THE DDIT(IT)-2(1), MUMBAI V. M/S. RELIANCE INDUSTRIES LTD, MUMBAI

ITA 1124/MUM/2008

• Counselvise Citation: [2010] 119 COUNSELVISE.COM (IT) 6379 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 9 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-11-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: L
• Next Hearing Date: 06-10-2010
• Assessment Year: misc
• Appeal Filed On: 14-02-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: NARENDRA SINGH
• Assessee Lawyers: ARVIND SONDE
• Keywords: Business income; Double taxation relief; Permanent establishment

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH L, MUMBAI BEFORE SHRI R.V. EASWAR, HONBLE PRESIDENT AND SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER 1. I.T.A. NO. 1124/MUM/2009 2. I.T.A. NO. 2526/MUM/2008 DY. DIRECTOR OF INCOME TAX, M/S RELIANCE INDUSTRIES LTD., (INTERNATIONAL TAXATION)-2(1), VS. 3 RD FLOOR, MAKER CHAMBERS-IV, MUMBAI. 222, NARIMAN POINT, MUMBAI-400021. APPELLANT. RESPONDENT. APPELLANT BY : SHRI NARENDRA SINGH RESPONDENT BY : SHRI ARVIND SONDE. O R D E R PER J. SUDHAKAR REDDY, A.M.: BOTH THESE APPEALS ARE FILED BY THE REVENUE AND D IRECTED AGAINST IDENTICAL ORDERS OF THE CIT(APPEALS)-XXXI, MUMBAI. AS THE ISSUES ARISING IN BOTH THESE APPEALS ARE COMMON AND AS THEY RELATE TO THE SAME ISSUE OF PURCHASE/USE OF SOFTWARE, FROM DIFFERENT PARTIES, WHO ARE RESIDENTS OF NETHERLANDS AND AS ALL THESE AGREEMENTS OF PURCHASE/USE OF SOFTWARE ARE COVERED BY THE DOUBLE TAXATION 2 AVOIDANCE AGREEMENT ENTERED INTO BY INDIA WITH NETH ERLAND, FOR THE SAKE OF CONVENIENCE THEY ARE HEARD TOGETHER AND DISPOSED OF BY WAY OF THIS COMMON ORDER. 2. THE SOLE ISSUE THAT ARISES FOR OUR CONSIDERATIO N IN THESE APPEALS IS WHETHER THE ASSESSEE IS REQUIRED TO WITHHOLD TAX U/S 195 OF THE ACT, FOR PURCHASE/USE OF SOFTWARE FROM THE PARTIES WHO ARE RESIDENT OF NE THERLAND. THE SOFTWARES IN QUESTION ARE UNDISPUTEDLY OPERATIONAL SOFTWARES, PU RCHASED FOR THE INTERNAL USE OF THE ASSESSEE. THE ASSESSEE WAS GRANTED NON-EXCLUSIV E , PERPETUAL, IRREVOCABLE, ROYALTY FREE, WORLDWIDE LICENSE TO USE THE NUMBER O F COPIES OF THE SOFTWARE ENUMERATED IN THE AGREEMENT SOLELY FOR INTERNAL OPE RATION, INCLUDING USE OF SOFTWARE FOR ASP SERVICES AND WEB HOUSING SERVICES. THE PARTIES FROM WHOM THE ASSESSEE ACQUIRED THE SOFTWARE DO NOT HAVE A PERMA NENT ESTABLISHMENT IN INDIA. 3. THE ASSESSEE PURCHASED THE SOFTWARE FOR SEISMIC DATA PROCESSING/INTERPRETATION SOFTWARE FOR O&G DIVISION FROM M/S JASON GEOSYSTEMS BV AND FOR RESERVOIR ENGINEERING SOFTWARE FOR O & G DIVISION FROM GEOQUEST SYSTEMS BV, NETHERLANDS. 4. THE LEARNED CIT(APPEAL) IN HER ORDER DATED 19-11 -2007, HAS CONSIDERED AN AGREEMENT FOR PURCHASE WITH M/S JASON GEOSYSTEMS BV , NETHERLANDS AND IN ORDER DATED 21-08-2008 HAS CONSIDERED AN AGREEMENT FOR PU RCHASE WITH GEOQUEST SYSTEMS BV, NETHERLANDS. THE FACTS ARE BROUGHT OUT AT PARA 1.1 TO 1.5 OF HER ORDER DATED 19-11-2007 WHICH ARE EXTRACTED BELOW FOR READ Y REFERENCE : 3 1.1 M/SRELIANCE INDUSTRIES LIMITED, (M/S RIL OR A PPELLANT), IS A PUBLIC LIMITED COMPANY. THE APPELLANT HAS ENTERED INTO A AGREEMENT WITH M/S JASON GEOSYSTEMS BV, NETHERLANDS, (JG) FOR PURCHASE OF MY BENCH SOFTWARE WHICH COULD BE USED IN OIL & GAS EXPLORATI ON PROJECT OF THE APPELLANT. THE AR HAS SUBMITTED THAT THE PURCHASE O RDER AND END USER SOFTWARE LICENSE AGREEMENT DATED 25-03-2003 WAS PLA CED WITH JG. A COPY OF THE AGREEMENT AND COPY OF PURCHASE ORDER WER E FILED BY THE APPELLANT BEFORE THE AO ALONG WITH THE APPLICATION U/S 195 DA TED 30-04-2003 SEEKING REMITTANCE OF US$ 2,70,000 WITHOUT DEDUCTION OF TAX . 