9911796707
TMI Blog2005 (2) TMI 438X X X X Extracts X X X X X X X X Extracts X X X X ..... , the licensor of the software retains ownership over the copyright in the software and protects such copyright in the licence On perusal of the agreement between the parties, we are of the view that in the present case also what the assessee had acquired is only a copy of the copyrighted articles i.e., software, whereas the copyright remains with the owner, i.e., foreign parties. We find that the incorporeal right to software i.e., copyright remained with the owner and the same was not transferred to the assessee. We have also noticed the definition of 'royalty' in the DTAA, which has been quoted above. The primary condition for bringing within the definition of 'royalty' in DTAA is that the payments of any kind received as consideration for the use of or right to use any copyright of a literary, artistic or scientific work etc., Right to use of a copyright is totally different from right to use the programme embedded in a cassette or CD or it may be a software. In this case, the assessee had acquired a ready made off the shelf computer programme for being used in its business. No right was granted to the assessee to utilize the copyright of the computer programme. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The contention of the assessee was not accepted by the ITO (TDS). It was held by the Assessing Officer that the assessee was a defaulter by not deducting tax from the remittance made by the assessee for purchase of these softwares. The reply of the assessee was not accepted by the Assessing Officer and it was held that as per the provision of section 9(1)(vi) of the Act, the payment made by the assessee is Royalty. Hence, the assessee was bound to deduct the tax. The ITO also placed reliance on the definition of the term 'Royalty', as mentioned in DTAA. Accordingly, it was held by the ITO that the assessee was a defaulter within the meaning of section 201(1) of the Act, for non-deduction of tax. Further, the interest under section 201(1A) was also levied for the three years, as follows: Asst. years 201(1) 201(1A) 1999-2000 Rs. 25,440 Rs.12,211 2000-01 Rs. 1,202 Rs. 216 2001-02 Rs. 16,87,270 Rs.58,447 Total Rs. 17,13,912 Rs.70,874 Against the said orders, the assessee moved appeals before the Commissioner of Income-tax(A). However, by the impugned common order dated 29-11-2001, the appeals were dismissed by the Commissioner of Income-tax). Against the said finding, the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... weden, and Article 13(2) of India-France treaties to the payments made to the respective suppliers. 5. It was submitted by the learned counsel for the assessee that internationally, as well as in India 'software', which in legal parlance known as 'computer programme' is covered under the broad category of 'literary, artistic or scientific work' which is a copyright. The copyright laws of different countries also recognize a computer programme to be subject-matter of copyright. According to him, the Assessing Officer held that the consideration paid by the assessee for import of software product was in the nature of Royalty. According to him, section 9(1)(vi) of the Act provided that the Royalty receivable by a non-resident, inter alia, from a person in India is seemed to accrue or arise in India. Section 90(2) of the Act, provides that if the provisions of a tax treaty between India and the country of non-resident is more beneficial to such non-resident, then the provisions of the tax treaty shall override the provisions of the Act. 6. The learned counsel for the assessee drew our attention to the definition of the term 'Royalty under the relevant Tax Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... along with the originals without retaining any copies thereof does not amount to utilization of the copyright. He submitted that section 202 of the US copyright law itself provides that transfer of ownership of any material object including the copy in which the work is first fixed does not itself convey any rights in the copyrighted work embodied in the object as ownership of a copyright or of any of exclusive rights under a copyright is distinct from ownership of any material object in which the work is embodied. (ii) Indo-Sweden Treaty - Article 12(3)(a) of the treaty between India and Sweden (1998) 229 ITR (St.) 11 defines the term 'royalty' to mean payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. (c) From the above, according to the learned counsel, it can be understood that the both Indo-US and Indo-Sweden treaties include payments for use or right to use the copyright of literary, artistic or scie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... righted work' and transfer of a copy of such computer programme to another person does not amount to allowing the use of the copyright by such other person. He also submitted that the payment received for sale of such copyrighted article is not in the nature of royalty per se, as it does not amount to exploitation of the copyright by the buyer, but it amounts to sale of an article. (g) The learned counsel further invited our attention to the various products purchased from Tektronix Inc., USA, OSS Nokalva Inc., USA, conduit, USA, European Telecom Standard Institute, France (ETSI), Telelogic AB, Sweden, to submit that the transactions in these cases were of purchase/sale of copyrighted article and there was no grant of right to use the copyright in the software. He submitted that the vendor in these cases had transferred the ownership of a copy of the computer programme to the appellant (without licensing any part of the copyright). He pointed out that Article 12 of Indo-Sweden Treaty does not contain payments for use of equipments within the definition of 'royalty'. The transaction is purely in the nature of a commercial transaction. He further-submitted that the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k [1991] 187 ITR 478 (SC). 