9911796707
TMI Blog2019 (12) TMI 1207X X X X Extracts X X X X X X X X Extracts X X X X ..... Ld. CIT(A) is contrary to the law and facts of the case. 2. The Ld. CIT(A) erred in deleting the disallowance of deduction u/s 40(a)(i) of the Act of Rs. 5.59 crores by relying on the decision of the Hon'ble Tribunal vide ITA No.1862 to 1868/Mds/2017 dated 23-10-2017 for AYs 2009-10 to 2015-16 in the assessee's own case, decided in favour of the assessee. 2.1. The Ld. CIT(A) ought to have appreciated that payment towards software was for the purpose of obtaining licence and would therefore constitute royalty. 3. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the Ld. CIT(A) be set aside and that of the Assessing Officer be restored." 3. The brief facts of the case are that the assessee is engaged in business of engineering and procurement assistance services, design and execution of large scale oil & gas onshore and offshore projects, cryogenic tanks, etc. The assessee had purchased certain software licenses from M/s.Saipem SPA, Italy, which were used by assessee for providing services to customers for various support functions in accounting, reporting, etc. . The AO made disallowance of aforesaid expenses claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 195 of the Act does not rise." In this connection, it is felt that the assessee's stand is inconsistent as when it comes to the purchase of software from its parent company, the assessee claims that no TDS is warranted and on the other hand when it is purchased from overseas non AE vendors the assessee has deducted tax at source. 3.2 It is also a point to be noted in this case that vide order u/s.201(1)(1A) of the Act, passed by the DCIT (Intl. Taxation)-1(1), Chennai, it is held that the payments for software and licensing fees are taxable as royalty as per section 9(1)(vi) of the Act and as per Article 12(3) of DTAA, Italy. In this regard, a show cause notice dated 02.11.2017 was given to the assesses which is reproduced 1. It is seen from the financial statements for the AY 2014-15, you have claimed a Rs. 18,63,35,391/- as software supporting charges. But the software expenses of Rs. 20,45,26,180/- claimed by the assessee is treated as Royalty vide order u/s.201(1)(1A) of the income tax Act 1961 dated 31.12.2016. 2. Hence you are asked to show cause why the software supporting charges of Rs. 18,63,35,391/- should not be treated as Royalty payment. 3. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not permitted or allowed to use the facility which exclusively belongs to the Canadian company. Hon'ble High Court held that merely because the agreement provides that the term 'cost' does not include any mark-up and is limited to the actual cost, makes no difference in the eyes of law. Since the ultimate transaction is obtaining license to get the right to use the software though it is styled as 'cost sharing agreement', it is payment towards royalty both as per the provisions of I.T. Act as well as DTAA. Similar view was held in AMD Research & Development Centre India (P) Ltd. Vs DCIT (ITAT, Hyd) 115 DTR 273 and ITO Vs F.L Smidth Ltd. (ITAT, Chennai) 51 taxmann.com 90. Considering the above judicial pronouncements, claim of the assessee is rejected on this ground also. 3.5 Therefore, for the elaborate reasons mentioned above it is held that disallowance u/s.40(a)(i) is called for on the payment made to M/s.Saipem, Italy under the head 'software support charges since TDS was not made u/s.195. Accordingly, the amount of 30% of Rs. 18,63,35,391/- is hereby disallowed. (Disallowance: Rs. 5,59,00,617/-)" 4. Aggrieved by an assessment order dated 17.11.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opinion, assesse was justified in harbouring a view that payments made by it did not fall within the meaning of the term "Royalty" as used in the DTAA. this being so, assesse could not be saddled with a liability for failure to deduct tax at source. Orders of the lower authorities for all the years are set aside. In the result, the appeals of the assesse are allowed." 4.3.3 Respectfully following the decision of Hon'ble ITAT, Chennai in the appellant's case in A.Y. 2014-15, the AO's disallowance is deleted and the appellant's ground is allowed. Thus, as could be seen that while allowing appeal of the assessee, the learned CIT(A) followed the decision of Chennai-tribunal in assessee's own case for impugned ay 2014-15,dated 23.10.2017 , wherein in context of orders passed by AO u/s 201(1) / (1A) of the 1961 Act, the tribunal had held that no income-tax was required to be deducted at source u/s 195 of the 1961 Act by assessee while making these payments to Saipem SPA, Italy as these payments do not constitute Royalty under Article 13(3) of Indo-Italy DTAA and provisions of DTAA being more beneficial vis-à-vis provisions of Section 9(1)(vi) of the 1961 Act shal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 017) 392 ITR 155 (Madras), wherein, it has been held that when payments were made for purchase of copyrighted article, there is no royalty payment and it is only when the copyright itself is acquired, then payment is to be held to be royalty . Thus, it is submitted that assessee has only purchased software, which is a copyrighted article there is no right to reproduce or copy the said software for commercial purposes although the said software can be reproduced and copies made but to be used only for internal