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TMI Blog2011 (11) TMI 887X X X X Extracts X X X X X X X X Extracts X X X X ..... amounting to `58,29,858/-is not chargeable to tax in India as per Article 7 of the India-USA Tax treaty. 3. During the course of assessment proceedings, the Assessing Officer observed that the assessee, a company incorporated in the United States and resident of USA for taxation purposes, is a leading provider of information solutions. The company operates globally through the presence of subsidiaries in other countries. In India it entered into joint venture company called Onward Novell Software (India) Private Limited (hereinafter called "NIPL") which acts as a distributor for the company and imports certain software from the assessee and duplicates and sells or sometimes resells the same in the Indian sub-continent. It was noticed by the AO that in the previous year relevant to the assessment year under consideration, the assessee received royalty as per the Distribution agreement amounting to `1.76 crore towards sales made by NIPL which was offered by the assessee as royalty income. There is no dispute on it inasmuch as the AO accepted the said amount as royalty income and taxed it accordingly. The assessee was also found to have received a sum of `58,29,858 from NI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on this amount because of it having no permanent establishment in India as claimed by the assessee and the categorical finding returned by the learned CIT(A) in his order. If however the said amount is held as royalty income, as has been decided by the learned CIT(A), then the assessee will be chargeable to tax on this amount. 5. Section 9(1)(vi) provides that income by way of royalty shall be deemed to accrue or arise in India where it is payable by ..... (b) a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilized for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India. Explanation 2 to this provision defines 'royalty' to mean "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 (i) to (iva).......... (v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng computer programmes, tables and compilations including computer databases. Sec. 2(ffc) defines a computer programme 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. Thus 'computer programmes' drop in the meaning of 'literary work', which, in turn, falls in clause (i) of section 2(y) of the Copyright Act defining 'work'. A close look at the meaning of copyright of a computer programme as per section 14(b) of the Copyright Act, 1957 indicates that it refers to the exclusive right to do or authorize to do in respect of a work, mainly, 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 not being copies already in circulation etc. as per clause (a) or to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer programme. On reading section 14 of the Copyright Act in juxtaposition to section 9(1)(vi) of the Income-tax Act, 1961, the position which emerges is that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elops, manufactures and sells computer software products. Distributor is in the business of distributing computer software products. This Agreement authorizes Distributor to acquire from Novell the computer software products identified as eligible in Exhibit A and to market them through an identified marketing channel. 10. Distributor in this agreement has been referred to as NIPL and the "computer software products" have been defined to mean the intellectual property of the assessee in the form of computer software, which NIPL shall sell in the defined market to the end customers. As per this agreement NIPL has been appointed as Distributor of the assessee "to market the Novell products acquired under the Agreement within the Defined area". Clause 3 of the agreement provides that NIPL may acquire Novell products at the price listed in the appropriate Novell product price list less the discount set forth. As per this agreement, NIPL is to secure orders for the Novell products and after purchasing the same from the assessee it has to sell the same products as such to the end users. It has further been set out in the agreement that each Novell product distributed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial form or issuing copies of it etc. As per agreement A, the assessee authorized NIPL to duplicate its computer software programme, which is the same thing as reproducing it in any material form or issuing copies of it. The duplicated products so made by NIPL were as a result of grant of exclusive right by the assessee to reproduce a work in any material form, thereby coming within the ambit of transfer of copyright in the computer programme. The consideration so paid apparently fell within section 9(1)(vi), as rightly declared by the assessee. However coming to the agreement B, by which the assessee did not allow NIPL to reproduce the computer software programme or to issue its copies, but only to re-sell the software made and sold by the assessee to it from the intellectual property of computer software programme. The assessee simply transferred its computer software products to NIPL for consideration for the purposes of resale without giving any right to duplicate the same in any manner. It is a clear cut case of consideration received for the transfer of copyrighted products and not for the transfer of copyrights in the computer software programme. The distinction between the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rticle for consideration, would also be royalty since going by the relevant definition, the grant of right to use the copyrighted article would also be a licence by the owner of the copyright, though limited in nature, limited to the use of the other contracting party alone, without entitling the grantee to further exploit the copyright". It is in this light of the aforesaid observations of the Authority that the learned Departmental Representative forcefully argued that even the consideration for transfer of a copyrighted article shall be considered as royalty. Let us examine the facts of that case. The applicant therein entered into a software licence and maintenance agreement with Indian Commodity and Exchange Limited (ICEL). Under the agreement, the applicant allowed ICEL to use the software product (the licensed programme) owned by it. The licensed programme was to be installed into the computer machines designated by ICEL. The applicant was to deploy its personnel to the designated site to train the employees of ICEL. The applicant was required to provide at its own cost, maintenance and support services. For installation and implementation of the licensed programme, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of USA. In that view of the matter, it would be apposite to consider the DTAA. The Assessing Officer has also considered Article 12 of the treaty which deals with Royalties and fees for included services. Clause 3 of Article 12 defines royalties as under: 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 payments derived by an enterprise described in paragraph 1 of article 8 (Shipping and Air Transport) from activities described in pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ular form though in essence and in substance it may be a different transaction. Going by the same logic, if an item of expenditure is given the name of an asset, it shall remain expenditure and will not find its place in the balance sheet. Similarly if an item of income is given the name of liability, it shall not shed its character of income merely for the reason that the assessee described it as liability. There is no dearth of judgments laying down this proposition. The Hon'ble Supreme Court in CBDT VS. Oberoi Hotels (1998) 231 ITR 148 (SC) has held that :'It is the substance of the case which matters and not the name.' Similar view has been reiterated by the Mumbai bench of the tribunal in a third member case in Nicholas Applegate South East Asia Fund Ltd. VS. ADI (International Taxation) (2009) 117 ITD 299 (Mum) (TM). 18. Thus it follows that the relevant thing to be examined is the true nature of transaction devoid of the name given. If the true nature of a payment is royalty, it will remain the same notwithstanding the fact that the parties preferred to refer it as sale and vice versa. When we slip back to the facts of the instant case, we find that the true nat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er XVII-B and such tax has not been deducted or, after deduction has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed u/s 200(1) , shall be disallowed. Thus it follows that if royalty is paid by an assessee to a non-resident which is chargeable to tax in the hands of such non-resident, it is the duty of the payer to deduct tax at source. In case of his failure to deduct tax at source, the amount paid, suffers disallowance u/s 40(a)(i). Coming back to the facts of the instant case it is noted that from the assessment order of the NIPL that no disallowance u/s 40(a)(i) has been made, which implies, that the AO accepted such payment to the assessee by NIPL as having been made on transaction of purchase and not as royalty. Once a particular stand has been taken by the Revenue in one transaction in the hands of the payer, it is impermissible to take diagonally contrary stand on the same transaction in the hands of the payee. Since the Department accepted such payment of `.58. lacs as having been made by NIPL on account of transaction of purchase from the assessee, it cannot now turn around to hold that the very same payment is ro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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