Samsung Electronics Company Limited India Software Operations, Bangalore V. DCIT, Bangalore

ITA 301/BANG/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 57557 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-03-2012
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 09-03-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 21-03-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: ETWA MUNDA CITIIIDR
• Assessee Lawyers: ANAND R BHAT
• Keywords: Double taxation relief; Competent authority
• Section: 201(1); 90

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI N.K. SAINI, ACCOUNTANT MEMBER AND SHRI GEORGE GEORGE K., JUDICIAL MEMBER ITA NO.301/BANG/2011 ASSESSMENT YEAR : 2005-06 M/S. SAMSUNG ELECTRONICS COMPANY LTD. INDIA SOFTWARE OPERATIONS, C/O. SAMSUNG INDIA SOFTWARE OPERATIONS PVT. LTD., BLOCK B, BAGMANE LAKE VIEW, BAGMANE TECH PARK, C.V. RAMAN NAGAR, BANGALORE 560 093. PAN : AACCS 8960N VS. THE DEPUTY DIRECTOR OF INCOME TAX (INTL. TAXATION), CIRCLE II(1), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI ANAND R. BHAT, C.A. RESPONDENT BY : SHRI ETWA MUNDA, CIT-III(DR) DATE OF HEARING : 09.03.2012 DATE OF PRONOUNCEMENT : 22.03.2012 O R D E R PER N.K. SAINI, ACCOUNTANT MEMBER THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORD ER DATED 30.12.2010 OF THE CIT(APPEALS)-IV, BANGALORE. ITA NO.301/BANG/2011 PAGE 2 OF 13 2. FOLLOWING GROUNDS HAVE BEEN RAISED IN THIS APPE AL: 1. THAT THE ORDER PASSED BY THE COMMISSIONER OF I NCOME-TAX (APPEALS)-IV (HEREINAFTER REFERRED TO AS THE LEARN ED CIT(A) UNDER SECTION 248 R.W.S. 254 OF THE INCOME-TAX ACT, 1961 (THE ACT) IS NOT BASED ON THE FACTS, CONTRARY TO THE PR OVISIONS OF LAW AND IS LIABLE TO BE QUASHED. 2. THAT THE LEARNED CIT(A) ERRED IN HOLDING THAT TH E APPELLANT IS REQUIRED TO DEDUCT TAX AT SOURCE AND P AY THE SAME TO THE GOVERNMENT IN RESPECT OF PAYMENT OF USD 2,985 P AYABLE TO DSP ASIA PTE LTD., SINGAPORE, FOR PURCHASE OF SOFTW ARE NAMELY WINDOWS CE PLATFORM BUILDER 5.0. 3. THAT THE LEARNED ERRED IN HOLDING THAT THE PAYME NT TO DSP ASIA PTE LTD., SINGAPORE TOWARDS PURCHASE OF SOFTWA RE ARE IN THE NATURE OF ROYALTY. 4. THAT THE APPELLANT DENIES ITS LIABILITY TO DEDUC T TAX AT SOURCE AND PAY THE SAME TO THE GOVERNMENT IN RESPEC T OF PAYMENT MADE TO DSP ASIA PTE LTD., SINGAPORE TOWARDS PURCHA SE OF SOFTWARE. 5. THAT THE LEARNED CIT(A) ERRED IN NOT DIRECTING T HE RESPONDENTS TO GRANT REFUND OF THE TAX DEPOSITED BY THE APPELLANT. 6. THAT THE APPELLANT CRAVES LEAVE TO ADD TO AND/OR ALTER, AMEND, RESCIND OR MODIFY THE GROUNDS HEREIN ABOVE B EFORE OR AT THE TIME OF HEARING THE APPEAL. 3. THE MAIN GRIEVANCE OF THE ASSESSEE IN THIS APPEA L RELATES TO THE ACTION OF THE LD. CIT(APPEALS) IN CONFIRMING THE VI EW EXPRESSED BY THE ASSESSING OFFICER IN HOLDING THAT THE PAYMENT OF US D 2,985 PAYABLE TO DSP ASIA PTE LTD., SINGAPORE, FOR PURCHASE OF SOFTW ARE WAS IN THE NATURE OF ROYALTY AND THE ASSESSEE WAS REQUIRED TO DEDUCT TAX AT SOURCE AND PAY THE SAME TO THE GOVERNMENT. 