1.2 THE AR HAS SUBMITTED THAT JG IS A COMPANY REGIS TERED IN THE NETHERLANDS AND TAX RESIDENT OF THE NETHERLANDS. AS PER THE LICENSE AHGREEMENT, APPELLANT DID NOT ACQUIRE ANY COPYRIGHT AND ACCORDINGLY WITHIN THE MEANING OF ARTICLE 12 OF INDO NETHERLAND S DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA), THE PAYMENT MADE BY APP ELLANT DID NOT AMOUNT TO ROYALTY. JG DOES NOT HAVE A PERMANENT EST ABLISHMENT (PE) IN INDIA AND ACCORDINGLY ITS BUSINESS INCOME IS NOT TA XABLE IN INDIA AS PER ARTICLES 7 AND 5 OF THE DTAA. THE AR HAS SUBMITTED THAT JG, BEING A TAX RESIDENT OF NETHERLANDS, PROVISIONS OF THE DTAA WOU LD APPLY, IF THEY ARE MORE FAVOURABLE TO IT OVER THE PROVISIONS OF THE IN COME-TAX ACT, 1961 AS PER SECTION 90(2) OF THE I.T. ACT, 1961. 1.3 THE AR HAS SUBMITTED THAT THE AO HAS EXAMINED T HE LICENSE AGREEMENT AND HAS REFERRED TO PARA 2 OF THE SOFTWAR E LICENSE AGREEMENT SPECIAL TERMS OF PURCHASE ORDER AND HAS CONCLUDED THAT FOR THE REASONS GIVEN BY HIM IN THE ORDER THAT THE PAYMENT MADE BY THE APPELLANT TO JG IS ROYALTY WITHIN THE MEANING OF ARTICLE 12 OF THE D TAA AND ALSO U/S 9(1)(VI) OF THE INCOME-TAX ACT, 1961. 1.4 THE AR HAS ALSO SUBMITTED THAT THE SAME ISSUE H AS BEEN EXAMINED BY ME IN MY ORDER NO. CIT(A)XXXI/DDIT(IT)2(1)/IT-303/0 2-03/06-07 DATED 29/10/2007 IN THE APPELLANTS OWN CASE. THE AR HAS SUBMITTED HIS WRITTEN SUBMISSIONS DT. 25/10/2007 AND HAS REITERATED ALL THE ARGUMENTS TAKEN BY HIM IN THAT APPEAL WHICH HAVE BEEN CONSIDERED IN MY ABOVE-MENTIONED ORDER. THE AR HAS SUBMITTED IN CONCLUSION THAT THE ABOVE PAYMENT MADE FOR PURCHASE OF SOFTWARE IS NOT ROYALTY BUT ONLY BUSI NESS INCOME AND IS ACCORDINGLY TAXABLE IN INDIA, ONLY IF JG HAS A PE. 1.5 ON THE OTHER HAND, THE AO HAS EXAMINED THE ISSU E. HE HAS REFERRED TO PARA 2 OF THE SOFTWARE LICENSE AGREEMENT AND HAS HE LD THAT THE APPELLANT HAS ONLY GOT A LICENSE AND HAS NOT PURCHASED THE SO FTWARE AND THUS THE 4 TRANSACTION DOS NOT AMOUNT TO SALE. I FIND THAT THE AO HAS TAKEN THE SAME ARGUMENTS AS TAKEN BY HIM IN RESPECT OF APPEAL NO. CIT(A)XXXI/DDIT(IT)2(1)/IT-303/02-03/07-08 AND WHIC H ARGUMENTS HAVE BEEN EXAMINED AND DEALT WITH BY ME IN THE SAID APPE AL ORDER DT. 02.11.2007. 5. THE FACTS GIVEN BY THE CIT(APPEALS) IN HER ORDER DATED 21-01-2008 REGARDING AGREEMENT FOR PURCHASE WITH GEOQUEST SYS TEMS BV, NETHERLANDS ARE MORE OR LESS THE SAME AS GIVEN IN HER ORDER DATED 19-11-2007. 6. THE TERMS AND CONDITIONS OF PURCHASE WITH M/S J ASON GEOSYSTEMS BV, NETHERLANDS ARE BROUGHT OUT AT PARA 1.6 OF THE ORDE R OF THE CIT(APPEALS) DATED 19- 11-2007 WHICH ARE EXTRACTED BELOW FOR READY REFEREN CE : `1.6 I HAVE ALSO EXAMINED THE SOFTWARE LICENSE AGREEMENT BETWEEN THE APPELLANT AND JG. THE APPELLANT HAS ENTERED INTO AN AGREEMENT FOR SALE AND PURCHASE OF SOFTWARE WITH JG. GENERAL TERMS AND CON DITIONS OF PURCHASE ARE PRESCRIBED IN THE AGREEMENT. CLAUSES 2 & 6 OF T HE SOFTWARE LICENSE AGREEMENT PROVIDE FOR THE SOFTWARE LICENSE AND INTE LLECTUAL PROPERTY. THE SAME READS AS UNDER:- 2. SOFTWARE LICENSE 2.1 JASON GRANTS TO CUSTOMER, SUBJECT TO THE PROVIS IONS OF THE AGREEMETN, AND CUSTOMER ACCEPTS, A NON-EXCLUSIVE, N ON- TRANSFERABLE LICENSE TO USE EACH LICENSED PRODUCT S OLELY FOR ITS OWN INTERNAL BUSINESS, PROVIDED THAT THE LICENSED PRODU CT SHALL NOT BE IN USE BY MORE USER PER FLOATING LICENSE CONCURRENTLY. THE LICENSE EXCLUDES THE RIGHT TO USE THE SOFTWARE TO PROVIDE S ERVICES OF THIRD PARTIES. 