usage/purposes. Thus, it is claimed that the same cannot be treated as Royalty payments. The assessee referred to Article 13(3) of the India-Italy DTAA and submitted that beneficial provision will be applicable and as per Article 13(3) of DTAA , the said payment will not constitute to be Royalty payment and hence no liability can be fastened on assessee u/s 195 read with Section 40(a)(i) and Section 9(1)(vi) of the 1961 Act. The Ld.DR, on the other hand, relied upon assessment order passed by the AO. 6. We have considered rival contentions and perused the material on record including cited case laws. We have observed that assessee is engaged in the business of engineering and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Hon'ble Karnataka High Court in the case of Synopsis International Old Ltd. (supra). Ld. Assessing Officer, apart from the case of Synopsis International Old Ltd (supra) has also relied on the judgment of the very same court in the case of CGI Information Systems & Management Consultants (P) Ltd (supra). Ld. Assessing Officer also considered a Co-ordinate Bench decision in the case of F.L. Smidth Ltd (supra). There can be no quarrel that Hon'ble Karnataka High Court in the case of Synopsis International Old Ltd (supra) after analyzing the DTAA held that even grant of a licence for non-exclusive, non-transferable use, without right of sub licencing would fall within the meaning of Royalty. As per this judgment, in order to constitute 'Royalty' transfer of an exclusive right in the copyright was not necessary. Transfer of the right to use confidential information in the form of computer programme itself constituted Royalty. However, as against this, Hon'ble Delhi High Court in the case of Infrasoft Ltd (supra) has held that receipts for licencing a software could not be considered as Royalty. Hon'ble Delhi High Court was seized of an issue, wherein customized software used for d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ware, Documentation, or Third Party Software documentation shall be made aware of all appropriate provisions of this Agreement and software license contained herein. Saipem agrees to commit its best efforts to prevent any violation by Saipem's, the Affiliates' personnel of either the licensed rights granted herein or PP&M's applicable copyrights or trade secrets and to ensure compliance with the provisions of the this Agreement. Saipem further acknowledges and agrees that Saipem takes liability for any such violation by Saipem, the Affiliates' personnel as if such violation resulted directly from the action, negligence or misconduct of Saipem. This license cannot be sublicensed, assigned, or transferred. It is agreed between the parties that Saipem S.p.A ICT Department will be the only Saipem Division entitled to cut software keys as provided for by this agreement and to send purchase orders to PP&M. Upon termination of this Agreement, any license granted hereunder shall terminate and Saipem and the Affiliates shall destroy all copies of the Licensed Software and Third Party Software provided under this Agreement, with the exception that Saipem and the Affiliate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l with them independently does not amount to transfer of rights in relation to copyright. 14. Now the question is whether the payments effected by the assessee for the right to use the copyrighted software for a limited term could be considered as income accruing or arising in India to its foreign principal, considering Explanations 4 to 6 added to Section 9(1) (vi) of the Act with retrospective effect from 01.06.1976. No doubt these explanations do widen the ambit of the term Royalty to include therein transfer of all right or any right for use or right to use a computer software including granting of a licence. However, admittedly, there has been no amendment whatsoever in India's DTAA with Italy in so far as definition of the term Royalty is concerned. Co-ordinate Bench of this Tribunal in the case of Dasault Systemes Simulia Corporation (supra) had considered a similar issue where software products were acquired by the assessee from a party abroad for distribution in India. Co-ordinate Bench held at para 6 of its order dated 30.11.2016 as under:- ''6. We have considered the rival contentions and perused the orders of the authorities below. It is not disputed by the Revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (supra), the coordinate bench was of the view that the provisions of the applicable tax treaty and the Income Tax Act are "identical" - a position which does not prevail in the situation before us. We, therefore, see no reasons to be guided by Gracemac decision (supra). The next issue that we need to consider is whether a payment for software can be said to be a payment for "process" as a computer program is a nothing but a set of instruction lying in the passive state and this execution of instructions is' a process' or' a series of processes'. No doubt, in terms of the provisions of Section 2 (ffc) of the Indian Copyright Act, 1957, a computer program, i.e. software, has been defined as "a set of instructions expressed in words, codes, schemes or in any other form, including a machine readable medium, capable of causing a computer to perform a particular task or achieve a particular result", but the moot question is as to what is that a customer pays for when he buys, or to put it in technical terms 'obtains licence to use the software for the process of executing the instructions in the software, or for the results achieved on account of use of the software. