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TMI Blog2021 (8) TMI 858X X X X Extracts X X X X X X X X Extracts X X X X ..... s appeal by the assessee is concerned, the only issue that arises for consideration is as to whether the Revenue authorities were justified in disallowing sum paid by the assessee as software maintenance charges to its overseas group companies by invoking section 40a(ia) of the Income Tax Act, 1961 ('the Act'). 3. The assessee is a company. It is a wholly owned subsidiary of World Courier (Group) Inc, USA. The assessee provides specialized courier services and supply chain services to domestic and overseas customers. For Assessment Year 2014-15, the assessee filed the return of income declaring total income of Rs. 5,93,68,070/-. In the course of assessment proceedings, the AO noticed that the assessee had paid a sum of Rs. 1,24,82, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce Agreement, World Courier Inc. is required to provide inter alia the following services: a. Remedial maintenance consisting of diagnosis and corrective action for problems in the operation of the software b. Supply of all product upgrades and new releases and installation of such upgrades and new releases c. Provide such software and or system enhancements as may from time to time be requested by the Customer, at extra cost d. Provide consultancy services in connection with the purchase and operation of computer hardware and software (other than the software to be maintained), including installation and training, as fees to be agreed in advance 6. The assessee submitted that under India - USA Double Taxation Avoidance Agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the definition of the term 'royalty' under the Act will not have any overriding impact on the definition of the term 'royalty' as provided under Article 12(3)(a) of the Treaty. 8. The AO did not agree with the submissions made by the assessee and following the decision of the Hon'ble Karnataka High Court in the case of Samsung Electronics Co. Ltd., 345 ITR 495 (Karn), he held that the payment in question was in the nature of royalty as it is a payment for a right to use the software and he accordingly disallowed the claim of the assessee for deduction of a sum of Rs. 1,28,84,818/-. He, however, allowed depreciation on computer software at 60% and disallowed a sum of Rs. 84,89,691/-. 9. On appeal by the assessee, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 45 ITR 494 on the basis of which the revenue authorities concluded that the payment in question is in the nature of royalty, now stand overruled by the decision of the Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P) Ltd. (2021) 125 Taxmann.com 42 (SC). The Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P) Ltd. (2021) 125 Taxmann.com 42 (SC) held that A copyright is an exclusive right that restricts others from doing certain acts. A copyright is an intangible right, in the nature of a privilege, entirely independent of any material substance. Owning copyright in a work is different from owning the physical material in which the copyrighted work may be embodied. Compu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... copyright owner, conferring no proprietary interest on the licensee, does not involve parting with any copyright. It said this is different from a licence issued under section 30 of the Copyright Act, which grants the licensee an interest in the rights mentioned in section 14(a) and 14(b) of the Copyright Act. What is 'licensed' by the foreign, non-resident supplier to the distributor and resold to the resident end-user, or directly supplied to the resident end-user, is the sale of a physical object which contains an embedded computer program. Therefore, it was a case of sale of goods. The payments made by end-users and distributors are akin to a payment for the sale of goods and not for a copyright license under the Copyright Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eration for "the use of, or the right to use, any copyright "of a literary work includes a computer program or software. It was held that regarding the expression "use of or the right to use", the position would be the same under explanation 2(v) of section 9(1)(vi) because there must be, under the licence granted or sales made, a transfer of any rights contained in sections 14(a) or 14(b) of the Copyright Act. Since the end-user only gets the right to use computer software under a non-exclusive licence, ensuring the owner continues to retain ownership under section 14(b) of the Copyright Act read with sub-section 14(a)(i)-(vii), payments for computer software sold/licenced on a CD/other physical media cannot be classed as a royalty. 13. A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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