5 6. PROPRIETARY RIGHT CUSTOMER ACKNOWLEDGES THAT JASON CLAIMS TO BE THE S OLE AND EXCLUSIVE OWNER OF, OR HAS THE RIGHT TO LICENSE, LI CENSED PRODUCT AND ALL PATENT, COPYRIGHT, TRADE SECRET AND OTHER INTEL LECTUAL PROPERTY AND PROPRIETARY RIGHTS THEREIN. NO TITLE TO OR OWNERSHI P OF LICENSED PRODUCT OR THE PATENT, COPYRIGHT, TRADE SECRET, TRA DEMARK OR OTHER PROPRIETARY RIGHTS CONTAINED THEREIN IS TRANSFERRED TO CUSTOMER. CUSTOMER AGREES THAT LICENSED PRODUCT IS CONFIDENTI AL AND PROPRIETARY INFORMATION IN WHICH JASON, ITS AUTHORS , SUPPLIERS AND DEVELOPERS CLAIM TRADE SECRET AND THAT LICENSED PRO DUCT IS DISCLOSED TO CUSTOMER ON A CONFIDENTIAL BASIS. CUSTOMER SHALL KEEP LICENSED PRODUCT CONFIDENTIAL AND PREVENT LICENSED PRODUCT F ROM BEING (A) USED EXCEPT AS PERMITTED BY THE LICENSE GRANTED IN ARTICLE 2 ABOVE, OR (B) DISCLOSED TO ANY PERSON OR ENTITY OTHER THAN CU STOMERS EMPLOYEES OR REPRESENTATIVES SOLELY FOR THE PURPOSE S OF CUSTOMERS PERMITTED USE OF LICENSED PRODUCT. THE SPECIAL CONDITIONS OF PURCHASE BETWEEN THE AS SESSEE AND GEOQUEST SYSTEMS BV, NETHERLANDS ARE BROUGHT OUT AT PARA 1.6 OF THE ORDER OF THE CIT(APPEALS) DATED 21-01-2008 WHICH ARE EXTRACTE D BELOW FOR READY REFERENCE : 1.6 I HAVE ALSO EXAMINED THE SPECIAL CONDITIONS OF PURCHASE BETWEEN THE APPELLANT AND GS. THE APPELLANT HAS ENTERED INTO AN SPECIAL CONDITIONS OF PURCHASE OF SOFTWARE WITH GS. SPECIAL TERMS AND CO NDITIONS OF PURCHASE ARE PRESCRIBED IN THE AGREEMENT. CLAUSE 2 OF THE SP ECIAL TERMS OF PURCHASE ORDER PROVIDE FOR THE SOFTWARE LICENSE AND INTELLEC TUAL PROPERTY. THE SAME READS AS UNDER : 6 2. SOFTWARE AND RELATED SERVICES : 2.1 SOFTWARE : SELLERS PROPRIETARY SOFTWARE TOOL/PRODUCT, FOR APP LICATION IN RESERVOIR ENGINEERING RELATED TO OIL AND GAS EXPLOR ATION AND PRODUCTION SOFTWARE IS USED FOR RESERVOIR SIMULATIO N AND CHARACTERIZATION. 2.2. SOFTWARE LICENSE & AGREEMENT UNDER EACH SOFTWARE COPY, SELLER SUPPLIES SOFTWARE USES KIT THAT COMPRISES. A) A CD WITH EXECUTABLE CODE AND DOCUMENTATION FOR THE SOFTWARE. B) INSTALLATION MANUAL AND USER MANUALS IN ONE SOFTCOP Y (ON CD) AND C) ONE SECURITY KEY. IN CASE OF NETWORK COPY THE SECURITY KEY ALLOWS THE SOFTWARE TOOLS TO BE INSTALLED ON NETWORK SERVE AND ANY NUMBER OF CLI ENT MACHINES CONNECTED TO THE NET WORK SERVER. NET WORK COPIES O F SOFTWARE CAN BE CONCURRENTLY ACCESSED AND USED BY AS MANY USERS AS ARE THE SUPPLIED NUMBER OF NETWORK COPIES. THUS, A PERUSAL OF PARA 2 OF THE SPECIAL TERMS OF P URCHASE ORDER REVEALS THAT THE APPELLANT HAS NOT RECEIVED ANY RIG HT OR COPY RIGHT OVER THE SOFTWARE. 7 7. THE GENERAL TERMS AND CONDITIONS OF AGREEMENT OF PURCHASE CAN BE SUMMARIZED AS UNDER: I) THE ASSESSEE IS NOT ENTITLED TO USE THE SOFTWARE FOR ASP SERVICES ON BEHALF OF THIRD PARTY. II) THE ASSESSEE HAS NO RIGHT TO USE, COPY, DUPLICA TE OR DISPLAY THE SOFTWARE EXCEPT AS SPECIFICALLY PROVIDED IN THE AGR EEMENT. III) THE ASSESSEE CANNOT MAKE MORE COPIES OF THE SO FTWARE THAN WHAT IS SPECIFIED IN THE AGREEMENT. IV) THE ASSESSEE CANNOT PROVIDE ACCESS TO THE SOFTW ARE TO ANY ONE, OTHER THAN ASSESSEES EMPLOYEES, CONTRACTORS OR CONSULTAN TS UNDER A WRITTEN CONTRACT BY WHICH ALL OF THEM WOULD BE BOUND BY THE TERMS AND CONDITIONS AS ARE APPLICABLE TO THE ASSESSEE ON PURCHASE OF SOFTW ARE. V) THE ASSESSEE CANNOT SELL LICENSE, DISTRIBUTE, PL EDGE, LEASE, RENT OR COMMERCIALLY SHARE (INCLUDING TIMESHARE) THE ABOVE SOFTWARE OR ANY RIGHTS THEREIN. 8 VI) THE ASSESSEE CANNOT USE THE SOFTWARE FOR PURPOS ES OF PROVIDING A SERVICE BUREAU, INCLUDING WITHOUT LIMITATION, FOR P ROVIDING THIRD PARTY HOSTING OR THIRD PARTY APPLICATION, INTEGRATION OR APPLICATION SERVICE PROVIDER OR ANY OTHER SIMILAR SERVICE. VII) THE ASSESSEE CANNOT MODIFY, TRANSLATE, REVERSE , ENGINEER, DECRYPT, DECOMPILE, DISASSEMBLE, CREATE DIRECTIVE WORKS BAS ED ON, OR OTHERWISE ATTEMPT TO DISCOVER THE ABOVE MENTIONED SOFTWARE SO URCE CODE OR UNDERLYING IDEAS OR ALGORITHMS. 