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TMI Blog2003 (10) TMI 250X X X X Extracts X X X X X X X X Extracts X X X X ..... dependent transaction. The assessee had not acquired any rights in the software. The assessee cannot be seen to be duplicating the software in making use of the same. The software that is so supplied by Lucent, USA is customer-specific and cannot be even reused or duplicated in any other exchange where identical orders are placed by the DOT. In other words, software that is supplied by Lucent, USA is customer-specific and is required only to be integrated into hardware that is supplied for specific unit. The Department, therefore, in our view is not justified in bifurcating the transactions as one of the supply of hardware and the other of software and treating software as a part of royalty. It must be appreciated that the assessee, in this case, has not acquired rights in the copyright program so that it can be exploited commercially. It is a customer-specific supply and it is a case of clear business transaction of purchase of equipment along with software to make the hardware functional. In our view, therefore, Department is not justified in treating the impugned payments as royalty simpliciter and thereby holding that the assessee is an assessee-in-default for failure to deduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... required to deduct tax at source on the payments made to nonresident. The arguments that weighed with the ITO (TDS) in reaching these conclusions may be found in the following paragraphs: (i) Software and hardware have been imported separately. In fact, software has come from Lucent, USA whereas hardware has come from Lucent, Taiwan. (ii) Proviso to section 9(1)(vi) of the Act dealing with royalty gives exemption in respect of computer software supplied by a nonresident manufacturer along with a computer or computer based equipment under any scheme approved under the Policy on Computer Software Export, Software Development and Training 1986 of the Govt. of India. The assessee cannot claim the benefit of this provision on two accounts: (a) As mentioned earlier, computer hardware and software have been supplied separately. (b) The import has not been made under any approved schemes. 5. It was contended that the assessee is a manufacturer and supplier of electronic switching systems required in the telecommunication industry and the switching system manufactured and supplied to the customers is based on customer specific requirement and depending upon such requirement of each customer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re. When such is the case, it has to be examined whether such payment (for import of software) is chargeable to tax in the hands of recipient in terms of the IT Act read with the provisions of the DTAA signed between India and the USA. As per the provisions of section 9(1)(vi) of the Indian IT Act, any payment on account of royalty made by the resident of India to any person outside India is deemed to be income of the recipient in India. Hence, such payments, if are royalty in nature, would be deemed to be the income chargeable to income-tax in India. One has now to examine whether such payments partake the character of "Royalty" as defined in the section 9(i)(vi) itself. As per the definition given in Expln. 2 to section 9(1)(vi). "Royalty" includes consideration for the use of any patent, invention, model, design, secret formula or process or trademark or similar property. It is quite possible that such software is patented by the company since patenting of technical softwares like these, is quite common now-a-days. Even if it is not patented, a software program of this kind used in telecom switching is a high technology work, and is essentially an 'invention' (to 'invent' means ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny industrial, commercial or scientific equipment......" (meaning of 'equipment' as per Oxford Dictionary is the necessary articles, etc. for a purpose, the process of being equipped and the meaning of 'equip' is to 'supply with what is needed). As discussed at length in the earlier paras, since the software in question being an integral part of the telecom equipment is an equipment by itself, and since this equipment (namely the software) is not sold outright (as the IPR still belongs to Lucent, USA) the consideration paid is for the use or right to use a commercial/industrial/scientific equipment and thus such consideration also will fall within the ambit of 'Royalty' as defined in the DTAA. The definition of royalty in the IT Act does not contain such a clause makes no difference since the consideration for the said software falls within the ambit of royalty as defined in the IT Act under other clauses. As per the sub-article 2 of article 12 of the DTAA "Royalty" is taxable in the State in which they arise and according to the laws of the State, which, as has been mentioned in earlier paras, is deemed to accrue and arise in India if payment is made by an Indian resident. I may a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is clear from the aforesaid that Lucent, USA has also to supply the application software required to make the equipment operational. Lucent, USA, in turn, raises two invoices for the supply of the various items of hardware as well as the software. It is