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as it is well settled, as noted by Maxwell in Interpretation of Statutes and while elaborating on the principle of noscitur a sociis, that when two or more words which are susceptible to analogous meaning are used together they are deemed to be used in their cognate sense. They take, as it were, their colours from each other, the meaning of more general being restricted to a sense analogous to that of less general. This principle of interpretation of statutes, in our considered view, holds equally good for interpretation of a treaty provision. Explaining this principle in more general terms, a very distinguished former colleague of ours Hon'ble Shri M.K. Chaturvedi, had, in an article 'Interpretation of Taxing Statutes' (AIFTP Journal: Vol. 4 No.7, July, 2002, at p. 7), put it in his inimitable words as follows: "Law is not a brooding omnipotence in the sky. It is a pragmatic tool of the social order. The tenets of law being enacted on the basis of pragmatism. Similarly, the rules relating to interpretation are also based on commonsense approach. Suppose a man tells his wife to go out and buy bread, milk or anything else-she needs, he will not normally be understood ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le in Article 12(3). It is not disputed that the said definition had not undergone any change despite the amendment to Sec. 9(1)(vi) brought in through Finance Act, 2012. It is trite law that an assessee can fall back on the DTA when it is more advantageous to it. Hon'ble Delhi High Court in the case of Infrasoft Ltd (supra) had clearly held that subsequent amendment to Sec. 9(1)(vi) of the Act in so far as it relates to definition of Royalty was not relevant when an assessee relied on DTAA provisions which were more beneficial to it. In the circumstances, following decisions of Co-ordinate Bench of earlier years, we are of the opinion that the receipts of the assessee from DSSPL could not have been considered as Royalty in the hands of the assessee liable for taxation in India. Addition made stands deleted. Thus, assessee could fall back on the definition of Royalty as given in DTAA if it was more advantageous to it. 15. The Hon'ble Delhi High Court in the case of Infrasoft Ltd (supra) had considered an issue whether mere transfer of right to use copyrighted material like software programme, gave rise to any royalty income in terms of article 12(4) of the India - USA DTAA. Their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... royalties of fees for technical services. 3. 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 film or films or tapes used 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, or for information concerning industrial, commercial or scientific experience''. Term 'Royalty'' has been defined in the same language in both DTAAs. Therefore in our opinion, the judgment of Hon'ble Delhi High Court in the case of Infrasoft Ltd (supra) will squarely apply on facts here also. There is no case for the Revenue that assessee's principal had any permanent establishment in India. What was held by their lordships in paras 85 to 96 is reproduced hereunder:- ''85. 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re 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. 87. In order to qualify as royalty payment, it is necessary to establish that there is transfer of all or any rights (including the granting of any licence) in respect of copyright of a literary, artistic or scientific work. In order to treat the consideration paid by the Licensee as royalty, it is to be established that the licensee, by making such payment, obtains all or any of the copyright rights of such literary work. 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, such as a manuscript. Just because one has the copyrighted article, it does not follow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r copyright or the conferment of the right of use of copyright implies that the transferee/licensee should acquire rights either in entirety or partially co-extensive with the owner/ transferor who divests himself of the rights he possesses pro tanto. 90. The license granted to the licensee permitting him to download the computer programme and storing it in the computer for his own use is only incidental to the facility extended to the licensee to make use of the copyrighted product for his internal business purpose. The said process is necessary to make the programme functional and to have access to it and is qualitatively different from the right contemplated by the said para because it is only integral to the use of copyrighted product. Apart from such incidental facility, the licensee has no right to deal with the product just as the owner would be in a position to do. 91. There is no transfer of any right in respect of copyright by the Assessee and it is a case of mere transfer of a copyrighted article. The payment is for a copyrighted article and represents the purchase price of an article and cannot be considered as royalty either under the IT Act or under the DTAA. 92 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of the Act and also whether the amount received for use of software would be royalty in terms thereof f or the reason that the Assessee is covered by the DTAA, the provisions of which are more beneficial. 