8. ANOTHER IMPORTANT FACT IS THAT THE SOFTWARE HAS BEEN SUPPLIED TO THE ASSESSEE ON A COMPUTER DISK, FROM A PLACE OUTSIDE INDIA, ON FOB BASIS. NONE OF THE PARTIES INVOLVED HAVE A PERMANENT ESTABLISHMENT IN INDIA. T HE FIRST APPELLATE AUTHORITY IN HER ORDER IN APPEAL NO. CIT(A)XXXI/DDIT(IT)2(1)IT -303/02-03/07-08 DATED 29-10-2007 WHILE CONSIDERING THE PURCHASE FROM A N ON-RESIDENT WHO IS A RESIDENT OF USA AT PARA 2.4 OBSERVED AS FOLLOWS : A PERUSAL OF THE AGREEMENT REVEALS THAT THE APPEL LANT HAS NOT RECEIVED ANY RIGHT FOR TRANSFERRING OR MODIFYING THE SOFTWAR E LICENSE OR DECOMPILING, REVERSE ENGINEERING, OR DISASSEMBLING IT. THE APPEL LANT HAS ALSO GOT NO POWER TO DECODE THE MACHINE CODE OF SOFTWARE. THE APPELLA NT HAS GOT NO POWER TO MAKE COPIES OF SOFTWARE EXCEPT FOR BACKUP PURPOSES. FROM A PERUSAL OF THE TERMS OF THE AGREEMENT REPRODUCED ABOVE, IT IS VERY APPARENT THAT THE APPELLANT HAS ACQUIRED THE RIGHT SOLELY IN CONNECTI ON WITH ITS INTERNAL OPERATIONS AND RIGHT TO USE THE SOFTWARE IS CONFINE D FOR THE EXPRESS PURPOSE OF ITS BUSINESS. WITH THESE FACTS IN MIND THE TAXAB ILITY OF PAYMENT RECEIVED BY M/S TIBCO IS EXAMINED. SHE FURTHER OBSERVED AT PARA 1.11 AND 1.12 OF THE IMPUGNED ORDER AS FOLLOWS : 1.11 CLOSE PERUSAL OF THE DEFINITION ROYALTY IN BOTH THESE TREATIES REVEAL THAT SO FAR AS PURCHASE OF COMPUTER SOFTWARE IS CON CERNED, THE DEFINITION OF 9 ROYALTY REGARDING THE COPY RIGHT OR TRADEMARK OR SECRET FORMULA IS SAME. THE DEFINITION OF ROYALTY IN THE INDO-US DTAA IS PR IMARILY EXPANDING THE DEFINITION OF ROYALTY IN INDO-AUSTRALIA DTAA. 1.12 ACCORDINGLY I HOLD THAT MY DECISION IN THE CAS E OF APPELLANT IN APPEAL NO. CIT(A)XXXU/DDIT(IT)2(1)/ IT-303/02-03 DATED 29/ 10/2007, IS APPLICABLE TO THIS CASE AS WELL. THEREFORE, FOLLOWI NG MY ORDER IN THAT APPEAL, I HOLD THAT THE PAYMENT MADE BY THE APPELLANT TO M/ S PARADIGM IS ONLY BUSINESS INCOME OF M/S. PARADIGM AND NOT ROYALTY. I N THE ABSENCE OF ANY PE IN INDIA, BUSINESS PROFIT IS NOT TAXABLE IN INDIA A S PER ARTICLE-5 & 7 OF DTAA. IN VIEW OF THIS APPEAL ON GROUND NO.1 TO 7 IS ALLOWED. 9. THIS BENCH OF THE TRIBUNAL, ON SIMILAR ISSUE, IN THE CASE OF PURCHASE OF SOFTWARE FROM USA VIDE ITS ORDER DATED 29 TH OCT., 2010 HAS HELD AS FOLLOWS 12. THE BANGALORE BENCH OF THE TRIBUNAL IN THE CAS E OF SAMSUNG ELECTRONIC COMPANY LTD. VS. ITO REPORTED IN 276 ITR (AT) 1 HELD AS FOLLOWS : HELD, ALLOWING THE APPEALS, THAT THE PROVISIONS O F THE INCOME-TAX ACT WOULD BE APPLICABLE TO THE EXTENT THEY WERE MORE BE NEFICIAL TO THE ASSESSEE. OTHERWISE, THE PROVISIONS OF THE DOUBLE TAXATION A VOIDANCE AGREEMENT HAD TO BE FOLLOWED. THEREFORE, THE PROVISIONS OF TH E DOUBLE TAXATION AVOIDANCE AGREEMENT HAD TO BE FOLLOWED FOR THE PUR POSE OF DECIDING THE ISSUE WHETHER PAYMENTS MADE BY THE ASSESSEE WAS RO YALTY OR NOT. THE PRIMARY CONDITION FOR BRINGING WITHIN THE DEFINITIO N OF ROYALTY IN THE DOUBLE TAXATION AVOIDANCE AGREEMENT IS PAYMENTS OF ANY KIND RECEIVED AS CONSIDERATION FOR THE USE OF OR RIGHT TO USE ANY CO PYRIGHT OF A LITERARY, ARTISTIC OR SCIENTIFIC WORK, ETC. THE RIGHT TO USE A COPYRIG HT IS TOTALLY DIFFERENT FROM THE RIGHT TO USE THE PROGRAMME EMBEDDED IN A CASSET TE OR CD OR IT MAY BE A SOFTWARE. IN THIS CASE, WHAT THE ASSESSEE HAD ACQUI RED WAS ONLY A COPY OF THE COPYRIGHTED ARTICLES, THAT IS SOFTWARE, WHEREAS THE COPYRIGHT REMAINED WITH THE OWNER, THAT IS THE FOREIGN PARTIES. NO RIGHT WA S GRANTED TO THE ASSESSEE TO UTILIZE THE COPYRIGHT OF THE COMPUTER PROGRAMME. TH E ASSESSEE HAD MERELY PURCHASED A COPY OF THE COPYRIGHTED ARTICLE, NAMELY , A COMPUTER