resident has a residence or place of business or business connection in India, (ii) the non-resident has rendered services in India. Therefore, the object is to levy tax on the income of a non-resident, if it has accrued or arisen in India and one such inco ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