4. THE FACTS OF THE CASE IN BRIEF ARE THAT THE ASSE SSEE DEDUCTED TAX AT SOURCE AND DEPOSITED THE SAME TO THE GOVERNMENT TRE ASURY, HOWEVER, THE ITA NO.301/BANG/2011 PAGE 3 OF 13 ASSESSEE U/S. 248 OF THE INCOME-TAX ACT, 1961 [HERE INAFTER REFERRED TO AS THE ACT IN SHORT] BEING THE PERSON DENYING THE L IABILITY TO DEDUCT TAX, HAD PREFERRED AN APPEAL TO THE LD. CIT(A), WHO DISMISSE D THE APPEAL BY OBSERVING IN PARA 10 OF THE IMPUGNED ORDER AS UNDER : 10. IT IS TRUE THAT THE HONBLE SUPREME COURT IN T HE CASE OF GE INDIA TECHNOLOGY CENTRE VS. CIT REPORTED IN 327 ITR 456 HAS REFERRED THE MATTER BACK TO HONBLE HIGH COURT TO D ECIDE ON THE CHARGEABILITY BEFORE CONCLUDING THAT ALL PAYMENTS M ADE TO NON- RESIDENTS REQUIRE DEDUCTION U/S 195. STILL IN THE C ASE OF M/S. SAMSUNG IT IS HELD THAT PAYMENT MADE TOWARDS SHRIN K WRAPPED SOFTWARE CONSTITUTE PAYMENT MADE TOWARDS R OYALTY, UNLESS THE HONBLE HIGH COURT REVERSES ITS JUDGEMEN T, IT IS OBLIGATORY ON THE PART OF THE LOWER AUTHORITIES TO FOLLOW THE ORDER OF THE JURISDICTIONAL HIGH COURT. IT IS NOT TRUE TH AT THE HONBLE SUPREME COURT HAS TOTALLY REVERSED THE JUDGEMENT OF M/S. SAMSUNG CASE BUT HAS STATED THAT THE HONBLE SUPREM E COURT JUDGMENT IN THE CASE OF M/S. TRANSMISSION CORPORATI ON OF AP LIMITED REPORTED IN 239 ITR 587 HAS NOT BEEN PROPER LY APPRECIATED BY THE HONBLE HIGH COURT. THE ONLY IS SUE TO BE DECIDED BEFORE APPLYING SECTION 195 IS REGARDING TH E CHARGEABILITY OF THE SUM / PART OF THE SUM PAID TO THE NON-RESIDENT AS TO WHETHER SUCH PART IS TAXABLE IN INDIA. IF IT IS TAXABLE, THEN AUTOMATICALLY PROVISIONS OF SECTION 195 APPLY. SINC E THIS JUDGEMENT HAD BEEN REVERSED BY THE HONBLE SUPREME COURT, THOUGH ON A LIMITED ISSUE OF CHARGEABILITY AND THE MATTER HAS BEEN REMANDED BACK TO THE HONBLE HIGH COURT BY THE HON BLE SUPREME COURT, STILL THE RULING OF THE JURISDICTION AL HIGH COURT ON THE ISSUE OF PAYMENTS TOWARDS SHRINK-WRAPPED SOFTW ARE BEING LIABLE TO BE TAXED AS ROYALTY HAS TO BE FOLLOWED. E VEN IN THE MICRO SOFTS CASE THE HONBLE DELHI TRIBUNAL HAS HELD THE ISSUE IN FAVOUR OF THE REVENUE AND AGAINST THE ASSESSEE. (RE F 328 ITR PART 4 INITIAL PAGE 5 NEWS - BRIEF AND WWW. THEHINDUBUSINESSLINE.COM DATED 31.10.2010. HENCE, IT IS HELD THAT THE APPELLANT WAS REQUIRED TO DEDUCT TAX ON IT S PAYMENTS MADE TO NON-RESIDENTS ON SOFTWARE PURCHASES. ONCE I T IS HELD AS ROYALTY PAYMENTS U/S 9(1)(VI), CONSEQUENCES OF SECT ION 195 AND 201(1) FOLLOW: ACCORDINGLY IT IS HELD THAT THE APPE LLANTS C.AS SSB ASSOCIATES WERE CORRECT IN HOLDING THAT THE PAY MENTS MADE BY THE APPELLANT TO NON-RESIDENTS WERE LIABLE FOR T AX DEDUCTION U/S 195. EVEN GOING BY THE