PROGRAMME WHICH WAS CALLED SOFTWARE . THEREFORE, THE REMITT ANCE MADE BY THE 10 APPELLANT FOR PURCHASE OF SOFTWARE WAS NOT AN INCOM E IN INDIA, HENCE NO TAX WAS TO BE DEDUCTED IN INDIA UNDER SECTION 195 OF TH E ACT. THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF MOTO ROLA INC VS. DCIT 95 ITD 269 IN THE FOLLOWING PARAS HELD AS FOLLOWS : 155. IT APPEARS TO US FROM A CLOSE EXAMINATION OF THE MANNER IN WHICH THE CASE HAS PROCEEDED BEFORE THE INCOME-TAX AUTHORITIE S AND THE ARGUMENTS ADDRESSED BEFORE US THAT THE CRUX OF THE ISSUE IS W HETHER THE PAYMENT IS FOR A COPYRIGHT OR FOR A COPYRIGHTED ARTICLE. IF IT IS FO R COPYRIGHT, IT SHOULD BE CLASSIFIED AS ROYALTY BOTH UNDER THE INCOME-TAX ACT AND UNDER THE DTAA AND IT WOULD BE TAXABLE IN THE HANDS OF THE ASSESSE E ON THAT BASIS. IF THE PAYMENTS IS REALLY FOR A COPYRIGHTED ARTICLE, THEN IT ONLY REPRESENTS THE PURCHASE PRICE OF THE ARTICLE AND THEREFORE, CANNOT BE CONSIDERED AS ROYALTY EITHER UNDER THE ACT OR UNDER THE DTAA. THIS ISSUE REALLY IS THE KEY TO THE ENTIRE CONTROVERSY AND WE MAY NOW PROCEED TO ADDRES S THIS ISSUE. 156 WE MUST LOOK INTO THE MEANING OF THE WORD COPY RIGHT AS GIVEN IN THE COPYRIGHT ACT, 1957 SECTION 14 OF THIS ACT DEFINES COPYRIGHT AS THE EXCLUSIVE RIGHT SUBJECT TO THE PROVISIONS OF THIS A CT, TO DO OR AUTHORIZE THE DOING OF ANY OF THE FOLLOWING ACTS IN RESPECT OF A WORK OR ANY SUBSTANTIAL PART THEREOF, NAMELY: (A) IN THE CASE OF A LITERARY, DRAMATIC OR MUSICAL WORK, NOT BEING A COMPUTER PROGRAMME,- (I) TO REPRODUCE THE WORK IN ANY MATERIAL FORM INCL UDING THE STORING OF IT IN ANY MEDIUM BY ELECTRONIC MEANS : (II) TO ISSUE COPIES OF THE WORK TO THE PUBLIC NOT BEING COPIES ALREADY IN CIRCULATION; (III) TO PERFORM THE WORK IN PUBLIC, OR COMMUNICATE IT TO THE PUBLIC; 11 (IV) TO MAKE ANY CINEMATOGRAPH FILM OR SOUND RECORD ING IN RESPECT OF THE WORK; (V) TO MAKE ANY TRANSLATION OF THE WORK; (VI) TO MAKE ANY ADAPTATION OF THE WORK; (VII) TO DO, IN RELATION TO A TRANSLATION OR AN ADA PTATION OF THE WORK, ANY OF THE ACTS SPECIFIED IN RELATION TO THE WORK IN SUB-CLAUSES (I) TO (VI); (B) IN THE CASE OF A COMPUTER PROGRAMME,- (I) TO DO ANY OF THE ACTS SPECIFIED IN CL. (A); (II) TO SELL OR GIVE ON COMMERCIAL RENTAL FOR SALE OR FOR COMMERCIAL RENTAL ANY COPY OF THE COMPUTER PROGRAMM E; PROVIDED THAT SUCH COMMERCIAL RENTAL DOES NOT APPLY IN RESPECT OF COMPUTER PROGRAMMES WHERE THE PROGRAMME ITSELF IS NOT THE ES SENTIAL OBJECT OF THE RENTAL, (C) IN THE CASE OF AN ARTISTIC WORK,- (I) TO REPRODUCE THE WORK IN ANY MATERIAL FORM INCL UDING DEPICTION IN THREE DIMENSIONS OF A TWO DIMENSIONAL WORK OR IN TWO-DIMENSIONS OF A THREE-DIMENSIONAL WORK; (II) TO COMMUNICATE THE WORK TO THE PUBLIC; (III) TO ISSUE COPIES OF THE WORK TO THE PUBLIC NOT BEING COPIES ALREADY IN CIRCULATION; (IV) TO INCLUDE THE WORK IN ANY CINEMATOGRAPH FILM; (V) TO MAKE ANY ADAPTATION OF THE WORK; (VI) TO DO IN RELATION TO AN ADAPTATION OF THE WORK ANY OF THE ACTS SPECIFIED IN RELATION TO THE WORK IN SUB-C LAUSE (I) TO (IV); (D) IN THE CASE OF CINEMATOGRAPH FILM,- 12 (I) TO MAKE A COPY OF THE FILM, INCLUDING A PHOTOGR APH OF ANY IMAGE FORMING PART THEREOF; (II) TO SELL OR GIVE ON HIRE, OR OFFER FOR SALE OR HIRE, ANY COPY OF THE FILM, REGARDLESS OF WHETHER SUCH COPY H AS BEEN SOLD OR GIVEN ON HIRE ON EARLIER OCCASIONS; (III) TO COMMUNICATE THE FILM TO THE PUBLIC; (E) IN THE CASE OF A SOUND RECORDING,- (I) TO MAKE ANY OTHER SOUND RECORDING EMBODYING IT; (II) TO SELL OR GIVE ON HIRE, OR OFFER FOR SALE OR HIRE, ANY COPY OF THE SOUND RECORDING REGARDLESS OF WHETHER S UCH COPY HAS BEEN SOLD OR GIVEN ON HIRE ON EARLIER OCCA SIONS; (III) TO