clear from the respective invoices, which are placed at pp. 17 and 18A of the paper book, that such supplies are made pursuant to a single purchase order. It was explained that upto July 1998, customs duty was payable on the software supplied as can be seen from p. 19 of the paper book. It is only thereafter that owing to exemption notification, excise duty was not paid for the software supplied. The assessee, thereafter integrates the software into hardware and sells the switch to the DoT. Copy of the invoice raised by the assessee on the DoT is placed at p. 20 of the paper book. 7(1). The learned counsel pointed out that acquisition of software component is therefore inextricably linked to the acquisition of hardware. None of its units can function independently. The learned counsel pointed out that considering these facts, there was absolutely no obligation on the part of the assessee to deduct tax at source. The learned counsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... longing to the author or the singer as the case may be. The purchaser has no right whatsoever to duplicate or make copies of the work that is purchased. This distinction was again demonstrated with an example viz., if an Indian publisher imports several copies of a book for the purpose of sale in India it would amount to the purchase of a copyrighted article. But if publisher acquires a right to publish in the book in India and thereafter makes copies for the purpose of sale the payment made for acquiring the right would be regarded as a royalty. In the present case, the learned counsel pointed out, all that the assessee has acquired is certain software, which is to be integrated into the hardware that is purchased and thereafter to sell the equipment as a whole. The assessee has no right to duplicate or utilize the software purchased in any other switch that it may sell. It is not disputed that for each switching system sold by the assessee, a corresponding acquisition both of the hardware as well as the software is made from Lucent, USA. The learned counsel pointed out that a certificate issued by the Lucent, USA wherein it has been clarified that the assessee had no legal author ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would have no application inasmuch as the payment that is made by the assessee would not be royalty as defined therein. Para (3) of article 12 defines the term 'royalty' to mean: (a) payments of any kind received as a 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 a 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 from the activities described in paragraph (2)(c) or (3) of article 8. 7(iii). The learned counsel submitted that what is covered within its ambit is payment for grant of a licence to use a copyright, patent, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a case of transfer of a copyrighted article and not a case of a grant of a permission to use a copyright. With the support of the above contention, the learned counsel vehemently argued that there was absolutely no obligation on the part of the assessee to deduct tax at source in respect of payments made to Lucent, USA for acquiring software and the ITO (TDS) was, therefore, not justified in treating the assessee in default and consequently levying interest under section 201(1A) of the Act. 9. The learned Departmental Representative, on the other hand, vehemently supported the findings of the ITO (TDS) as well as the order of the CIT(A). Our attention was drawn to the memorandum explaining the provisions in the Finance (No. 2) Bill, 1991 reported in [1991] 190 ITR (St.) 281, decision of the Gujarat High Court in the case of CIT v. Ahmedabad Mfg. Calico Printing Co. Ltd. [1995] 215 ITR 735 (Guj.), Calcutta High Court decision in the case of N.V. Philips v. CIT [1988] 172 ITR 521 and the decision of the Authority for Advance Ruling reported in ABC's case. 10. We have carefully considered the rival submissions and gone through the records in the light of the paper book filed by the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion without the help of the other. As pointed out by the learned counsel, what the assessee has purchased is a copyrighted article and not copyright of the rights. Therefore, it is wrong on the part of the Department to have separated the transaction of purchase of software and viewing the purchase of software as an independent transaction. The assessee had not acquired any rights in the software. The assessee cannot be seen to be duplicating the software in making use of the same. The software that is so supplied by Lucent, USA is customer-specific and cannot be even reused or duplicated in any other exchange where identical orders are placed by the DOT. In other words, software that is supplied by Lucent, USA is customer-specific and is required only to be integrated into hardware that is supplied for specific unit. The Department, therefore, in our view is not justified in bifurcating the transactions as one of the supply of hardware and the other of software and treating software as a part of royalty. It must be appreciated that the assessee, in this case, has not acquired rights in the copyright program so that it can be exploited commercially. It is a customer-specific supply ..... X X X X Extracts X X X X X X X X Extracts X X X X
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