7. To sum up the aforesaid submission of the assessee, we find that according to the assessee, the payment made by it does not come within the purview of royalty, as defined in DTAA, which overrides section 9(1)(vi) of the Act. 8. The consideration was paid by the assessee for the acquisition of a copyrighted article. The assessee company had not obtained the copyright of any software. The payments were made by the assessee for purchase of a produce that is most suitable for development of its software programmes. These are branded softwares readily available in the market. Such software can be placed within the meaning of 'goods' or 'article'. Submission of Revenue: 9. On the other hand, the learned DR supported the order passed by the Assessing Officer. He drew our attention to various paragraphs of the impugned order, particularly, para 4.10 onwards. It was submitted that the assessee was given the right to use the software. Therefore, the payment made by the assessee company has to be treated as royalty within the meaning of section 9(1)(vi) of the Act. Regarding the decision of the Supreme Court in Tata Consultancy Services case, it w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also in terms of provisions of the DTAA between India and US, India and France and India and Sweden, and consequently, the same was a sum chargeable to tax in India rendering the appellant liable to deduct tax at source in terms of the provisions of section 195 of the IT Act. As there was failure to deduct such tax, the appellant was considered to be an assessee in default and consequently order under sections 201(1) and 201(1A) was passed by the ITO. (2.2) Thereafter, being aggrieved by the order passed by the ITO under sections 201(1) and 201(1A) of the IT Act, as aforesaid, the appellant preferred an appeal before the Commissioner of Income-tax(A)-IV. Assailing the order passed by the ITO, the appellant contended before the Commissioner of Income-tax(A) that the order was passed by the ITO without affording proper opportunity and that at any rate, the no had erroneously treated the payments made by the appellant in respect of imported software as royalty so as to apply the provisions of section 195 read with section 9(1)(vi) of the Act. (2.3) The Commissioner of Income-tax(A), by order dated 29-11-2001 has confirmed the order passed by the ITO. On the contention raised by the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e untenable and unsustainable in law and that the appellate order is to be upheld as the same is in accordance with the related statutory provisions and the settled principles governing the applicability of the same. (4.1) It is submitted that the contention putforth by the appellant regarding the violation of principles of natural justice is not tenable. In negativing this plea, the Commissioner of Income-tax(A) has rightly adverted to the position that in the proceedings before the ITO the appellant had taken up the bold plea that the imported software being the non-customised shrink-wrap software, there was no necessity of deduction of tax at source and thereupon the ITO had afforded yet another opportunity to the appellant to explain and substantiate their case and however such an opportunity was not availed to by the appellant. On such grounds, the Commissioner of Income-tax(A) has rightly negatived the contention of non-affording of adequate opportunity by the ITO. (4.2) It is submitted that the Commissioner of Income-tax(A) has rightly held that the consideration paid by the appellant for the import of software was in the nature of royalty payment and constituting chargeable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... take the character of royalty so as to apply the related provisions of the IT Act. The appellant has also strongly relied upon the recent Supreme Court decision in the case of Tata Consultancy Services. (4.4) The plea so put forth by the appellant is patently untenable and unsustainable in law. (5) As mentioned earlier, the appellant is in the business of software development and during the related periods, the appellant had imported software from countries such as USA, France and Sweden. Section 9 of the IT Act provides that the income referred to therein is deemed to accrue or arise in India. At this stage, it is relevant to refer to the provisions of section 9(1)(vi): Explanation 2 to clause (vi) of section 9(1): Explanation 3 to clause (vi) of section 9(1): Second proviso to section 9(1) of the IT Act, 1961 (which are extracted in the paper book filed by the standing counsel). On a perusal of the foregoing relevant provisions