COMMUNICATE THE SOUND RECORDING TO THE PUB LIC. EXPLANATION FOR THE PURPOSES OF THIS SECTION, A C OPY WHICH HAS BEEN SOLD ONCE SHALL BE DEEMED TO BE A COPY ALREADY IN CIRCUL ATION. IT IS CLEAR FROM THE ABOVE DEFINITION THAT A COMPUT ER PROGRAMME MENTIONED IN CLAUSE (B) OF THE SECTION HAS ALL THE RIGHTS MEN TIONED IN CLAUSE (A) AND IN ADDITION ALSO THE RIGHT TO SELL OR GIVE ON COMMERCI AL RENTAL OR OFFER FOR SALE OR FOR COMMERCIAL RENTAL ANY COPY OF THE COMPUTER PROG RAMME. THIS ADDITIONAL RIGHT WAS SUBSTITUTED W.E.F. 15.1.200. THE DIFFEREN CE BETWEEN THE EARLIER PROVISION AND THE PRESENT ONE IS NOT OF ANY RELEVAN CE. WHAT IS TO BE NOTED IS THAT THE RIGHT MENTIONED IN SUB-CLAUSE (II) OF CLAU SE (B) OF SECTION 14 IS AVAILABLE ONLY TO THE OWNER OF THE COMPUTER PROGRAM ME. IT FOLLOWS THAT IF ANY OF THE CELLULAR OPERATORS DOES NOT HAVE ANY OF THE RIGHTS MENTIONED IN CLAUSES (A) AND (B) OF SECTION 14, IT WOULD MEAN TH AT IT DOES NOT HAVE ANY RIGHT IN A COPYRIGHT. IN THAT CASE, THE PAYMENT MAD E BY THE CELLULAR OPERATOR CANNOT BE CHARACTERIZED AS ROYALTY EITHER UNDER THE INCOME-TAX ACT OR UNDER THE DTAA. THE QUESTION, THEREFORE, TO BE ANSWERED I S WHETHER ANY OF THE OPERATORS CAN EXERCISE ANY OF THE RIGHTS MENTIONED IN THE ABOVE PROVISIONS WITH REFERENCE TO THE SOFTWARE SUPPLIED BY THE ASSE SSEE. 13 FURTHER, THE DELHI SPECIAL BENCH OF ITAT IN PARAS 1 62, 168 AND 169 HELD AS FOLLOWS: 162. A CONJOINT READING OF THE TERMS OF THE SUPPLY CONTRACT AND THE PROVISIONS OF THE COPYRIGHT ACT, 1957 CLEARLY SHOWS THAT THE CELLULAR OPERATOR CANNOT EXPLOIT THE COMPUTER SOFTWARE COMME RCIALLY WHICH IS THE VERY ESSENCE OF A COPYRIGHT. IN OTHER WORDS A HOLDE R OF A COPYRIGHT IS PERMITTED TO EXPLOIT THE COPYRIGHT COMMERCIALLY AND IF HE IS NOT PERMITTED TO DO SO THEN WHAT HE HAS ACQUIRED CANNOT BE CONSIDERE D AS A COPYRIGHT. IN THAT CASE, IT CAN ONLY BE SAID THAT HE HAS ACQUIRED A CO PYRIGHTED ARTICLE. A SMALL EXAMPLE MAY CLARIFY THE POSITION. THE PURCHASER OF A BOOK ON INCOME-TAX ACQUIRES ONLY A COPYRIGHTED ARTICLE. ON THE OTHER H AND, A RECORDING COMPANY WHICH HAS RECORDED A VOCALIST HAS ACQUIRED THE COPY RIGHT IN THE MUSIC RENDERED AND IS, THEREFORE, PERMITTED TO EXPLOIT TH E RECORDING COMMERCIALLY. IN THIS CASE THE MUSIC RECORDING COMPANY HAS NOT ME RELY ACQUIRED A COPYRIGHTED ARTICLE IN THE FORM OF A RECORDING, BUT HAS ACTUALLY ACQUIRED A COPYRIGHT TO REPRODUCE THE MUSIC AND EXPLOIT THE SA ME COMMERCIALLY. IN THE PRESENT CASE WHAT JTM OR ANY OTHER CELLULAR OPERATO R HAS ACQUIRED UNDER THE SUPPLY CONTRACT IS ONLY THE COPYRIGHTED SOFTWARE, W HICH IS AN ARTICLE BY ITSELF AND NOT ANY COPYRIGHT THEREIN. 168. THE ACTUAL REGULATIONS BRING OUT THE DISTINCTI ON VERY CLEARLY BETWEEN THE COPYRIGHT RIGHT AND A COPYRIGHTED ARTICLE. THEY ALS O SPECIFY THE FOUR RIGHTS WHICH, IF ACQUIRED BY THE TRANSFEREE, CONSTITUTE HI M THE OWNER OF A COPYRIGHT RIGHT. THEY ARE: (A) THE RIGHT TO MAKE COPIES OF THE COMPUTER PROGRA MME FOR PURPOSES OF DISTRIBUTION TO THE PUBLIC BY SALE OR OTHER TRAN SFER OF OWNERSHIP, OR BY RENTAL, LEASE, OR LENDING. (II) THE RIGHT TO PREPARE DERIVATIVE COMPUTER PROGR AMMES BASED UPON THE COPYRIGHTED COMPUTER PROGRAMME 14 (III) THE RIGHT TO MAKE A PUBLIC PERFORMANCE OF THE COMPUTER PROGRAMME. (IV) THE RIGHT TO PUBLICALLY DISPLAY THE COMPUTER P ROGRAMME. 