M/s NICE Ltd , Israel V. The Assistant Commissioner of Income Tax Circle-1(2) International Taxation , Bangalore

ITA 287/BANG/2018

• Counselvise Citation: [2021] 108 COUNSELVISE.COM (IT) 1786 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 4 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-06-2021
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 17-06-2021
• Assessment Year: 2012-2013
• Appeal Filed On: 01-02-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Double taxation relief; Permanent establishment; Question of law; Non-deduction of tax; Reassessment proceedings; TDS; Set aside
• Section: 195; 201; 9(1); 9(1); 9(1); 13; 22; 147

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI , JUDICIAL MEMBER IT (IT) A NO S . 287 & 289/BANG/2018 ASSESSMENT YEAR S : 2012 - 13 & 2 - 14 - 15 NICE LTD. (FORMERLY NICE SYSTEMS LIMITED), [ 22, ZARHIN ALEXANDER, RAANANA, ISRAEL 458 25. ] C/O. NICE INTERACTIVE SOLUTIONS PRIVATE LIMITED, 3, QUADRANT, 8 TH FLOOR, TOWER-1, UMIYA BUSINESS BAY, MARATHAHALLI, SARJAPUR OUTER RING ROAD, BANGALORE 560 103. PAN: AADCN 2524J VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 1(2), INTERNATIONAL TAXATION, BANGALORE. APPELLANT RESPONDENT APPELLANT BY : S HRI ALIASGAR RAMPURWALA, CA RESPONDENT BY : SHRI KANNAN NARAYANAN, JT. CIT(DR)(ITAT), B ENGALURU. DATE OF HEARING : 1 7 .0 6 .202 1 DATE OF PRONOUNCEMENT : 22 .0 6 .202 1 ITA NOS. 287 & 289/BANG/2018 PAGE 2 OF 13 O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THESE TWO APPEALS ARE AGAINST DIFFERENT ORDERS O F THE CIT(APPEALS)-12, BENGALURU BOTH DATED 30.11.2017 FO R THE ASSESSMENT YEARS 2012-13 & 2014-15. 2. THE ASSESSEE HEREIN IS AN ISRAEL BASED COMPANY ENGAGED IN THE BUSINESS OF DEVELOPING, MANUFACTURING, MARKETING AN D SELLING COMMUNICATION PRODUCTS. DURING THE YEAR UNDER CONS IDERATION, THE ASSESSEE GRANTED LICENCE TO INDIAN CUSTOMERS FOR US E OF COMPUTER SOFTWARE AND IT RECEIVED PAYMENT FOR THE SALE OF SOFTWARE TO THE INDIAN CUSTOMERS, WHICH WAS NOT DECLARED AS INCOME TAXABLE IN INDIA. THE AO TREATED THE SAME AS ROYALTY AND CHARGED TAX BOTH UNDER THE INCO ME-TAX ACT AND DTAA. 3. THE SAME WAS CONFIRMED BY THE CIT(APPEALS) BY FO LLOWING THE JUDGMENT OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT V. SAMSUNG ELECTRONICS, 345 ITR 494 (KARN) , WHEREIN IT WAS HELD AS FOLLOWS:- THE SUPREME COURT, IN UNION OF INDIA V. AZADI BACH AO ANDOLAN [2003] 263 ITR 705/ 132 TAXMAN 373, HAS LAID DOWN T HAT PROVISIONS OF THE DTAA PREVAILS OVER THE PROVISIONS OF THE ACT IF THE PROVISIONS OF THE DTAA ARE MORE BENEFICIAL TO T HE ASSESSEE. IT IS CLEAR ON PERUSAL OF THE DEFINITION OF 'ROYALTY' UNDER THE ACT AND THE DTAA THAT THE DEFINITION OF 'ROYALTY' IS RESTRI CTIVE IN THE DTAA, WHEREAS THE DEFINITION OF 'ROYALTY' UNDER THE ACT IS BROADER IN ITS CONTENT. THEREFORE, THE DEFINITION O F 'ROYALTY' IN THE DTAA IS MORE BENEFICIAL TO THE ASSESSEE AS ACCORDIN G TO THE ASSESSEE, PAYMENT IS NOT ROYALTY AND, THEREFORE, TH E ROYALTY IN THE RESTRICTED MEANING UNDER DTAA IS MORE BENEFICIAL TO THE ASSESSEE AND, HENCE, IT IS TO BE FOUND OUT AS TO WH ETHER THE PAYMENT MADE BY THE ASSESSEE WOULD AMOUNT TO ROYALT Y UNDER THE CLAUSE IN THE DTAA. EVEN OTHERWISE, IT IS CLEAR THA T IF THE PAYMENT IS HELD TO BE ROYALTY WITHIN THE RESTRICTED MEANING GIVEN TO THE TERM IN THE DTAA, NATURALLY, IT WOULD ALSO T O BE COVERED ITA NOS. 287 & 289/BANG/2018 PAGE 3 OF 13 WITHIN THE TERM 'ROYALTY' IN THE BROADER MEANING OF THE TERM 'ROYALTY' UNDER THE ACT. [PARA 16] THE DISPUTE