of section 9(1) of the Act, it can be noticed that any income by way of royalty payable by a resident is governed by section 9(1)(vi) of the Act. The second proviso thereto specifically provides that nothing contained therein shall apply in relation to so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the nonresident and the corresponding consideration paid by the appellant herein for such software is towards transfer of rights in the software as contemplated in the End User Licence Agreement. The appellant's case is, therefore, governed by the provisions of section 9(1)(vi) of the Act read with relevant article of the DTAA. The appellant is not correct in law in contending that their case is not covered by section 9(1)(vi) of the Act. (5.2) At this stage, it is relevant to advert to the meaning of the expression 'software'. At the outset, it is submitted that by virtue of its intrinsic and inherent qualities, a transaction relating to computer software involving transfer of rights thereto under the End User Licence Agreement cannot be treated on the same footing as that of traditional transaction of sale of goods. (5.3) A software may be described as a program or series of programs containing instructions for a computer required either for operational activities of the computer itself (operational software) or for the accomplishment of other tasks (application software). Thus, in essence, software is a series of commands arranged in a structure (or a language) whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accessed by the processing of the computer and as such the program should be reduced to a form to be capable of being stored and as such programs are, therefore, of a nature that they may be recorded on magnetic media such as a floppy drive or a hard drive. (iv) When computer software, be it of any type such as operation software, application software etc., is procured, such type of software are recorded on CD ROM or Floppy Diskettes. In other words, the programs are recorded on these various types of media and then copies on to the hard disk of the computer, from where they can be accessed by the computer when called upon by the operator. Although the floppy disc, the CD ROM and the Hard disc are tangible commodity, they are worthless, but for the software embedded therein, which is intangible and fall in the different category. Since the consideration paid for procuring the computer software is essentially the consideration for the intangible command routines contained in the CD ROM etc., the utilization and use of such command routines and instructions embedded therein without the payment of adequate compensation to the original developer of the software whatever by the type of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... software and licences out certain rights for use of such software in favour of the licences such as the appellant. The appellant has placed on record the software licence agreement with M/s. Telelogic and with M/s. OSS Nokalva inc. (The related and relevant terms of the agreement with M/s. Telelogic are reproduced elsewhere). It can be noticed on a perusal of the foregoing terms and conditions of the Software Licence Agreement entered into between the appellant and the exporter of the software that by virtue of such licence agreement, the appellant acquires the right to use the copyrighted software. Indeed, the software are imported under End User Licence Agreement constituting a binding agreement between the appellant and the developer of the copyrighted software whereby in terms of such agreement, the appellant has acquired the right to use the copyrighted articles. At this stage, it is relevant to note the peculiarity of the computer software is that it is not sold in the ordinary sense like any traditional goods or article. By licensing the software and through the medium of the licensing agreement, the owner of the copyrighted software enables the licences to use the software. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1)(vi) of the Act. The meaning assigned to the expression 'royalty' in the DTAA between India and France and India and Sweden, is akin to the meaning as envisaged in section 9(1)(vi) of the Act. (5.6) Thus, it can be noticed that looked from any angle, the consideration paid by the appellant acquires a character of royalty and therefore, the appellant was found to deduct the tax of source in terms of section 195 of the Act. The Commissioner of Income-tax(A) has dealt with the issue with a reasoned threadbear discussion and the conclusion reached by the Commissioner of Income-tax(A) is based upon valid data, material and on correct understanding of the related provisions. (5.7) In this context, it is submitted that the appellant is strongly relying upon the recent decision of the Supreme Court in the case of Tata Consultancy Services v. State of Andhra Pradesh [2004] 271 ITR 401, to contend that as per the said decision of the Apex Court, computer software is held to be 'goods' and consequently the consideration paid by the appellant for the imported software in question cannot be considered as royalty. (5.8) Adverting to the reliance so strongly placed by the appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s court, noticing the earlier authorities, held that the