96. The amount received by the Assessee under the licence agreement for allowing the use of the software is not royalty under the DTAA''. Provisions of DTAA being more beneficial to the assessee. Assessee was in our opinion justified in relying on DTAA and taking a view that payments effects by it did not warrant deduction of tax at source under section 195 of the Act. In our opinion assessee was justified in harbouring a view that payments made by it did not fall within the meaning of the term ''Royalty'' as used in the DTAA. This being so, assessee could not be saddled with a liability for failure to deduct tax at source. Orders of the lower authorities for all the years are set aside." Thus, as could be seen from aforesaid order dated 23.10.2017 passed by Chennai tribunal in assessee's own case that assessee has made payments to Saipem SPA, Italy towards software licenses/purchase of software , a personal , non exclusive , non transferable license with a right to make un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same are liable to be dismissed and accordingly, the same are dismissed. The questions framed, as quoted above, are http://www.judis.nic.in Judgt. dt. 23.4.19 in T.C.2184/2006 M/s.Zylog Systems Limited v. ITO answered against the Assessee and in favour of the Revenue. No order as to costs." It is pertinent to mention that definition of Royalty under Article 13(3) of India-Italy DTAA is parametria with definition of Royalty in Article 12(3) of India-Ireland DTAA except exclusion of applicability to aircraft in India- Ireland DTAA, which is reproduced hereunder: India-Italy DTAA -Article 13(3) reads as under: "13(3) 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 film or films or tapes used 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, or for information concerning industrial, commercial or scientific experience." India-Ireland DTAA-Article 12(3) read as un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... censee to the intellectual property including the copyrights. The assessee is a subsidiary of the aforesaid company. Synopsys Corporation has granted a non exclusive license in the territory which is geographical, as described in the said agreement to use and commercially exploit the intellectual property, manufacture, market, distribute, sub-license and maintain the products and provide ail services to customers during the term of 'TLA' under an agreement dated 31/10/1999, for a period of one year to be continued thereafter, after mutual agreement, as per the discretion of the Synopsys Inc. In pursuance of the rights acquired under the said agreement, the assessee has entered into 'EULA" with various Indian customers. One such agreement is dated 30/5/2002 entered into with M/s. Athena Semi-conductors Private Limited, Bangalore. 11. In pursuance of the aforesaid agreement, the assessee has granted the Indian customers a non-exclusive, non-transferable license, without right of sub-license, to use the licensed software and design techniques only in the quantity authorised by the licensee, in accordance with the documentation and in the use area with a right to licensee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be considered as 'Royalty' either under the Act or DTAA. 12. Similar question arose for consideration before the Authority for Advance Rulings in case of Dassault Systems K.K., (supra) in Para.8 of the said order, the question for consideration is formulated in the following manner:- "The first and foremost question is whether the payments received by the applicant from the VARs represent consideration for the use of, or the right to use, any copyright of literary/scientific work. Going by the language of the Act, the question is whether there is transfer of all or any rights in respect of the copyright of literary or scientific work." 13. After referring to the facts of that particular case and the law on the point, it is observed as under at para 17 and 17.1:- "17. Can it be said that the one time payment based on standard price minus discount paid by VAR to the applicant is in the nature of royalty? It depends on the question whether any rights that the applicant granted to the licensee/end-user include the right of using the copyright Alternatively, going by the language of IT Act, the question is whether any right in respect of copyright has been transferred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of the owner/grantor and he enjoys the copyright to the extent of its grant to the exclusion of others. As the right attached to copyright is conveyed to such licencee, he has the authority to commercially deal with it. In case of infringement of copyright, he can maintain a suit to prevent it. Different considerations will arise if the grant is non-exclusive that too confined to the user purely for in-house or internal purpose." 14. Ultimately, it was ruled that payment was received by the VARs ("third party resellers") on account of supplies of software products to the end-customers (from whom the licence fee is collected and appropriated by VAR) does not result in income in the nature of royalty to the applicants. 