BETWEEN THE REVENUE AND THE ASSESSEE IN THESE CASES IS WHETHER PAYMENTS MADE BY THE ASSESSEE TO THE NON -RESIDENT WOULD CONSTITUTE 'ROYALTY' OR 'INCOME FROM BUSINESS ' AND IF IT IS TO BE TREATED AS 'INCOME FROM BUSINESS', WHETHER THE N ON-RESIDENT IS REQUIRED TO HAVE A PERMANENT ESTABLISHMENT IN INDIA . FURTHER, IN THE ABSENCE OF ANY PERMANENT ESTABLISHMENT OF THE N ON-RESIDENT IN INDIA, IS THERE NO OBLIGATION ON THE PART OF THE PAYEE, THE ASSESSEE HEREIN, TO DEDUCT TAX AT SOURCE UNDER SECT ION 195. THEREFORE, THE FACT THAT THE PAYMENTS MADE BY THE A SSESSEE TO THE NON-RESIDENT WOULD CONSTITUTE INCOME OF THE NON-RES IDENT IS INDISPUTABLE. HOWEVER, THE DISPUTE IS AS TO WHETHER SUCH INCOME IN THE HANDS OF THE NON-RESIDENT IS TO BE TREATED A S SALE AND INCOME FROM BUSINESS COVERED UNDER ARTICLE 7 OF THE DTAA WITH RESPECTIVE COUNTRIES OR WHETHER THE PAYMENTS WOULD AMOUNT TO ROYALTY IN THE HANDS OF THE NON-RESIDENT, FOR WHICH NO PERMANENT ESTABLISHMENT IS REQUIRED FOR MAKING PAYMENT IN IND IA. THERE IS ALSO NO DISPUTE THAT IF THE PAYMENTS MADE BY THE AS SESSEE ARE HELD TO BE ROYALTY AND NOT 'INCOME FROM BUSINESS', THERE IS AN OBLIGATION ON THE PART OF THE PAYEE, THE ASSESSEE, TO DEDUCT THE TAX AT SOURCE AND IN DEFAULT, THE ASSESSEE WOULD BE CON SIDERED AS A DEFAULT ASSESSEE. ONCE THERE IS AN OBLIGATION TO DE DUCT TAX AT SOURCE UNDER SECTION 195, WHICH IMPOSES A STATUTORY RIGHT ON ANY PERSON RESPONSIBLE FOR PAYING TO A NON-RESIDENT, AN Y INTEREST (NOT BEING INTEREST ON SECURITIES) OR ANY OTHER SUM (NOT BEING DIVIDEND) CHARGEABLE UNDER THE PROVISIONS OF THE AC T, TO DEDUCT INCOME-TAX AT THE RATES IN FORCE UNLESS HE IS LIABL E TO PAY INCOME TAX THEREON AS AN AGENT. PAYMENT TO NON-RESIDENTS B Y WAY OF ROYALTY AND PAYMENT FOR TECHNICAL SERVICES RENDERED IN INDIA ARE COMMON EXAMPLES OF SUMS CHARGEABLE UNDER THE PROVIS IONS OF THE ACT TO WHICH THE AFORESTATED REQUIREMENT OF TDS APPLIES. THE TAX SO COLLECTED AND DEDUCTED IS REQUIRED TO BE PAI D TO THE CREDIT OF THE CENTRAL GOVERNMENT IN TERMS OF SECTION 200 R EAD WITH RULE 30 OF THE INCOME-TAX RULES, 1962. FAILURE TO DEDUCT TAX OR FAILURE TO PAY TAX WOULD ALSO RENDER A PERSON LIABLE TO PEN ALTY UNDER SECTION 201 READ WITH SECTION 221. IN ADDITION, HE WOULD ALSO BE LIABLE UNDER SECTION 201(1A) TO PAY SIMPLE INTEREST AT 12 PER CENT PER ANNUM ON THE AMOUNT OF SUCH TAX FROM THE DATE O N WHICH SUCH TAX WAS DEDUCTIBLE TO THE DATE ON WHICH SUCH T AX IS ACTUALLY ITA NOS. 287 & 289/BANG/2018 PAGE 4 OF 13 PAID. THEREFORE, IF THE AMOUNT IS HELD TO BE ROYALT Y, THE OTHER CONSEQUENCES AS REFERRED TO ABOVE WOULD FOLLOW. [PA RA 17] IN VIEW OF THE DEFINITION OF 'ROYALTY' GIVEN IN ART ICLE 12 OF THE DTAA, IT IS CLEAR THAT THE NECESSARY INGREDIENT TO BE SATISFIED TO FIND OUT AS TO WHETHER THE PAYMENT WOULD AMOUNT TO 'ROYALTY' IS AS FOLLOWS:- - PAYMENT OF ANY KIND RECEIVED AS A CONSIDERATION F OR THE USE OF OR THE RIGHT TO USE, ANY COPYRIGHT OF LITERA RY, ARTISTIC OR SCIENTIFIC WORK. IT HAS BEEN UNIVERSALLY ACCEPTED THAT A LITERARY WO RK IS ENTITLED TO COPYRIGHT AND, WHEREFORE, A LITERARY WORK IS ENTITL ED TO BE REGISTERED AS COPYRIGHT. UNDER SECTION 2(O ) OF THE COPYRIGHT ACT, 1957, COMPUTER SOFTWARE HAS BEEN RECOGNIZED AS COPY RIGHT WORK IN INDIA ALSO. [PARA 19] IN THE INSTANT CASE, IN THE SOFTWARE LICENCE AGREEM ENT, IT IS AVERRED THAT CUSTOMER ACCEPTS AN INDIVIDUAL, NON-TRANSFERAB LE AND NON- EXCLUSIVE LICENCE TO USE THE LICENSED SOFTWARE PROG RAM(S) PROGRAM(S) ON THE TERMS AND CONDITIONS ENUMERATED I N THE