169. A COPYRIGHTED ARTICLE HAS BEEN DEFINED IN THE REGULATION (PAGE 147 OF THE PAPER BOOK) AS INCLUDING A COPY OF A COMPUTER P ROGRAMME FROM WHICH THE WORK CAN BE PERCEIVED, REPRODUCED OR OTHERWISE COMMUNICATED EITHER DIRECTLY OR WITH THE AID OF A MACHINE OR DEVICE. TH E COPY OF THE PROGRAMME MAY BE FIXED IN THE MAGNETIC MEDIUM OF A FLOPPY DIS C OR IN THE MAIN MEMORY OR HARD DRIVE OF A COMPUTER OR IN ANY OTHER MEDIUM. FINALLY, THE SPECIAL BENCH OF ITAT, DELHI, IN PARA NO. 184 CONCLUDED AS FOLLOWS : 184. IN VIEW OF THE FOREGOING DISCUSSION, WE HOLD T HAT THE SOFTWARE SUPPLIED WAS A COPYRIGHTED ARTICLE AND NOT A COPYRIGHT RIGHT , AND THE PAYMENT RECEIVED BY THE ASSESSEE IN RESPECT OF THE SOFTWARE CANNOT BE CONSIDERED AS ROYALTY EITHER UNDER THE INCOME-TAX ACT OR THE DTAA . ( EMPHASIS SUPPLIED) THE BANGALORE A-BENCH OF TRIBUNAL IN THE CASE OF H EWLETT-PACKARD (INDIA)(P) LTD. VS. ITO 5 SOT 660 (BANG) HELD AS FO LLOWS : SECTION 9(1)(VI) PROVIDES THAT ROYALTY RECEIVABLE BY A NON-RESIDENT FROM A PERSON IN INDIA IS DEEMED TO ACCRUE OR ARISE IN IND IA. FURTHER, SECTION 90(2) PROVIDES THAT IF THE PROVISIONS OF TAX TREATY BETWE EN INDIA AND THE COUNTRY OF THE NON-RESIDENT ARE MORE BENEFICIAL TO SUCH NON -RESIDENT, THEN THE PROVISIONS OF TAX TREATY SHALL OVERRIDE THE PROVISI ONS OF THE ACT [PARA 6). ARTICLE 12(3) OF THE INDIA-USA DTAA DEFINES THE TER M ROYALTY. AS PER THE INDIA-USA DTAA ROYALTY IN RESPECT OF THE SUBJECT-MA TTER OF A COPYRIGHT INCLUDES ONLY THE PAYMENTS FOR THE USE I.E., EXPLOI TATION OF THE COPYRIGHT OF SUCH LITERARY/ARTISTIC OR SCIENTIFIC WORK. THEREFOR E, IN ORDER TO BE CLASSIFIED AS ROYALTY, THE RIGHT OF THE PERSON IN POSSESSION OF T HE SUBJECT-MATTER OF A COPYRIGHT SHOULD BE TO UTILIZE SUCH COPYRIGHT IN TH E MANNER WHICH IS OTHERWISE PROTECTED BY THE RESPECTIVE COPYRIGHT LAW IN FAVOUR OF THE OWNER OF THE COPYRIGHT. THE USE OF A COPYRIGHT OF A COPYR IGHTED WORK IS DIFFERENT 15 FROM USE OF SUCH WORK ITSELF. THE ACQUISITION OF A PRODUCT, WHEREIN THE SUBJECT-MATTER OF COPYRIGHT IS EMBEDDED, WITHOUT RI GHT TO EXPLOIR THE COPYRIGHT, DOES NOT AMOUNT TO USE OR RIGHT TO USE T HE COPYRIGHT OF SUCH LITERARY/ARTISTIC/SCIENTIFIC I.E., COPYRIGHTED WORK [PARA 6]. FURTHER, AS PER CLAUSE 13.1 OF THE OECD MODEL COMME NTARY, PAYMENTS MADE FOR ACQUISITION OF PARTIAL RIGHTS IN COPYRIGHT WOUL D REPRESENT A ROYALTY WHERE THE CONSIDERATION IS FOR THE RIGHT TO USE THE PROGR AMMES IN A MANNER THAT WOULD, WITHOUT SUCH LICENSE, CONSTITUTE AN INFRINGE MENT OF THE COPYRIGHT. IN OTHER WORDS, THE PAYMENT CAN CONSTITUTE ROYALTY ONL Y IF THE TRANSFEROR GRANTS TO THE TRANSFEREE THE RIGHT TO USE THE COPYRIGHT OF THE PRODUCT. IF, ON THE OTHER HAND, THE USE OF THE PROGRAMMES BY THE TRANSFEREE ( BY ACQUIRING A COPY OF SUCH PROGRAMME) IS IN A MANNER WHICH DOES NOT CONST ITUTE INFRINGEMENT OF THE COPYRIGHT, THE PAYMENT THEREFOR WOULD NOT AMOUN T TO ROYALTY. THEREFORE, UNDER THE OECD MODEL COMMENTARY ALSO PAY MENTS FOR ACQUIRING A COPY OF A COMPUTER PROGRAMME WOULD NOT BE TREATED AS PAYMENTS FOR RIGHT TO USE THE COPYRIGHT IN THE COMPUTER PROGRAMMES. AC CORDINGLY SUCH PAYMENTS ARE TO BE CONSIDERED S COMMERCIAL INCOME U NDER ARTICLE 7 AND NOT AS ROYALTY UNDER ARTICLE 12 OF THE INDIA-USA DTAA [ PARAS 6.2 AND 6.3]. FURTHER, THE COMPUTER PROGRAMME MAY BE COPYRIGHT AS INTELLECTUAL PROPERTY DOES NOT ALTER THE FACT THAT ONCE IN THE FORM OF A FLOPPY DISC OR OTHER MEDIUM, THE PROGRAMME IS TANGIBLE, MOVABLE AND AVAILABLE IN THE MARKET PLACE. THE FACT THAT SOME PROGRAMMES MAY BE TAILORED FOR SPECI FIC PURPOSES NEED NOT ALTER THEIR STATUS AS GOODS BECAUSE THE CODE DEFI NITION INCLUDED SPECIALLY MANUFACTURED GOODS. IN THE CASE OF TATA CONSULTAN CY SERVICES V. STATE OF ANDHRA PRADESH [2004] 271 ITR 401 / 141 TAXMAN 132 THE APEX COURT AFTER CITING SEVERAL DECISIONS OF THE COURTS OF THE USA H AS NOTED THAT ACQUISITION OF A COPY OF COMPUTER PROGRAMMES, WHICH IS A COPYRI GHTED ARTICLE, AMOUNTS TO SALE OF SUCH ARTICLE [PARA 6.7]. THEREFORE, THE PAYMENT MADE BY THE ASSESSEE TO H WAS NOT IN THE NATURE OF ROYALTY BUT WAS SUBJECT-MATTER OF ARTICLE 7 OF THE INDIA-USA DTAA. FURTHER IT WAS AN ADMITTED FACT THAT H, DID NOT HAVE ANY PE RMANENT ESTABLISHMENT IN 16 INDIA. THEREFORE, THE ASSESSEE HAD NO OBLIGATION TO DEDUCT TAX AT SOURCE ON SUCH PAYMENTS MADE TO H, USA. THEREFORE, THE CLAIM OF THE ASSESSEE WAS LIABLE TO BE ALLOWED.