15. It was contended relying on these two judgments that under the 'EULA' no right in the copyright as such is transferred. As such, the consideration paid in the aforesaid agreement is not a 'Royalty' and no tax is leviable under section 9 of the Act. 16. Reliance is also placed on the judgment of the Authority for Advance Rulings (Income Tax), New Delhi, in the case of Factset Research Systems Inc., In re [2009] 182 Taxman 268 (AAR - New Delh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmation/data in a focused manner so as facilitate easy and convenient reference to the user. For this purpose, the applicant is called upon to do collation, analysis, indexing and noting wherever necessary. These value additions are the product of the applicant's efforts and skills and they are outside the public domain. In that sense, the database is the intellectual property of the applicant and copyright attaches to it; but, the question is whether in making this centralized data available to the customer-licensee for a consideration, can it be said that any rights which the applicant has as a holder of copyright in database are being parted in favour of the customer? The answer, in our view, must be in the negative. No proprietary right and no exclusive right which the applicant has, has been made over to the customer. The copyright or the proprietary rights over the 'literary work' remains intact with the applicant notwithstanding the fact that the right to view and make use of the data for internal purposes of the customer is conferred. Several restrictions are placed on the licensee so as to ensure that licensee cannot venture on a business of his own by distribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsidered as the charges for the right to reproduce the imported goods." That was also a case in which the property in the software remained with the supplier-a foreign company and the licence fee was payable by SBI for using the software in a limited way at its own centers for a limited period. 19. From the aforesaid judgments it is clear, a distinction has been made between a transfer of a right in a copyright and transfer of a right in a copyrighted article. In view of the language employed in sub-clause (v) to Explanation 2, the question is not whether what is transferred is a right in a copyright or a copyrighted article. The real question is whether the consideration paid to the owner or a licensor of a copyright, for permission to use the software/computer programme is a consideration for transfer of any right in respect of a copyright and falls within the mischief of the definition of 'Royalty'. This is clear from the wordings in section 9 of the Act, which reads as under :- "(1) The following incomes shall be deemed to accrue or arise in India:- .................................. (vi) income by way of royalty payable by- (b) a person who is a resident, exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to tax. The second proviso to Clause (vi) makes it clear that any lump sum payment made by a resident for the transfer of all or any lights including granting of a licence in respect of computer software supplied by a non-resident manufacturer along with a computer of computer based equipment under any scheme approved under the Policy on Computer Software Export, Software Developments and Training, 1986 of the Govt., of India, would not constitute 'Royalty'. For the purpose of the said section, the computer software supplied by a non-resident to a resident falls within the definition of 'Royalty'. If the case falls under the proviso it is out of the definition of the 'Royalty'. Therefore, it is clear that the consideration paid for supply of a software by a non-resident to a resident is a software (sic. royalty) unless it falls within the section proviso. 21. Therefore, any computer software sold on the shelf falls under the; second proviso and the consideration paid thereon falls within the mischief of 'Royalty' as defined in the said proviso. It is in this background, we have to look into clause (v) of Explanation 2. Under Explanation 2, for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intention in that every word of the statute should have effect. The intention of the legislature is primarily to be gathered from the words used. The words of a statute are first understood in their natural, ordinary or popular sense and phrases and sentences are construed according to their grammatical meaning, unless that leads to some absurdity or unless is some thing in the context, or in the object of the statute to suggest the contrary. The right way is to take the words as the legislature has given them, and to take the meaning which the words given naturally imply, unless where the construction of those words is. either by the preamble or by the context of the words in question controlled or altered. In this context it is necessary to know the meaning of the words "in respect of used in the aforesaid provision. In fact this phrase has been the subject matter of interpretation by the Apex Court as well as the High Court. 