AGREEMENT. IT IS FURTHER AVERRED THAT THE CUSTOMER- ASSESSEE SHALL PROTECT CONFIDENTIAL INFORMATION AND SHALL NOT REMO VE ANY COPYRIGHT, CONFIDENTIALITY OR OTHER PROPRIETARY RIG HTS PROVIDED BY THE NON-RESIDENT. HOWEVER, WHAT IS GRANTED UNDER TH E SAID LICENCE IS ONLY A LICENCE TO USE THE SOFTWARE FOR INTERNAL BUSINESS WITHOUT HAVING ANY RIGHT FOR MAKING ANY ALTERATION OR REVER SE ENGINEERING OR CREATING SUB-LICENCES. WHAT IS TRANSFERRED UNDER THE SAID LICENCE IS THE LICENCE TO USE THE SOFTWARE AND COPY RIGHT CONTINUE TO BE WITH THE NON-RESIDENT AS PER THE AGREEMENT, E VEN AS PER THE AGREEMENT ENTERED INTO WITH THE OTHER DISTRIBUTORS AS ALSO THE END- USER LICENCE AGREEMENT, IT IS CLEAR THAT THE DISTRI BUTOR WOULD GET EXCLUSIVE NON-TRANSFERABLE LICENCE WITHIN THE TERRI TORY FOR WHICH HE IS APPOINTED AND HE HAS GOT RIGHT TO DISTRIBUTE VIA RESELLERS THE SOFTWARE, UPON PAYMENT OF THE LICENSES SET FORTH IN THE AGREEMENT ONLY TO END-USERS PURSUANT TO A VALID ACTUATE SHRIN K WRAP OR OTHER ACTUATE LICENSE AGREEMENT AND EXCEPT AS EXPRESSLY S ET FORTH IN THE SAID AGREEMENT, DISTRIBUTOR MAY NOT RENT, LEASE, LO AN, SELL OR OTHERWISE DISTRIBUTE THE SOFTWARE THE DOCUMENTATION OR ANY DERIVATIVE WORKS BASED UPON THE SOFTWARE OR DOCUMEN TATION IN WHOLE OR IN PART. DISTRIBUTOR SHALL NOT REVERSE ENG INEER, ITA NOS. 287 & 289/BANG/2018 PAGE 5 OF 13 DECOMPILE, OR OTHERWISE ATTEMPT TO DERIVE OR MODIFY THE SOURCE CODE FOR THE SOFTWARE. DISTRIBUTOR SHALL HAVE NO RI GHTS TO THE SOFTWARE OTHER THAN THE RIGHTS EXPRESSLY SET FORTH IN THE AGREEMENT. DISTRIBUTOR SHALL NOT MODIFY OR COPY ANY PART OF THE SOFTWARE OR DOCUMENTATION. DISTRIBUTOR MAY NOT USE SUB- DISTRIBUTORS FOR FURTHER DISTRIBUTION OF THE SOFTWA RE AND DOCUMENTATION WITHOUT THE PRIOR CONSENT OF ACTUATE. WHAT IS CHARGED IS THE LICENCE FEE TO BE PAID BY THE DISTRI BUTOR OF THE SOFTWARE AS ENUMERATED IN THE AGREEMENT. FURTHER, C LAUSE 6.01 OF THE AGREEMENT DEALING WITH TITLE STATES THAT THE DI STRIBUTOR ACKNOWLEDGES THAT ACTUATE AND ITS SUPPLIERS RETAIN ALL RIGHTS, TITLE AND INTEREST IN AND TO THE ORIGINAL, AND ANY COPIES (BY WHOMEVER PRODUCED), OF THE SOFTWARE OR DOCUMENTATION AND OWN ERSHIP OF ALL PATENT COPYRIGHT, TRADEMARK, TRADE SECRET AND OTHER INTELLECTUAL PROPERTY RIGHTS PERTAINING THERETO, SHALL BE AND RE MAIN THE SOLE PROPERTY OF ACTUATE. DISTRIBUTOR SHALL NOT BE AN OW NER OF ANY COPIES OF, OR ANY INTEREST IN, THE SOFTWARE, BUT RA THER IS LICENCED PURSUANT TO THE AGREEMENT TO USE AND DISTRIBUTE SUC H COPIES. ACTUATE REPRESENTS THAT IT HAS THE RIGHT TO ENTER I NTO THE AGREEMENT AND GRANT THE LICENCES PROVIDED THEREIN AND CONFIDE NTIALITY IS PROTECTED. THEREFORE, ON READING THE CONTENTS OF TH E RESPECTIVE AGREEMENT ENTERED INTO BY THE ASSESSEE WITH THE NON -RESIDENT, IT IS CLEAR THAT UNDER THE AGREEMENT, WHAT IS TRANSFERRED IS ONLY A LICENCE TO USE THE COPYRIGHT BELONGING TO THE NON-R ESIDENT SUBJECT TO THE TERMS AND CONDITIONS OF THE AGREEMENT AS REF ERRED TO ABOVE AND THE NON-RESIDENT SUPPLIER CONTINUES TO BE THE O WNER OF THE COPYRIGHT AND ALL OTHER INTELLECTUAL PROPERTY RIGHT S. IF IS WELL- SETTLED THAT COPYRIGHT IS A NEGATIVE RIGHT. IT IS A N UMBRELLA OF MANY RIGHTS AND LICENCE IS GRANTED FOR MAKING USE OF THE COPYRIGHT IN RESPECT OF SHRINK WRAPPED SOFTWARE/OFF-THE-SHELF SO FTWARE UNDER THE RESPECTIVE AGREEMENT, WHICH AUTHORIZES THE END USER, I.E., THE CUSTOMER TO MAKE USE OF THE COPYRIGHT SOFTWARE CONT AINED IN THE SAID SOFTWARE, WHICH IS PURCHASED OFF THE SHELF OR IMPORTED AS SHRINK WRAPPED