HONBLE KARNATAKA HIGH COURT OBSERVATION IN THE APPELLANTS OWN CASE WHERE IN IT WAS HELD THAT SHRINK-WRAPPED SOFTWARE IS LIABLE FOR DEDUCTION OF TAX, THE ITA NO.301/BANG/2011 PAGE 4 OF 13 APPELLANT GETS NO RELIEF. HOWEVER, SINCE THE MATTER IS NOW REFERRED BACK TO THE HONBLE KARNATAKA HIGH COURT A ND IF THE HONBLE COURT REVERSES ITS JUDGEMENT, THE POSITION WOULD BE DIFFERENT. FOR THE TIME BEING, GOING BY THE HONBLE KARNATAKA HIGH COURT JUDGEMENT IN THE APPELLANTS OWN CASE, I T IS HELD THAT THE PAYMENTS MADE SOFTWARE PURCHASES FROM NON-RESID ENTS ARE LIABLE FOR DEDUCTION UNDER SECTION 195. NOW THE ASSESSEE IS IN APPEAL. 5. THE LD. COUNSEL FOR THE ASSESSEE WAS FAIR ENOUGH TO ADMIT THAT THE ISSUE HAS BEEN DECIDED AGAINST THE ASSESSEE IN ASSE SSEES OWN CASE BY THE HONBLE JURISDICTIONAL HIGH COURT VIDE ORDER DA TED 15.10.2011. HOWEVER, AGAINST THE SAID ORDER, THE ASSESSEE PREFE RRED A SLP BEFORE THE HONBLE SUPREME COURT. IT WAS FURTHER STATED THAT A SIMILAR ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE AND AGAINST THE R EVENUE BY THE HONBLE DELHI HIGH COURT IN THE CASE OF DIT V. ERRICSON A.B., NEW DELHI, [2012] 204 TAXMAN 192 , COPY OF THE SAID ORDER WAS FURNISHED. 6. IN HIS RIVAL SUBMISSIONS, THE LD. CIT(DR) STRONG LY SUPPORTED THE IMPUGNED ORDER PASSED BY THE LD. CIT(A) AND FURTHER SUBMITTED THAT NOW THE ISSUE HAS BEEN SETTLED BY THE HONBLE JURISDICT IONAL HIGH COURT IN ASSESSEES OWN CASE IN FAVOUR OF THE REVENUE VIDE O RDER DATED 15.10.2011 IN ITA NO.2808/2005 & OTHERS, THEREFORE THE LD. CIT (A) WAS FULLY JUSTIFIED IN DECIDING THE ISSUE AGAINST THE ASSESSEE. 7. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE P ARTIES AND CAREFULLY GONE THROUGH THE MATERIAL AVAILABLE ON RE CORD. IN THE PRESENT CASE, IT IS NOT IN DISPUTE THAT IN ASSESSEES OWN C ASE, IDENTICAL ISSUE HAS BEEN DECIDED BY THE HONBLE JURISDICTIONAL HIGH COU RT AND THEIR LORDSHIPS ITA NO.301/BANG/2011 PAGE 5 OF 13 IN THE JUDGMENT DATED 15.10.2011 WHILE DECIDING THE ITA NO.2808/2005 & ORS., OBSERVED IN PARAS 20 TO 25 AS UNDER: 20. HAVING REGARD TO THE ABOVE SAID DEFINITION OF 'RO YALTY', WE HAVE TO CONSIDER THE CONTENTS OF SOFTWARE LICENCE A GREEMENT ENTERED INTO BY NON-RESIDENT WITH SAMSUNG ELECTRONI CS AND ALSO RESPONDENTS IN THE CASE REPRESENTED BY SRI GANESH, LEARNED SENIOR COUNSEL AND SRI ARAVIND DATTAR, WHEREIN IT IS A CAS E OF PURCHASE, SALE OR DISTRIBUTION OR OTHERWISE OF THE OFF-THE-SH ELF SOFTWARE. IT IS DESCRIBED AS A 'SOFTWARE LICENCE AGREEMENT', WHEREI N IT IS AVERRED THAT CUSTOMER ACCEPTS AN INDIVIDUAL, NON-TRANSFERAB LE AND NON- EXCLUSIVE LICENCE TO USE THE LICENSED SOFTWARE PROG RAM(S) PROGAM(S) ON THE TERMS AND CONDITIONS ENUMERATED IN THE AGREEMENT. IT IS FURTHER AVERRED THAT THE CUSTOMER - SAMSUNG ELECTRONICS SHALL PROTECT CONFIDENTIAL INFORMATION AND SHALL NOT REMOVE ANY