23. The Apex Court in the case of Shahdara (Delhi) Saharanpur Light Railway Co. Ltd. v. Upper Doab Sugar Mills Ltd. AIR 1960 SC 695, held as under:- "We do not propose, however, to rest our decision on this narrow question of haulage from the station ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that whereas in some cases accommodation provided by stations will he used, in, some cases sidings will be used, in other wharves, in others warehouses and in other cases cranes, and in certain cases several of these may be used, in most cases there will be no use of all of these. From the practical point of view it is impossible to regulate terminate charges separately in respect of user of each of these several things mentioned. When therefore the legislature authorised the Central Government to fix terminals as defined in S. 3(14), the intention must have been that the terminals leviable would not depend on how many of these things would be used. It is also worth noticing that the user of a depot, warehouse and cranes would necessarily mean some service rendered "threat". If terminals did not include charges in respect of the provisions of depots, warehouses, cranes unless these were used, there would be no need of including these in the first portion as they would be covered by the second part of the definition viz., "of any services rendered threat". For from being there any reason to cut down, the consequence of the generality of language used viz., "in respect of, there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e entitled to compensation, but he will not lose the right, which he possesses under the standing orders, of reinstatement when the normal working is resumed. The employer cannot insist, on his attendance and there is also no obligation upon 1dm to provide work or to pay wages even if the worker presents himself for work. In order to escape liability for compensation, the employer may provide the worker with alternative employment, but the worker is not bound to accept it. If he does not accept it, he will not be entitled to claim lay-off compensation, but he will not lose his right of reinstatement when the lay-off ends. The compensation for lay-off is, therefore, paid in respect of a period when no work is done and when in fact there is no liability on the employer to provide work and on the employee to do work. It is not paid as additional remuneration for work done previously. It cannot, therefore, be said to be attributable to the employment of a worker or to the work done by him. It is made payable in order to mitigate or reduce the hardship caused by reason of unemployment or temporary loss of employment. Consequently, it cannot be said to be a payment "in respect of emplo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which is prohibited under section 4(1). The intention of the legislature is clear from the explanation to sub-section (1B) of section 23 which provides that "for the purposes of the sub-section properly in respect of which contravention has taken place shall include deposits in a bank where such property is converted into such deposits." If for this sub-section any property in respect of which a contravention has taken place includes deposits into which the property may be converted and can be reached even where the deposits are in a bank, it is not reasonable to think that the sale proceeds in Indian currency of any foreign exchange would be outside the scope of section 23(1B) and therefore not liable to be confiscated. In our opinion the High Court was wrong in quashing the order of confiscation which we consider valid and lawful" 27. The words "in respect of" denotes the intention of the Parliament to give a broader meaning. The words 'in respect of admit of a wide connotation, than the word "in" or "on". The expression "in respect of" "means attributable to" If it is given a wider meaning "relating to or with reference to", it has been used in the sense of being 'co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the word 'in' copyright. The meaning is clear, intention is clear, there is no ambiguity. Therefore, there is no scope for interpretation of this expressed term inasmuch as in the context in which it is used in the provision. Any other interpretation would lead to the aforesaid provision becoming otiose. 28. The classic treatise of Copinger and Skone James on Copyright (1999 Edn.) gives the meaning of Copyright as under : "Copyright gives the owner of the copyright in a work of any description the exclusive right to authorize or prohibit the Exploitation of the copyright work by third parties. This includes the right to copy the work itself and also to use the work in other ways protected under the law", (p.26) Copyright is often described as a negative right. This idea is conveyed by copinger in the following words. "Copyright, however, does not essentially mean a right to do something, but rather a right to restrict others from doing certain acts, and, when copyright is referred to as 'an exclusive right,' the emphasis is on the word 'exclusive'." The expression 'copyright' is not defined in the Income-tax Act. It must be understood in acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the definition is prima facie restrictive and exhaustive whereas the word defined is declared to 'include' such and such, the definition is prima facie extensive. Although it is normally presumed that the Legislature will be specially precise and careful in its choice of language in a definition section, at times the language used in such a section itself requires interpretation. A definition is not to be read in isolation. It must be read in the context of the phrase which it defines, realising that the function of a definition is to give precision and certainty to a word or phrase which would otherwise be vague and uncertain but not to contradict it or supplant it altogether. An interpretation clause is not meant to prevent the word receiving its ordinary, popular and natural sense whenever that would be properly applicable but to enable the word 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. 