SOFTWARE AND THE SAME WOULD AMOUNT T O TRANSFER OF PART OF THE COPYRIGHT AND TRANSFER OF RIGHT TO U SE THE COPYRIGHT FOR INTERNAL BUSINESS AS PER THE TERMS AND CONDITIO NS OF THE AGREEMENT. THEREFORE, THE CONTENTION OF THE ASSESSE E THAT THERE IS NO TRANSFER OF COPYRIGHT OR ANY PART THEREOF UNDER THE AGREEMENTS ENTERED INTO BY IT WITH THE NON-RESIDENT SUPPLIER O F SOFTWARE CANNOT BE ACCEPTED. [PARA 20] ITA NOS. 287 & 289/BANG/2018 PAGE 6 OF 13 IT IS WELL-SETTLED THAT THE INTENT OF THE LEGISLATU RE IN IMPOSING SALES TAX AND INCOME-TAX ARE ENTIRELY DIFFERENT AS INCOME TAX IS A DIRECT TAX AND SALES TAX IS AN INDIRECT TAX AND, WH EREFORE, MERE FINDING THAT THE COMPUTER SOFTWARE WOULD BE INCLUDE D WITHIN THE TERM 'SALES TAX' WOULD NOT PRECLUDE THE COURT FROM HOLDING THAT THE SAID PAYMENTS MADE BY THE ASSESSEE TO THE NON-R ESIDENT COMPANY IN THE INSTANT CASE WOULD AMOUNT TO 'ROYALT Y' UNLESS THE ASSESSEE IS ABLE TO PROVE THAT THE SAID PAYMENT IS FOR THE SALE OF COMPUTER SOFTWARE, WHEREIN THE INCOME WOULD BE FROM THE BUSINESS AND IN THE ABSENCE OF ANY PERMANENT ESTABL ISHMENT OF THE NON-RESIDENT SUPPLIER, THERE IS NO OBLIGATION O N THE PART OF THE PAYEE TO MAKE DEDUCTION UNDER SECTION 195(1). [PARA 22] IT IS WELL-SETTLED THAT IN THE ABSENCE OF ANY DEFIN ITION OF 'COPYRIGHT' IN THE INCOME-TAX ACT OR THE DTAA WITH THE RESPECTIVE COUNTRIES, IN VIEW OF CLAUSE 3 OF THE DT AA, REFERENCE IS TO BE MADE TO THE RESPECTIVE LAW REGARDING DEFIN ITION OF 'COPYRIGHT', NAMELY, COPYRIGHT ACT, 1957, IN INDIA, WHEREIN IT IS CLEARLY STATED THAT 'LITERARY WORK' INCLUDES COMPUT ER PROGRAMMES, TABLES AND COMPILATIONS INCLUDING COMPUTER [DATABAS ES]. [PARA 23] IT IS CLEAR FROM THE PROVISIONS OF THE COPYRIGHT AC T THAT THE RIGHT TO COPYRIGHT WORK WOULD ALSO CONSTITUTE EXCLUSIVE R IGHT OF THE COPYRIGHT HOLDER AND ANY VIOLATION OF THE SAID RIGH T WOULD AMOUNT TO INFRINGEMENT UNDER SECTION 51 OF THE SAID ACT. H OWEVER, IF SUCH COPYING OF COMPUTER PROGRAMME IS DONE BY A LAW FUL POSSESSOR OF A COPY OF SUCH COMPUTER PROGRAMME, THE SAME WOULD NOT CONSTITUTE INFRINGEMENT OF COPYRIGHT AND WHEREFORE, BUT FOR THE LICENCE GRANTED IN THESE CASES TO THE A SSESSEE TO MAKE COPY OF THE SOFTWARE CONTAINED IN SHRINK-WRAPPED/OF F-THE-SHELF SOFTWARE INTO THE HARD DISK OF THE DESIGNATED COMPU TER AND TO TAKE A COPY FOR BACK-UP PURPOSES, THE END USER HAS NO OT HER RIGHT AND THE SAID TAKING BACK-UP WOULD HAVE CONSTITUTED AN I NFRINGEMENT, BUT FOR THE LICENCE. THEREFORE, LICENCE IS GRANTED FOR TAKING COPY OF THE SOFTWARE AND TO STORE IT IN THE HARD DISK AN D TO TAKE A BACK- UP COPY AND RIGHT TO MAKE A COPY ITSELF IS A PART O F THE COPYRIGHT. THEREFORE, WHEN LICENCE IS GRANTED TO MAKE USE OF T HE SOFTWARE BY MAKING COPY OF THE SAME AND TO STORE IT IN THE HARD DISK OF THE DESIGNATED COMPUTER AND TO TAKE BACK-UP COPY OF THE SOFTWARE, IT IS CLEAR THAT WHAT IS TRANSFERRED IS RIGHT TO USE T HE SOFTWARE, AN ITA NOS. 287 & 289/BANG/2018 PAGE 7 OF 13 EXCLUSIVE RIGHT, WHICH THE OWNER OF THE COPYRIGHT, I.E., THE SUPPLIER OWNS AND WHAT IS TRANSFERRED IS ONLY RIGHT TO USE COPY OF THE SOFTWARE FOR THE INTERNAL BUSINESS AS PER THE T ERMS AND CONDITIONS OF THE AGREEMENT. [PARA 24] THEREFORE, THE CONTENTION OF THE ASSESSEE THAT THER E IS NO TRANSFER OF ANY PART OF COPYRIGHT OR COPYRIGHT UNDER THE IMP UGNED AGREEMENTS OR LICENSES CANNOT BE ACCEPTED. ACCORDIN GLY, RIGHT TO MAKE A COPY OF THE SOFTWARE AND USE IT FOR INTERNAL BUSINESS BY MAKING COPY OF THE SAME AND STORING THE SAME IN THE HARD DISK OF THE DESIGNATED