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TMI Blog2024 (3) TMI 1063X X X X Extracts X X X X X X X X Extracts X X X X ..... tion for the use of, or the right to use, any copyright of a literary work includes a computer program or software. As held that the 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. The terms of the licence in the present case does not grant any proprietory interest on the licencee and there is no parting of any copy right in favour of the licencee. It is non-exclusive non-tranferrable licence merely enabling the use of the copy righted product and does not create any interest in copy right and therefore the payment for such licence would not be in the nature of royalty as defined in DTAA. We therefore hold that the sum in question can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in the world. NDS technology includes end-to-end connections for satellite, broadband IPTV etc., Further, NDS UK provides support services for ensuring the deployment/maintenance of hardware and software license supplied through the assessee, which is its subsidiary. NDS Ltd., UK was earlier operating through its branch office in India. Pursuant to an internal reorganization, the operations of the branch office were closed in the year 2006. Subsequently, by way of an agreement effective from 1 April 2006, the services of the assessee were used to develop software and other technology relating to the business of NDS Ltd., UK and to provide support and maintenance services to customers of NDS UK. By way of a service agreement effective from 1 July 2006 between NDS Ltd., UK and the assessee, NDS Ltd., UK agreed to use the services of the assessee for pre-sales support and marketing services to potential and existing customers. As per the submissions of the assessee dated 20-02-2018, the nature of services under the services contract includes the following: Installation, configuration, optimization, operation, maintenance, support, remote diagnosis, telephonic support, management and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibution Agreement between the assessee and NDS Limited, UK. NDS Ltd. UK enters into an agreement with Indian cable TV operators, like TATA SKY, HATHWAY, AIRTEL etc. for supply of hardware, installation and integration. After the initial installation and integration, NDS Ltd. UK contracts with the cable TV operators for supply of viewing cards, set-top boxes, software upgradation etc. NDS Ltd. UK sells its products, including the software to the Indian TV pay channels and also supports the after-sales services to the Indian customers. The support and after sales services are carried through its subsidiary, CVTIPL, in terms of the Distribution Agreement. As per the Distribution Agreement, the assessee engages into a service contract with Indian customers and the necessary support relating to the service is provided by NDS Ltd.UK to such third-party customers with the assistance of the assessee. The AO has reproduced a sample service agreement between Bharti Telemedia Limited and NDS Ltd., which gives details of the license given by NDS Ltd. UK to its customers. The AO then referred to the assessment in the case of NDS Ltd. UK, wherein it was established that the payment received by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered into a Research and Development services agreement with the assessee to perform research and development services on behalf of NDS Ltd.UK. For this purpose, the assessee had access to confidential information of NDS Ltd.UK which it used for its research purpose viz. for development of software and software upgrade. This had also been stated by the product manager in his statement recorded u/s 131, which the AO has reproduced at para 9.2 of the impugned order. Thus, as per the AO, there was a continuous transfer of technical know-how and knowledge between NDS Ltd.UK and the assessee. 2.4 Based on the above findings, the AO held the assessee to be an assessee in default for non-compliance of the provisions of section 195 of the Act and the liability u/s 201 and 201(1A), with respect to the payment in the nature of FTS to the NDS Ltd. UK was worked out as follows: Total Remittance Tax u/s 201 including EC and SC Interest u/s 201 (IA) Total tax liability 15,82,38,841 2,37,35,826 1,21,05,271 3,58,41,097 2.5 The interest u/s 201 (IA) is calculated from the last day of the relevant previous year. Aggrieved by the levy of the above demand, the assessee went in appeal before CIT(A). Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom Acceptance, to make, store and use two back-up copies of the NDS Software and Third Party Software on back-up server(s) but only as required as part of a disaster recovery programme or expressly permitted under applicable law; (c) From Acceptance, to use the Components as integrated in the STBs but only as is strictly required to provide the services to the Subscribers; (d) To use the documentation in connection with the operation of the NDS Systems; (e) From Acceptance, to distribute the Viewing Cards to Subscribers in the Territory so that such Subscribers may, in conjunction with the STBs receive the Services in the Territory; and From Acceptance, to grant Subscribers a sublicense to use the NDS Software incorporated into the Viewing Cards but only as is strictly required to receive the Services from DEN and on terms consistent with those set out in Clause 7.2 and 7.4 which relate to the NDS Software contained on the Viewing Cards. 24. The terms of the other licence agreement between the various parties have not been set out in the order of assessment though the copies of the same are available in the Paper Book. The terms of the agreement are clearly similar to the terms of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom para 73 of SC judgment that granting of license has to be granting license over copyright rights as per section 14(b) read with 14(a) of Copyright Act. In para 97 the Hon ble Supreme Court has observed that under software license agreement, customer is licensed to only use the software as such and not the copyrights in the software, therefore granting of license in such cases does not amount to royalty (Assessee s case is similar see Article 3.01 and 3.02 of the Agreement). In para 109 of SC judgment, it has been specifically laid down that it is wholly incorrect to say that license in software EULA is license to use copyrights. In para 117 for overall conclusions of SC in the context of distinction between license over copyright and license to use copyrighted product specifically para 117(v), the Hon ble Supreme Court has held that even if fee schedule refers to royalty payment, this is consideration for purchase of an integrated system. One has to look at the overall agreement and the real nature of the transaction (para 51 of SC judgment). On the AO s reference in para 4.4 of FAO as license being for use of IPR over viewing cards and software is incorrect since as per Articl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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. Computer programs are categorised as literary work under the Copyright Act. Section 14 of the Copyright Act states that a copyright is an exclusive right to do or authorise the doing of certain acts in respect of a work, including literary work. The Hon ble Court took the view that a transfer of copyright would occur only when the owner of the copyright parts with the right to do any of the acts mentioned in section 14 of the Copyright Act, 1957(Copyright Act). In the case of a computer program, section 14(b) of the Copyright Act, speaks explicitly of two sets of acts: 1. The seven acts enumerated in sub-clause (a); and 2. The eighth act of selling or giving of commercial rental or offering for sale or commercial rental any copy of the computer program. The seven acts as enumerated in section 14(a) of the Copyright Act, in respect of literary works are: 1. To reproduce the work in any material form, including the storing of it in any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amendment, a payment could only be treated as royalty if it involved a transfer of all or any rights in copyright by way of license or other similar arrangements under the Copyright Act. The court held that once a DTAA applies, the provisions of the Act can only apply to the extent they are more beneficial to the taxpayer and therefore the definition of royalties will have the meaning assigned to it by the DTAA which was more beneficial. It was held that the term copyright has to be understood in the context of the Copyright Act. The court said that by virtue of Article 12(3) of the DTAA, royalties are payments of any kind received as a consideration 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 the 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 retai ..... X X X X Extracts X X X X X X X X Extracts X X X X
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