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 inclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be any interest in the right. Therefore, when the word 'copyright' has not been defined in the definition section of the Act and the meaning of the word 'copyright' is to be found in section 14 of the Act. it is only for the purposes of the Act. Even though under section 14 copyright means the exclusive right, that is also subject to the provisions of the Act. The intention of the legislature is unambiguous, clear. The meaning of the word 'copyright' cannot be read in isolation. It most be understood in the context of the aforesaid restrictions, limitations imposed by the Parliament by express words. Therefore, if would not be proper to assign the same meaning as found in section 14 to the word 'copyright' when it is used in another enactment. The interpretation clause is not meant to prevent the word receiving its ordinary, popular and natural sense whenever that would be properly applicable, but to enable the word 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 'roya ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iterary, artistic or scientific work. Therefore, the word exclusive right used in section 14 of the Act do not fit into the meaning of the word 'royalty' in Explanation 2 because royalty means the consideration for the transfer of all or any rights including the granting of a licence which is certainly not an exclusive right or transfer of all rights in the copyright or literary work. Payments made for the acquisition of partial rights in the copyright without the transfer fully alienating the copyright rights will represent a royalty where the consideration is for granting of lights to use the programe in a manner that would, without such license, constitute an infringement of copyright. In these circumstances, the payments are for the right to use the copyright in the program i.e., to exploit the rights that would otherwise be the sole prerogative of the copyright holder. Therefore, to constitute royalty under the Income-tax Act it is 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le. This version will be run to test it, and any errors which are discovered will be fixed in the source code and the whole recompiled. The final process is to produce the documentation which the user will need to operate the program. The completed product is the package of object code version and documentation. A complex piece of software may well consist of a number of programs which are called by a master program as different functions are required. Some writers distinguish between programs (the specific executable code modules) and software (the complete set of programs plus documentation), 'Software' is thus used interchangeably for both of these unless the context otherwise makes clear. 35. The copyright subsists in a computer program. It is not only unauthorised reproduction but also the storage of a program in a computer constitutes copyright infringement. Copying a literary work (such as a computer program) includes 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carrying on his business which is a commercial venture. It facilitates his business. It is for that he pays consideration. Without such transfer or permission, the enduser cannot use the said intellectual property. If he does it amounts to infringement. Therefore, the right to use the intellectual property in respect of which the owner or the licensor possess a copyright is also a right in respect of a copyright, though not in the copyright itself. Therefore, the words used in the provision that transfer of all or any of the rights includes the right to grant license in respect of copyright includes such right to use the intellectual property in respect of which the owner or the licensor possess copyright. It falls within the mischief of the word 'royalty' as defined under section 9(l)(vi) of the Act. 37. It is submitted during the assessment years 2000-01 and 2001-02, there was no Double Taxation Avoidance Agreement/convention 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 coun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of article 7 or article 14, as the case may be, shall apply. (5) Royalties or fees for technical services shall be deemed to arise in a Contracting State when me payer is that State itself, a political, sub-division, a local authority or a resident of that State. Where however, the person paying the royalties or fees for technical 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to tax. Therefore, we do not see any substance in the said contention. What is a license? 40. A licence is a grant of authority to do a particular thing. It enables a person to do lawfully what he could not otherwise lawfully do. A licence does not, in law, confer a right. It only prevents that from being unlawful which, but for the licence, would be unlawful. It amounts to a consent or permission by an owner of copyright that another person should do an act which, but for that licence, would involve an infringement of the copyright of licensor. A licence gives no more than the right to do the thing actually licensed to be done. It transfers an interest to a limited extent, whereby the licensee acquires an equitable right only in the copyrighted article. 