COMPUTER AND TAKING BACK-UP COPY WOU LD ITSELF AMOUNT TO COPYRIGHT WORK UNDER SECTION 14(1) OF THE SAID ACT AND LICENCE IS GRANTED TO USE THE SOFTWARE BY MAKING CO PIES, WHICH WORK, BUT FOR THE LICENCE GRANTED WOULD HAVE CONSTI TUTED INFRINGEMENT OF COPYRIGHT AND LICENCEE IS IN POSSES SION OF THE LEGAL COPY OF THE SOFTWARE UNDER THE LICENCE. THERE FORE, THE CONTENTION OF THE ASSESSEE, THAT THERE IS NO TRANSF ER OF ANY PART OF COPYRIGHT OR COPYRIGHT AND TRANSACTION ONLY INVOLVE S SALE OF COPY OF THE COPYRIGHT SOFTWARE, CANNOT BE ACCEPTED. WHAT IS SUPPLIED IS THE COPY OF THE SOFTWARE OF WHICH THE SUPPLIER CONT INUES TO BE THE OWNER OF THE COPYRIGHT AND WHAT IS GRANTED UNDER TH E LICENCE IS ONLY RIGHT TO COPY THE SOFTWARE AS PER THE TERMS OF THE AGREEMENT, WHICH, BUT FOR THE LICENCE WOULD AMOUNT TO INFRINGE MENT OF COPYRIGHT AND IN VIEW OF THE LICENCE GRANTED, THE S AME WOULD NOT AMOUNT TO INFRINGEMENT UNDER SECTION 52 OF THE COPY RIGHT ACT. THEREFORE, THE AMOUNT PAID TO THE NON-RESIDENT SUPP LIER TOWARDS SUPPLY OF SHRINK-WRAPPED SOFTWARE, OR OFF-THE-SHELF SOFTWARE IS NOT THE PRICE OF THE C.D. ALONE NOR SOFTWARE ALONE NOR THE PRICE OF LICENCE GRANTED. THIS IS A COMBINATION OF ALL AND, IN SUBSTANCE, UNLESS LICENCE IS GRANTED PERMITTING THE END USER T O COPY AND DOWNLOAD THE SOFTWARE, THE DUMB C.D. CONTAINING THE SOFTWARE WOULD NOT IN ANY WAY BE HELPFUL TO THE END USER AS SOFTWARE WOULD BECOME OPERATIVE ONLY IF IT IS DOWNLOADED TO THE HARDWARE OF THE DESIGNATED COMPUTER AS PER THE TERMS AND CON DITIONS OF THE AGREEMENT AND THAT MAKES THE DIFFERENCE BETWEEN THE COMPUTER SOFTWARE AND COPYRIGHT IN RESPECT OF BOOKS OR PRE-R ECORDED MUSIC SOFTWARE AS BOOK AND PRE-RECORDED MUSIC C.D. CAN BE USED ONCE THEY ARE PURCHASED, BUT SO FAR AS SOFTWARE STORED I N DUMB C.D. IS CONCERNED, THE TRANSFER OF DUMB C.D., BY ITSELF, WO ULD NOT CONFER ANY RIGHT UPON THE END USER AND THE PURPOSE OF THE C.D. IS ONLY TO ENABLE THE END USER TO TAKE A COPY OF THE SOFTWARE AND TO STORE IT ITA NOS. 287 & 289/BANG/2018 PAGE 8 OF 13 IN THE HARD DISK OF THE DESIGNATED COMPUTER IF LICE NCE IS GRANTED IN THAT BEHALF AND IN THE ABSENCE OF LICENCE, THE S AME WOULD AMOUNT TO INFRINGEMENT OF COPYRIGHT, WHICH IS EXCLU SIVELY OWNED BY NON-RESIDENT SUPPLIERS, WHO WOULD CONTINUE TO BE THE PROPRIETOR OF COPYRIGHT. THEREFORE, THERE IS NO SIM ILARITY BETWEEN THE TRANSACTION OF PURCHASE OF THE BOOK OR PRE-RECO RDED MUSIC C.D. OR THE C.D. CONTAINING SOFTWARE AND IN VIEW OF THE SAME, THE LEGISLATURE, IN ITS WISDOM, HAS TREATED THE LITERAR Y WORK LIKE BOOKS AND OTHER ARTICLES SEPARATELY FROM 'COMPUTER' SOFTWARE WITHIN THE MEANING OF THE 'COPYRIGHT' AS REFERRED T O ABOVE UNDER SECTION 14 OF THE COPYRIGHT ACT. [PARA 24] IF IS ALSO CLEAR FROM THE ABOVESAID ANALYSIS OF THE DTAA, INCOME-TAX ACT, COPYRIGHT ACT THAT THE PAYMENT WOUL D CONSTITUTE 'ROYALTY' WITHIN THE MEANING OF ARTICLE 12(3) OF TH E DTAA AND EVEN AS PER THE PROVISIONS OF SECTION 9(1)(VI) AS T HE DEFINITION OF 'ROYALTY' UNDER SECTION 9(1)(VI) IS BROADER THAN TH E DEFINITION OF 'ROYALTY' UNDER THE DTAA AS THE RIGHT THAT IS TRANS FERRED IN THE INSTANT CASE IS THE TRANSFER OF COPYRIGHT INCLUDING THE RIGHT TO MAKE COPY OF SOFTWARE FOR INTERNAL BUSINESS, AND PA YMENT MADE IN THAT REGARD WOULD CONSTITUTE 'ROYALTY' FOR IMPAR TING OF ANY INFORMATION CONCERNING TECHNICAL, INDUSTRIAL, COMME RCIAL OR SCIENTIFIC KNOWLEDGE, EXPERIENCE OR SKILL AS PER CL AUSE (IV) OF EXPLANATION 2 TO SECTION 9(1)(VI). IN ANY VIEW OF T HE MATTER, IN VIEW OF THE