[PARA 6.8]. 10. NOW WE EXTRACT THE RELEVANT PROVISION UNDER THE INDO-NETHERLANDS DTAA. 12(4) THE TERM ROYALTIES AS USED IN THIS ARTICLE MEANS 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 MOTION PICTURE FILMS AND WORKS ON FILM OR VIDEO TAPE FOR U SE IN CONNECTION WITH TELEVISION, ANY PATENT, TRADE MARK, DESIGN OR MODEL, PLAN, SECRET FORMULA OR PROCESS, OR FOR INFORMATION CONCERNING I NDUSTRIAL, COMMERCIAL OR SCIENTIFIC EXPERIENCE. 11 THE DEFINITION OF ROYALTY IS SIMILAR TO THE DEFI NITION OF ROYALTY IN THE INDO- US DTAA. IN ANY EVENT, WE DO NOT GO INTO IT, AS THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF MOTOROLA INC. VS. DCIT HELD THAT SEC TION 9(1)(VII) IS NOT ATTRACTED IN SUCH CASES WHERE THERE IS A TRANSFER OF COPYRIGHTED ARTICLE AND NOT A TRANSFER OF A COPYRIGHT ITSELF. ON FACTS WE HAVE HELD THAT IN THI S CASE, IT IS A TRANSFER OF A COPYRIGHT ARTICLE. HENCE IT IS NOT ROYALTY U/S 9( 1)(VII) OF THE INCOME-TAX ACT . 12. APPLYING THESE PROPOSITIONS TO THE FACTS OF THE CASE, WE UPHOLD THE ORDER OF THE FIRST APPELLATE AUTHORITY WHEREIN IT IS HELD TH AT : A) IT IS NOW ESTABLISHED LAW THAT COMPUTER SOFTWARE AF TER BEING PUT ON TO A MEDIA AND THEN SOLD, BECOMES GOODS LIKE ANY OTHER A UDIO CASSETTE OR PAINTING ON CANVAS OR A BOOK AND THAT THE AO IS WRO NG IN HOLDING THAT 17 COMPUTER SOFTWARE ON A MEDIA, CONTINUES TO BE AN IN TELLECTUAL PROPERTY RIGHT. B) THAT THE ASSESSEE HAS PURCHASED A COPYRIGHTED ARTIC LE AND NOT THE COPYRIGHT ITSELF. THERE IS NO TRANSFER OF ANY PART OF COPYRIGHT. C) THE PRESENT COMPUTER SOFTWARE CANNOT BE TREATED AS A PATENT OR AN INVENTION. 13. IN VIEW OF THE ABOVE DISCUSSION, WE RESPECTFULL Y FOLLOW THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF MOTORO LA INC. (SUPRA) AND HOLD THAT THE SOFTWARE SUPPLIED WAS A COPY RIGHTED ARTICLE AND NO T A COPY RIGHT AND THAT THE PAYMENT RECEIVED BY THE ASSESSEE IN RESPECT OF THE SOFTWARE CANNOT BE CONSIDERED AS ROYALTY UNDER THE INCOME-TAX ACT. ONCE IT IS NO T ROYALTY UNDER THE INCOME-TAX ACT, THE QUESTION OF EXAMINING WHETHER IT IS ROYAL TY UNDER THE DOUBLE TAXATION AVOIDANCE AGREEMENT WITH NETHERLANDS DOES NOT ARIS E ONCE IT IS NOT ROYALTY, IT IS BUSINESS INCOME AND AS THE ASSESSEE DOES NOT HAVE A P.E. IN INDIA IT IS NOT TAXABLE IN INDIA. IT IS WELL SETTLED THAT WHEN A PARTICULA R TRANSACTION IS TAXABLE AS ROYALTY UNDER THE INDIAN INCOME-TAX ACT, THEN ONLY, WE HAVE TO EXAMINE WHETHER THE DOUBLE TAXATION AVOIDANCE AGREEMENT GIVES AN EXEMP TION OR BENEFIT. WHEN A TRANSACTION CANNOT BE BROUGHT TO TAX AS ROYALTY U NDER THE INCOME-TAX ACT ITSELF, THE QUESTION OF EXAMINING THE POSITION UNDER THE DO UBLE TAXATION AVOIDANCE AGREEMENT DOES NOT ARISE. HENCE WE LEAVE THAT ISSUE OPEN. THUS, WE UPHOLD THE ORDER OF THE FIRST APPELLATE AUTHORITY FOR THE REAS ONS GIVEN HEREIN ABOVE AND DISMISS THE APPEAL OF THE REVENUE. 18 14. IN THE RESULT, THE APPEALS FILED BY THE REVENU E ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 26 TH NOV.. , 2010. SD/- SD/- (R.V. EASWAR) (J. S UDHAKAR REDDY) PRESIDENT ACCOUNTANT MEMBER MUMBAI, DATED: 26 TH NOV., 2010. WAKODE COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, L-BENCH (TRUE COPY) BY ORDER ASSTT. R EGISTRAR, ITAT, MUMBAI B ENCHES MUM BAI.