41. Licences may be exclusive, or non-exclusive. Non-exclusive licence is not defined in the Act. The term 'exclusive licence' 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 particu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l property embedded in the copyright, and therefore it is for transfer of one of those rights of the owner of the copyright. It is not a right in copyright but it is in respect of a copyright. When a copyrighted article is sold also, the end-user gets the right to use the intellectual property embedded in the copyright and not a right in the copyright as such. Therefore the mode adopted or the terminology given is not decisive to decide the nature of transfer. Ultimately, it is the substance which has to be looked into. 44. Therefore, it is necessary to look into the terms of the agreement entered into between the parties, as it would be purely question of fact to be decided on the basis of the intention of the parties as could be gathered from the written words used in the agreement. The relevant terms in the agreement between the parties is as under:- "End user software License agreement 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g copyright in computer software), design rights, database rights, semi-conductor topography rights, trade secrets service marks, maskworks and trademarks, whether or not registered or capable of registration, and any applications for any of the foregoing, in all countries in the world. 1.15 "License Key" means a document (in physical or electronic format) provided by Synopsys to Licensee which reflects the applicable Licensee purchase order and lists: (i) the Licensed Product, including version number and quantity, licensed to Licensee; (ii) the Key server(s); and (iii) the codes which Licensee must input to initialize use of the Key Server(s). 1.16 "Licensed Product(s)" means collectively Design Ware and the Licensed Software. 1.17 "Licensed Software" means' the Synopsys computer software 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" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... easonable number of copies of Design Ware for backup and/or archival purposes only. 2.3 Documentation License Synopsys hereby grants Licensee a non-exclusive, nontransferable license, without right of sub-license, to use the Documentation and to make a reasonable number of copies of the Documentation solely for its own internal business purposes to support Licensee's use of the Licensed Product. 2.4 Evaluation License In the event Licensee obtains evaluation copies (which excludes any copy of the Licensed Products issued pursuant to Licensee's purchase order) of the Licensed Product the terms and conditions of this Agreement shall govern, except as follows: (i) Licensee may use such Licensed Product only for internal, non-production evaluation for 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ird party beneficiaries. Such third parties are listed in the applicable Documentation. 3.2 Licensee Designs. Licensee shall retain all right, title and interest in and to Designs, Integrated Designs and all copies and portions thereof, subject to Synopsys' underlying rights in any Design Ware incorporated in such Designs and Integrated Designs. 5. Delivery Terms 5.1 Purchase Order. In order to obtain products and services from Synopsys, Licensee must first submit a purchase order. As part of a purchase order, Licensee must identify the Licensed product it wishes to License, the identity (by machine ID number) of the Key server(s) and the location of such Key Server(s). All purchase orders are subject to acceptance by Synopsys, in its sole 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Documentation and return or destroy all such copies and all portions of the Licensed Product (other than Design Ware incorporated into Designs prior to termination) and so certify in writing in Synopsys Termination will not relieve Licensee or Synopsys from any liability Grising from any breach of this Agreement. Neither party will be liable to the other for damages of any sort solely as a result of terminating this Agreement in accordance with its terms, and termination of this Agreement will be without prejudice to any other right or remedy of either party. The provisions of sections 3, 7, 8.2, 8.3, 11, 12 and 13 shall survive any termination or expiration of this Agreement. 10. Patent and Copyright Infringement 10.1 Indemnity. Synopsys agrees, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s granted is a license. Even if it is not transfer of exclusive right in the copyright, the right to use the confidential information embedded in the software in terms of the aforesaid licence makes it abundantly clear that there is transfer of certain rights which the owner of copyright possess in the said computer software/programme in respect of the copyright owned. In terms of the DTAA the consideration paid for the use or right to use the said confidential information in the form of computer programme software itself constitutes royalty and attracts tax. It is not necessary that there should be a transfer of exclusive right in the copyright as contended by the assessee. The consideration paid is for rights in respect of the copyright and for 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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