definition of 'goods' in Article 366(12) of the Constitution of India was very wide and included all kinds of movable properties. It was held that the term 'movable property' when considered with reference to 'goods' as defined for the purposes of sales tax cannot be taken in a narrow sense. It was held that merely because electric energy was not tangible or would not be mover or touched like, for instance, a piece of wood or a book it would not cease to be movable property when it had all the attributes of such property. It was held that electricity was capable of abstraction, consumption and use which, if done dishonestly, was punishable under section 39 of the Indian Electricity Act, 1910. It was held that electric energy could be transmitted, transferred, delivered, stored and possessed in the same way as any other movable property. It was held that electricity was thus 'goods' within the meaning of the Sales-tax Act. Thus, on noticing the earlier rulings holding that the definition of goods, as defined in the sales-tax laws cannot be taken in narrow sense and that even the intangible and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ware, if sold along with the computer, cannot be included in the assessable value of the computer for the purposes of excise duty. Again, in the case of Sprint RPG India Ltd. v. Commissioner of Customs [2002] 2 SCC 486, the Supreme Court was considering the issue as to whether customs duty on imported computer software loaded on a hard disk drive should be valued on the basis of hard disk simpliciter at 25% under head 84.71 of the Customs Tariff Act, 1975 or on the basis of computer software at 10% under Heading 85.24. It was held by the Supreme Court that hard disk is a refined form of floppy and serves the same purpose of recording material in a more efficient way and that the moot difference between the hard disk and the software is that a hard disk is a hardware whereas software is a representation of any type of data and which can be stored on the hard disk. Admittedly, a floppy on which software is stored would be taxable under Tariff Heading 85.24 and instead of storing the software on the floppy, if it is stored on a hard disk drive, it would not cease to be a software. The Supreme Court has explained this position thus: 7. In the present case, what is imported by the appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id rules of interpretation, it would be clear that the disk or the floppy on which computer data is recorded, would be covered by Heading 85.24. Rule 3(a) inter alia provides that when two or more headings each refer to part only of the materials or composite goods, those headings are to be regarded as equally specific in relation of those goods, even if one of them (sic them) gives a more complete or precise description of the goods. Further, considering imported goods to be a mixture of two substances namely 'hard disk drive' and 'software' as per Rule 3(b) they can be classified under the heading which gives them their essential character. In the present case, considering its price factor it would be computer software. The price of the imported consignment was approximately Rs. 68 lakhs. As against this, the value of the seven hard disk drives would be roughly Rs. 60,000 that is to say the value of the computer software is hundred times more than its container's hard disk. Hence, the essential character of the imported goods is computer software. (6) It is submitted that having regard to the various factual and legal aspects relating to the procurement of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 9(1)(vi) of the Act for the purpose of the definition of 'Royalty', which has already been extracted in the reply filed by the revenue at page 6. The definition of the term 'Royalty' as we find in different treaties is almost same. The aforesaid definition has been quoted in the written submission filed by the assessee and the revenue at pages 9 and 25 respectively. The common definition of the term 'Royalty' as per DTAA is quoted below for ready reference: Payment 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, trade mark, 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 hereof. From a perusal of the aforesaid two definitions, we find that under DTAA, consideration paid for use of or right to use a copy ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to be bound by these terms and conditions. If you do not agree to the Telelogic general terms and conditions, promptly return the unopened disk package and the accompanying items (including written materials and binder or other containers) to the Telelogic office or distributor from which you obtained them for a full refund. 'The terms Program means the enclosed Telelogic software program, all whole or partial copies of it (including portions merged into other programs) and all subsequent updates to the software program legally received by you.' 