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TMI Blog2021 (7) TMI 608X X X X Extracts X X X X X X X X Extracts X X X X ..... he Respondent : Shri Kannan Narayanan, Jt. CIT(DR)(ITAT), Bengaluru. ORDER PER CHANDRA POOJARI, ACCOUNTANT MEMBER These two appeals are against different orders of the CIT(Appeals)-12, Bengaluru both dated 30.11.2017 for the assessment years 2012-13 2014-15. 2. The assessee herein is an Israel based company engaged in the business of developing, manufacturing, marketing and selling communication products. During the year under consideration, the assessee granted licence to Indian customers for use of computer software and it received payment for the sale of software to the Indian customers, which was not declared as income taxable in India. The AO treated the same as royalty and charged tax both under the Income-tax Act and DTAA. 3. The same was confirmed by the CIT(Appeals) by following the judgment of the Hon ble Karnataka High Court in the case of CIT v. Samsung Electronics, 345 ITR 494 (Karn) , wherein it was held as follows:- The Supreme Court, in Union of India v. Azadi Bachao Andolan [2003] 263 ITR 705/ 132 Taxman 373, has laid down that provisions of the DTAA prevails over the provisions of the Act if the provisions of the DTAA are more benefici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... non-resident, any interest (not being interest on securities) or any other sum (not being dividend) chargeable under the provisions of the Act, to deduct income-tax at the rates in force unless he is liable to pay income tax thereon as an agent. Payment to non-residents by way of royalty and payment for technical services rendered in India are common examples of sums chargeable under the provisions of the Act to which the aforestated requirement of TDS applies. The tax so collected and deducted is required to be paid to the credit of the Central Government in terms of section 200 read with rule 30 of the Income-tax Rules, 1962. Failure to deduct tax or failure to pay tax would also render a person liable to penalty under section 201 read with section 221. In addition, he would also be liable under section 201(1A) to pay simple interest at 12 per cent per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid. Therefore, if the amount is held to be royalty, the other consequences as referred to above would follow. [Para 17] In view of the definition of 'royalty' given in article 12 of the DTAA, it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may not use subdistributors for further distribution of the software and documentation without the prior consent of actuate. What is charged is the licence fee to be paid by the distributor of the software as enumerated in the agreement. Further, clause 6.01 of the agreement dealing with title states that the distributor acknowledges that actuate and its suppliers retain all rights, title and interest in and to the original, and any copies (by whomever produced), of the software or documentation and ownership of all patent copyright, trademark, trade secret and other intellectual property rights pertaining thereto, shall be and remain the sole property of actuate. Distributor shall not be an owner of any copies of, or any interest in, the software, but rather is licenced pursuant to the agreement to use and distribute such copies. Actuate represents that it has the right to enter into the agreement and grant the licences provided therein and confidentiality is protected. Therefore, on reading the contents of the respective agreement entered into by the assessee with the non-resident, it is clear that under the agreement, what is transferred is only a licence to use the copyright ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e right of the copyright holder and any violation of the said right would amount to infringement under section 51 of the said Act. However, if such copying of computer programme is done by a lawful possessor of a copy of such computer programme, the same would not constitute infringement of copyright and wherefore, but for the licence granted in these cases to the assessee to make copy of the software contained in shrink-wrapped/off-the-shelf software into the hard disk of the designated computer and to take a copy for back-up purposes, the end user has no other right and the said taking back-up would have constituted an infringement, but for the licence. Therefore, licence is granted for taking copy of the software and to store it in the hard disk and to take a backup copy and right to make a copy itself is a part of the copyright. Therefore, when licence is granted to make use of the software by making copy of the same and to store it in the hard disk of the designated computer and to take back-up copy of the software, it is clear that what is transferred is right to use the software, an exclusive right, which the owner of the copyright, i.e., the supplier owns and what is tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o take a copy of the software and to store it in the hard disk of the designated computer if licence is granted in that behalf and in the absence of licence, the same would amount to infringement of copyright, which is exclusively owned by non-resident suppliers, who would continue to be the proprietor of copyright. Therefore, there is no similarity between the transaction of purchase of the book or pre-recorded music C.D. or the C.D. containing software and in view of the same, the Legislature, in its wisdom, has treated the literary work like books and other articles separately from 'computer' software within the meaning of the 'Copyright' as referred to above under section 14 of the Copyright Act. [Para 24] If is also clear from the abovesaid analysis of the DTAA, Income-tax Act, Copyright Act that the payment would constitute 'royalty' within the meaning of article 12(3) of the DTAA and even as per the provisions of section 9(1)(vi) as the definition of 'royalty' under section 9(1)(vi) is broader than the definition of 'royalty' under the DTAA as the right that is transferred in the instant case is the transfer of copyright including t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was initiated to circumvent the time barred assessment proceedings. 5. That in the facts and circumstances in the case and in law, the learned CIT(A) erred in upholding the action of the learned AO, in bringing to tax the receipts from the sale of software of INR 8,44,16,311 as royalty income. That the Appellant craves leave to add to and/or to alter, amend, rescind, modify the grounds herein below or produce further documents before or at the time of hearing of this Appeal. 5. Similarly, in AY 2014-15, the assessee has raised identical ground with regard to action of the AO in bringing to tax the receipts from sale of software as royalty income. 6. At the time of hearing of the appeals, the assessee has not pressed the grounds Nos.1 to 4 in AY 2012-13 relating to reopening of assessment. Accordingly these grounds are dismissed as not pressed. 7. Coming to the ground on merits relating to taxation on sale of software as royalty income, it was brought to our notice that similar issue for AY 2011-12 in assessee s own case came up before the Hon ble High Court of Karnataka in ITA No.7/2019 and vide judgment dated 26.3.2021 it was held as under:- 7. The controve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, inasmuch as Section 30 of the Copyright Act speaks of granting an interest in any of the rights mentioned in Sections 14(a) and 14(b) of the Copyright Act. The EULAs in all the appeals before us do not grant any such right or interest, least of all, a right or interest to reproduce the computer software. In point of fact, such reproduction is expressly interdicted, and it is also expressly stated that no vestige of copyright is at all transferred, either to the distributor or to the end-user. A simple illustration to explain the aforesaid position will suffice. If an English publisher sells 2000 copies of a particular book to an Indian distributor, who then resells the same at a profit, no copyright in the aforesaid book is transferred to the Indian distributor, either by way of licence or otherwise, inasmuch as the Indian distributor only makes a profit on the sale of each book. Importantly, there is no right in the Indian distributor to reproduce the aforesaid book and then sell copies of the same. On the other hand, if an English publisher were to sell the same book to an Indian publisher, this time with the right to reproduce and make copies of the aforesaid book with the p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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