COPYRIGHT, CONFIDENTIALITY OR OTHER PROP RIETARY RIGHTS PROVIDED BY THE NON-RESIDENT. HOWEVER, WHAT IS GRAN TED UNDER THE SAID LICENCE IS ONLY A LICENCE TO USE THE SOFTWARE FOR INTERNAL BUSINESS WITHOUT HAVING ANY RIGHT FOR MAKING ANY AL TERATION OR REVERSE ENGINEERING OR CREATING SUB-LICENCES. WHAT IS TRANSFERRED UNDER THE SAID LICENCE IS THE LICENCE TO USE THE SO FTWARE AND COPYRIGHT CONTINUE TO BE WITH THE NON-RESIDENT AS P ER THE AGREEMENT. EVEN AS PER THE AGREEMENT ENTERED INTO W ITH THE OTHER DISTRIBUTORS AS ALSO THE END-USER LICENCE AGREEMENT , IT IS CLEAR THAT THE DISTRIBUTOR WOULD GET EXCLUSIVE NON-TRANSFERABL E LICENCE WITHIN THE TERRITORY FOR WHICH HE IS APPOINTED AND HE HAS GOT RIGHT TO DISTRIBUTE VIA RESELLERS THE SOFTWARE, UPON PAYMENT OF THE LICENSES SET FORTH IN EXHIBIT A TO THE AGREEMENT ON LY TO END USERS PURSUANT TO A VALID ACTUATE SHRINKWRAP OR OTHER ACT UATE LICENSE AGREEMENT AND EXCEPT AS EXPRESSLY SET FORTH IN THE SAID AGREEMENT, DISTRIBUTOR MAY NOT RENT, LEASE, LOAN, SELL OR OTHE RWISE DISTRIBUTE THE SOFTWARE THE DOCUMENTATION OR ANY DERIVATIVE WO RKS BASED UPON THE SOFTWARE OR DOCUMENTATION IN WHOLE OR IN P ART. DISTRIBUTOR SHALL NOT REVERSE ENGINEER, DECOMPILE, OR OTHERWISE ATTEMPT TO DERIVE OR MODIFY THE SOURCE CODE FOR THE SOFTWARE. DISTRIBUTOR SHALL HAVE NO RIGHTS TO THE SOFTWARE OT HER THAN THE RIGHTS EXPRESSLY SET FORTH IN THE AGREEMENT. DISTRI BUTOR SHALL NOT MODIFY OR COPY ANY PART OF THE SOFTWARE OR DOCUMENT ATION. DISTRIBUTOR MAY NOT USE SUB-DISTRIBUTORS FOR FURTHE R DISTRIBUTION OF THE SOFTWARE AND DOCUMENTATION WITHOUT THE PRIOR CO NSENT OF ACTUATE. WHAT IS CHARGED IS THE LICENCE FEE TO BE P AID BY THE DISTRIBUTOR OF THE SOFTWARE AS ENUMERATED IN EXHIBI T A TO THE AGREEMENT. FURTHER, CLAUSE 6.01 OF THE AGREEMENT DE ALING WITH TITLE STATES THAT THE DISTRIBUTOR ACKNOWLEDGES THAT ACTUATE AND ITS SUPPLIERS RETAIN ALL RIGHT, TITLE AND INTEREST IN A ND TO THE ORIGINAL, ITA NO.301/BANG/2011 PAGE 6 OF 13 AND ANY COPIES (BY WHOMEVER PRODUCED), OF THE SOFTW ARE OR DOCUMENTATION AND OWNERSHIP OF ALL PATENT COPYRIGHT , TRADEMARK, TRADE SECRET AND OTHER INTELLECTUAL PROPERTY RIGHTS PERTAINING THERETO, SHALL BE AND REMAIN THE SOLE PROPERTY OF A CTUATE. DISTRIBUTOR SHALL NOT BE AN OWNER OF ANY COPIES OF, OR ANY INTEREST IN, THE SOFTWARE, BUT RATHER IS LICENCED PURSUANT T O THE AGREEMENT TO USE AND DISTRIBUTE SUCH COPIES. ACTUATE REPRESEN TS THAT IT HAS THE RIGHT TO ENTER INTO THE AGREEMENT AND GRANT THE LICENCES PROVIDED THEREIN AND CONFIDENTIALITY IS PROTECTED. THEREFORE, ON READING THE CONTENTS OF THE RESPECTIVE AGREEMENT EN TERED INTO BY THE RESPONDENTS 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-RESIDENT SUBJECT TO THE TERMS AND CONDITIONS OF THE AGREEMENT AS REFERRED TO ABOVE AN D THE NON- RESIDENT SUPPLIER CONTINUES TO BE