'These general terms and conditions apply to each program licensed by Telelogic AB as well as maintenance and other services provided by Telelogic AB.' 1. Grant of licence. Telelogic grants you the right to use the program on one computer or in one local computer network during the term of this licence. Under this Licence you may: (i) Copy of program for backup; and (ii) Merge the program into another program; and (iii) Transfer of program and accompanying written materials on a permanent basis provided you retain no copies and the recipient agrees to the terms of this licence; and (iv) To the extent the program is specif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... blicence the OSS runtime dynamic link libraries (currently labelled *.DLL) as part of the customer's complete application where the application adds significant function to the runtime libraries and is a final produce which the end user would use without relinking, rebuilding, or modification and (d) link the BER, PER and DER runtime static libraries (currently labelled *.LIB) into customer's complete application where the application adds significant function to the runtime libraries and is a final product which the end user would use without relinking, rebuilding or modification. All right, title and interest in and to the program(s) and all related material are and shall at all times remain the sole property of OSS. Neither the program(s) nor this agreement may be assigned, sublicensed or otherwise transferred by customer without prior written consent from OSS. TERM This agreement shall be effective on the date it is accepted by OSS at Somerset, New Jersey, and shall remain in force unless terminated in accordance with the provisions set forth to this agreement. OSS may terminate this Agreement if customer fails to comply with any of the terms and conditions of the agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he appellant and the exporter of the software that by virtue of such license agreement, the appellant acquires the right to use the copyrighted software. Indeed, the software are imported under End User License Agreement constituting a binding agreement between the appellant and the developer of the copyrighted software, whereby, in terms of such agreement, the appellant has acquired the right to use the copyrighted article. At this stage, it is relevant to note the peculiarity of the computer software is that it is not sold in the ordinary sense like any traditional goods or article. By licensing the software and through the medium of the licensing agreement, the owner of the copyrighted software enables the licensee to use the software. In other words through the End User License Agreement software developers take care to ensure that their intellectual creation does receive its due share of protection and as per the terms of such agreement the persons procuring such software are contractually bound to certain obligations as stipulated thereto. In the present case, the appellant is the recipient of the right to use the software. The End User Licensing Agreement undoubtedly enables ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich enable the computer to perform a designated task. The copyright in that programme may remain with the originator of the programme. But the moment copies are made and marketed, it becomes goods, which are susceptible to sales-tax. Even intellectual property, once it is put on to a media, whether it be in the form of books or canvas (in case of painting) or computer discs or cassettes, and marketed would become 'goods'. We see no difference between a sale of a software programme on a CD/floppy disc from a sale of music on a cassette/CD or a sale of a film on a video cassette/CD. In all such cases, the intellectual property has been incorporated on a media for purposes of transfer. Sale is not just of the media, which by itself has very little value. The software and the media cannot be split up. What the buyer purchases and pays for is not the disc or the CD. As in the case of paintings or books or music or films the buyer is purchasing the intellectual property and not the media i.e., the paper or cassette or disc or CD. Thus a transaction sale of computer software is clearly a sale of 'goods', within the meaning of the term as defined in the said Act. The term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstitutes a corporeal body. It has been held that a software recorded in physical form becomes inextricably intertwined with, or part and parcel of the corporeal object upon which it is recorded, be that a disk, tape, hard drive, or other device. It has been held that the fact that the information can be transferred and then physically recorded on another medium does not make computer software any different from any other type of recorded information that can be transferred to another medium such as film, video tape, audio tape or books. It has been held that by sale of the software programme the incorporeal right to the software is not transferred. It is held that the incorporeal right to software is the copyright, which remains with the originator. What is sold is a copy of the software. It is held that the original copyright version is not the one which operates the computer of the customer but the physical copy of that software which has been transferred to the buyer. It has been held that when one buys a copy of copyright novel in a bookstore or recording of a copyright song in a record store, one only acquires ownership of that particular copy of the novel or song but not the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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