PROVISIONS OF SECTION 90, AGREEMENTS WI TH FOREIGN COUNTRIES (DTAA) WOULD OVERRIDE THE PROVISIONS OF T HE ACT. ONCE IT IS HELD THAT PAYMENT MADE BY THE ASSESSEE T O THE NON- RESIDENT COMPANIES WOULD AMOUNT TO 'ROYALTY' WITHIN THE MEANING OF ARTICLE 12 OF THE DTAA WITH THE RESPECTIVE COUNT RY, IT IS CLEAR THAT THE PAYMENT MADE BY THE ASSESSEE TO THE NON-RE SIDENT SUPPLIER WOULD AMOUNT TO ROYALTY. IN VIEW OF THE SA ID FINDING, IT IS CLEAR THAT THERE IS OBLIGATION ON THE PART OF THE A SSESSEE TO DEDUCT TAX AT SOURCE UNDER SECTION 195 AND CONSEQUENCES WO ULD FOLLOW. ON FACTS AND CIRCUMSTANCES OF THE CASE, THE TRIBUNA L WAS NOT JUSTIFIED IN HOLDING THAT THE AMOUNT(S) PAID BY THE ASSESSEE TO THE FOREIGN SOFTWARE SUPPLIERS WAS NOT 'ROYALTY' AND TH AT THE SAME DID NOT GIVE RISE TO ANY 'INCOME' TAXABLE IN INDIA AND, WHEREFORE, THE ASSESSEE WAS NOT LIABLE TO DEDUCT ANY TAX AT SOURCE . [PARA 25]. ITA NOS. 287 & 289/BANG/2018 PAGE 9 OF 13 4. AGAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE U S BY WAY OF THE FOLLOWING GROUNDS IN ITA NO.287/B/2019, AY 2012-13: - 1. THAT IN THE FACTS AND IN CIRCUMSTANCES OF THE C ASE AND IN LAW, THE ORDER PASSED BY THE ASSISTANT COMMISSIONER OF I NCOME- TAX, CIRCLE- 1(2), INTERNATIONAL TAXATION, BANGALOR E (LEARNED ASSESSING OFFICER' OR 'LEARNED AO') AND LEARNED ASS ISTANT COMMISSIONER OF INCOME-TAX (APPEALS)-12, BANGALORE [`CIT(A)], IS BAD IN LAW AND LIABLE TO BE SET ASIDE . 2. THAT IN THE FACTS AND CIRCUMSTANCES IN THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN UPHOLDING THE ACTION OF THE LEARNED AO, IN INITIATING REASSESSMENT PROCEEDINGS UNDER SE CTION 147 OF THE ACT. 3. THAT IN THE FACTS AND CIRCUMSTANCES IN THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN DISREGARDING THE CONTENTION OF THE APPELLANT THAT THE INITIATION OF RE-ASSESSMENT PROC EEDINGS WAS A MERE BACKDOOR MODE OF ASSESSING THE INCOME OF THE APPELLANT TO CIRCUMVENT THE TIME BARRED ASSESSMENT PROCEEDINGS. 4. THAT IN THE FACTS AND CIRCUMSTANCES IN THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN NOT APPRECIATING THAT THE REASSESSMENT PROCEEDINGS WAS INITIATED TO CIRCUMVEN T THE TIME BARRED ASSESSMENT PROCEEDINGS. 5. THAT IN THE FACTS AND CIRCUMSTANCES IN THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN UPHOLDING THE ACTION OF THE LEARNED AO, IN BRINGING TO TAX THE RECEIPTS FROM THE SALE O F SOFTWARE OF INR 8,44,16,311 AS ROYALTY INCOME. THAT THE APPELLANT CRAVES LEAVE TO ADD TO AND/OR TO ALTER, AMEND, RESCIND, MODIFY THE GROUNDS HEREIN BELOW OR PRODUCE FURTHER DOCUMENTS BEFORE OR AT THE TIME OF HEARING OF THIS APPEAL. 5. SIMILARLY, IN AY 2014-15, THE ASSESSEE HAS RAIS ED IDENTICAL GROUND WITH REGARD TO ACTION OF THE AO IN BRINGING TO TAX THE RECEIPTS FROM SALE OF SOFTWARE AS ROYALTY INCOME. ITA NOS. 287 & 289/BANG/2018 PAGE 10 OF 13 6. AT THE TIME OF HEARING OF THE APPEALS, THE ASSES SEE HAS NOT PRESSED THE GROUNDS NOS.1 TO 4 IN AY 2012-13 RELATING TO RE OPENING OF ASSESSMENT. ACCORDINGLY THESE GROUNDS ARE DISMISSED AS NOT PRES SED. 7. COMING TO THE GROUND ON MERITS RELATING TO TAXAT ION ON SALE OF SOFTWARE AS ROYALTY INCOME, IT WAS BROUGHT TO OUR N OTICE THAT SIMILAR ISSUE FOR AY 2011-12 IN ASSESSEES OWN CASE CAME UP BEFOR E THE HONBLE HIGH COURT OF KARNATAKA IN ITA NO.7/2019 AND VIDE JUDGME NT DATED 26.3.2021 IT WAS HELD AS UNDER:- 7. THE CONTROVERSY INVOLVED IN THE PRESENT CASE, AS INFORMED BY THE LEARNED COUNSEL FOR THE PARTIES STANDS CONCL UDED ON ACCOUNT OF THE JUDGMENT DELIVERED BY THE HONBLE SU PREME COURT IN THE CASE OF ENGINEERING ANALYSIS CENTRE FOR EXCELLENCE PRIVATE LIMITED VS COMMISSIONER OF INCOME TAX & ANOTHER AIR 2021 SC 124 / 432 ITR 47 1 (SC). THE APEX COURT IN THE AFORESAID CASE HAS HELD IN PARAGRAPHS 27, 47, 52, 168 & 169 AS UNDER: 27. THE MACHINERY PROVISION CONTAINED IN SECTION 1 95 OF THE INCOME TAX ACT IS INEXTRICABLY LINKED WITH THE CHARGING PROVISION CONTAINED IN SECTION 9 READ WITH SECTION 4 OF THE INCOME TAX ACT, AS A RESULT OF WHI CH, A PERSON RESIDENT IN INDIA, RESPONSIBLE FOR PAYING A SUM OF MONEY, CHARGEABLE UNDER THE PROVISIONS OF [THE] AC T, TO A NON-RESIDENT, SHALL AT THE TIME OF CREDIT OF SUCH AMOUNT TO THE ACCOUNT OF THE PAYEE IN ANY MODE, DEDUCT TAX AT SOURCE AT THE RATE IN FORCE WHICH, UNDER SECTION 2( 37A)(III) OF THE INCOME TAX ACT, IS THE RATE IN FORCE PRESCRI BED BY THE DTAA. IMPORTANTLY, SUCH DEDUCTION IS ONLY TO BE MADE IF THE NON-RESIDENT IS LIABLE TO PAY TAX UNDER THE CHARGING PROVISION CONTAINED IN SECTION 9 READ WITH SECTION 4 OF THE INCOME TAX ACT, READ WITH THE DTAA. THUS, IT IS ONL Y WHEN THE NON-RESIDENT IS LIABLE TO PAY INCOME TAX I N INDIA ON INCOME DEEMED TO ARISE IN INDIA AND NO DEDUCTION OF TDS IS MADE UNDER SECTION 195(1) OF THE INCOME TAX ACT, OR SUCH PERSON HAS, AFTER APPLYING SECTION 195(2) O F THE INCOME TAX ACT, NOT DEDUCTED SUCH PROPORTION OF TAX AS IS REQUIRED, THAT THE CONSEQUENCES OF A FAILURE TO DED UCT AND PAY, REFLECTED IN SECTION 201 OF THE INCOME TAX ACT , FOLLOW, BY VIRTUE OF WHICH THE RESIDENT-PAYEE IS DEEMED AN ITA NOS. 287 & 289/BANG/2018 PAGE 11 OF 13 ASSESSEE IN DEFAULT, AND THUS, IS MADE LIABLE TO PAY TAX, INTEREST AND PENALTY THEREON. THIS POSITION IS ALSO MADE AMPLY CLEAR BY THE REFERRAL ORDER IN THE CONCERNED APPEALS FROM THE HIGH COURT OF KARNATAKA, NAMELY, THE JUDGM ENT OF THIS COURT IN GE TECHNOLOGY (SUPRA). 47. IN ALL THESE CASES, THE LICENCE THAT IS G RANTED VIDE THE EULA, IS NOT A LICENCE IN TERMS OF SECTION 30 O F THE COPYRIGHT ACT, WHICH TRANSFERS AN INTEREST IN ALL O R ANY OF THE RIGHTS CONTAINED IN SECTIONS 14(A) AND 14(B) OF THE COPYRIGHT ACT, BUT IS A LICENCE WHICH IMPOSES RESTRICTIONS OR CONDITIONS FOR THE USE OF COMPUTER SOFTWARE. THUS, IT CANNOT BE SAID THAT ANY OF THE E ULAS THAT WE ARE CONCERNED WITH ARE REFERRED TO SECTION 30 OF THE COPYRIGHT ACT, INASMUCH AS SECTION 30 OF THE COPYRIGHT ACT SPEAKS OF GRANTING AN INTEREST IN ANY OF THE RIGHTS MENTIONED IN SECTIONS 14(A) AND 14(B) OF THE COPYRIGHT ACT. THE EULAS IN ALL THE APPEALS BEFORE US DO NOT GRANT ANY SUCH RIGHT OR INTEREST, LEAST OF ALL, A RIGHT OR INTEREST TO REPRODUCE THE COMPUTER SOFTWARE. IN POI NT OF FACT, SUCH REPRODUCTION IS EXPRESSLY INTERDICTED, A ND IT IS ALSO EXPRESSLY STATED THAT NO VESTIGE OF COPYRIGHT IS AT ALL TRANSFERRED, EITHER TO THE DISTRIBUTOR OR TO THE EN D-USER. A SIMPLE ILLUSTRATION TO EXPLAIN THE AFORESAID POSITI ON WILL SUFFICE. IF AN ENGLISH PUBLISHER SELLS 2000 COPIES OF A PARTICULAR BOOK TO AN INDIAN DISTRIBUTOR, WHO THEN RESELLS THE SAME AT A PROFIT, NO COPYRIGHT IN THE AFORESAID BOOK IS TRANSFERRED TO THE INDIAN DISTRIBUTOR, EITHER BY WA Y OF LICENCE OR OTHERWISE, INASMUCH AS THE INDIAN DISTRI BUTOR ONLY MAKES A PROFIT ON THE SALE OF EACH BOOK. IMPOR TANTLY, THERE IS NO RIGHT IN THE INDIAN DISTRIBUTOR TO REPR ODUCE THE AFORESAID BOOK AND THEN SELL COPIES OF THE SAME. ON THE OTHER HAND, IF AN ENGLISH PUBLISHER WERE TO SELL TH E SAME BOOK TO AN INDIAN PUBLISHER, THIS TIME WITH THE RIG HT TO REPRODUCE AND MAKE COPIES OF THE AFORESAID BOOK WIT H THE PERMISSION OF THE AUTHOR IT CAN BE SAID THAT COPYRI GHT IN THE BOOK HAS BEEN TRANSFERRED BY WAY OF LICENCE OR OTHERWISE, AND WHAT THE INDIAN PUBLISHER WILL PAY F OR, IS THE RIGHT TO REPRODUCE THE BOOK, WHICH CAN THEN BE CHARACTERIZED AS ROYALTY FOR THE EXCLUSIVE RIGHT TO REPRODUCE THE BOOK IN THE TERRITORY MENTIONED BY TH E LICENCE. 52. THERE CAN BE NO DOUBT AS TO THE REAL NATURE OF THE TRANSACTIONS IN THE APPEALS BEFORE US. WHAT IS LIC ENSED ITA NOS. 287 & 289/BANG/2018 PAGE 12 OF 13 BY THE FOREIGN, NON-RESIDENT SUPPLIER TO THE DISTRI BUTOR AND RESOLD TO THE RESIDENT END-USER, OR DIRECTLY SU PPLIED TO THE RESIDENT END-USER, IS IN FACT THE SALE OF A PHY SICAL OBJECT WHICH CONTAINS AN EMBEDDED COMPUTER PROGRAMME, AND IS THEREFORE, A SALE OF GOODS, WHICH , AS HAS BEEN CORRECTLY POINTED OUT BY THE LEARNED COUNS EL FOR THE ASSESSEES, IS THE LAW DECLARED BY THIS COURT IN THE CONTEXT OF A SALES TAX STATUTE IN TATA CONSULTANCY SERVICES V. STATE OF A.P., 2005(1) SCC 308 (SEE PARAGRAPH 27 ). 168. GIVEN THE DEFINITION OF ROYALTIES CONTAINED IN ARTICLE 12 OF THE DTAAS MENTIONED IN PARAGRAPH 41 O F THIS JUDGMENT, IT IS CLEAR THAT THERE IS NO OBLIGATION O N THE PERSONS MENTIONED IN S.195 OF THE INCOME TAX ACT TO DEDUCT TAX AT SOURCE, AS THE DISTRIBUTION AGREEMENT S/ EULAS IN THE FACTS OF THESE CASES DO NOT CREATE ANY INTEREST OR RIGHT IN SUCH DISTRIBUTORS/END-USERS, W HICH WOULD AMOUNT TO THE USE OF OR RIGHT TO USE ANY COPY RIGHT. THE PROVISIONS CONTAINED IN THE INCOME TAX ACT (S. 9(1) (VI), ALONG WITH EXPLANATIONS 2 AND 4 THEREOF), WHI CH DEAL WITH ROYALTY, NOT BEING MORE BENEFICIAL TO THE ASSE SSEES, HAVE NO APPLICATION IN THE FACTS OF THESE CASES. 169. OUR ANSWER TO THE QUESTION POSED BEFORE US, IS THAT THE AMOUNTS PAID BY RESIDENT INDIAN END- USERS/DISTRIBUTORS TO NON-RESIDENT COMPUTER SOFTWAR E MANUFACTURE/SUPPLIERS, AS CONSIDERATION FOR THE RESALE/USE OF THE COMPUTER SOFTWARE THROUGH EULAS/ DISTRIBUTION AGREEMENTS, IS NOT THE PAYMENT OF ROYA LTY FOR THE USE OF COPYRIGHT IN THE COMPUTER SOFTWARE, AND THAT THE SAME DOES NOT GIVE RISE TO ANY INCOME TAXABLE I N INDIA, AS A RESULT OF WHICH THE PERSONS REFERRED TO IN SEC TION 195 OF THE INCOME TAX ACT WERE NOT LIABLE TO DEDUCT ANY TDS UNDER SECTION 195 OF THE INCOME TAX ACT. THE ANSWER TO THIS QUESTION WILL APPLY TO ALL FOUR CATEGORIES OF CASES ENUMERATED BY US IN PARAGRAPH-4 OF THIS JUDGMENT. 8. IN THE LIGHT OF THE AFORESAID JUDGMENT DELIVERED BY THE HONBLE SUPREME COURT, THE QUESTION OF LAW FRAMED I N THE PRESENT APPEAL IS DECIDED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. ITA NOS. 287 & 289/BANG/2018 PAGE 13 OF 13 8. FURTHER, THE JUDGMENT RELIED ON BY THE CIT(APPEA LS) IN THE CASE OF SAMSUNG ELECTRONICS (SUPRA) WAS REVERSED BY THE HONBLE SUPREME COURT IN CIVIL APPEAL NO.8733-8734/2018 & ORS. IN THE CAS E OF ENGINEERING ANALYSIS CENTRE FOR EXCELLENCE PRIVATE LIMITED V. C IT & ANR. (SUPRA WHICH HAS BEEN EXTRACTED IN THE FOREGOING PARAGRAPH. BE ING SO, THE ISSUE BEFORE US IS ALREADY SETTLED BY THE HONBLE SUPREME COURT IN FAVOUR OF ASSESSEE. ACCORDINGLY, THE GROUND OF APPEAL IS ALLOWED IN FAV OUR OF ASSESSEE FOR BOTH THE ASSESSMENT YEARS. 9. IN THE RESULT, ITA NO.287/BANG/2018 IS PARTLY AL LOWED, WHILE ITA NO.289/BANG/2018 IS ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 22 ND DAY OF JUNE, 2021. SD/- SD/- ( BEENA PILLAI ) ( CHANDRA POOJARI ) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE, DATED, THE 22 ND JUNE, 2021. / DESAI S MURTHY / COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.