THE OWNER OF THE COPYRIGHT AND ALL OTHER INTELLECTUAL PROPERTY RIGHTS. IT IS WELL SETTLED THAT COPYRIGHT IS A NEGATIVE RIGHT. IT IS AN UMBRELLA OF MANY RIGHTS AND LICENCE IS GRANTED FOR MAKING USE OF THE COPYRIGHT IN RESPECT OF SHRINK WRAPPED SOFTWARE/OFF-THE-SHELF SOFTWARE UNDE R 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 LEARNED SENIOR COUNSEL APPEARING FOR THE RESPONDENTS THAT THERE IS NO TRANSFER OF COPYRIGHT OR ANY PART THEREOF UNDER THE AGREEMENTS ENTERED INTO BY THE RESPONDENT WITH THE NON-RESIDENT SUPPLIER OF SOFTWARE CANNOT BE ACCEPTED. 21. IT IS FURTHER CONTENDED BY THE LEARNED SENIOR COUN SEL APPEARING FOR THE RESPONDENTS THAT IN VIEW OF THE F ACT THAT WHAT IS SUPPLIED BY THE NON-RESIDENT TO THE RESPONDENT IN I NDIA IS ONLY A SHRINK WRAPPED SOFTWARE/OFF-THE-SHELF SOFTWARE, WHI CH IS NOT CUSTOMISED TO SUIT THE NEEDS OF THE RESPONDENT, THE SAID SOFTWARE IS TO BE TREATED AS GOODS AND THERE IS SALE OF THE SOFTWARE AND COPY OF THE SOFTWARE. THEREFORE, THE QUESTION OF PAYING ANY ROYALTY WOULD NOT ARISE. IN SUPPORT OF THE SAID CONTENTION, THE LEARNED SENIOR COUNSEL APPEARING FOR THE RESPONDENTS HAS ST RONGLY RELIED UPON THE DECISION OF THE HON'BLE SUPREME COURT IN TATA CONSULTANCY SERVICES' CASE ( SUPRA ) (HEREINAFTER REFERRED TO AS THE TCS'S CASE), WHEREIN THE HON'BLE SUPREME COURT WAS CONSIDERING THE QUESTION AS TO WHETHER THE CANNED SOFTWARE SOLD BY THE APPELLANTS CAN BE TERMED TO BE 'GOODS' AND AS SUCH ASSESSABLE TO SALES TAX UNDER THE ANDHRA PRADESH GENERAL SALES TA X ACT, 1957. ITA NO.301/BANG/2011 PAGE 7 OF 13 HAVING REGARD TO THE BROAD DEFINITION OF 'GOODS' UN DER SECTION 2(H) OF THE SAID ACT AND ALSO THE PROVISIONS OF ART ICLE 366(12) OF THE CONSTITUTION OF INDIA, THE HON'BLE SUPREME COUR T WAS PLEASED TO ANSWER THE SAID QUESTION FOR DETERMINATION BY HO LDING THAT ONCE THE 'INFORMATION' OR 'KNOWLEDGE' IS TRANSFORME D INTO PHYSICAL EXISTENCE AND RECORDED IN PHYSICAL FORM, IT IS CORP OREAL PROPERTY. THE PHYSICAL RECORDING OF THE SOFTWARE IS NOT AN IN CORPOREAL RIGHT TO BE COMPREHENDED AND ACCORDINGLY, HELD THAT THE S OFTWARE MARKETED BY THE APPELLANTS THEREIN INDISPUTABLY WAS CANNED SOFTWARE AND THUS, SALE OF THE SAME WOULD ATTRACT T HE PROVISIONS OF THE ANDHRA PRADESH GENERAL SALES TAX ACT, 1957. 22. THE QUESTION AS TO WHETHER THE PAYMENT MADE FOR IMP ORT OF SOFTWARE OR SUPPLY OF SOFTWARE BY THE NON-RESIDENT COMPANIES WAS ROYALTY OR NOT WAS NOT AT ALL IN ISSUE IN TCS'S CASE AND THE QUESTION WAS WHETHER CANNED SOFTWARE SOLD BY THE AP PELLANTS THEREIN AMOUNTED TO SALE OF GOODS UNDER THE ANDHRA PRADESH GENERAL SALES TAX ACT. FURTHER, THE ISSUE OF TRANSF ER OF RIGHT TO USE THE GOODS AS PER THE EXPANDED DEFINITION OF 'SA LE' DID NOT COME UP FOR CONSIDERATION IN THAT CASE. ON THE OTHE R HAND THE ISSUE IN THE PRESENT CASE IS AS TO WHETHER THE PAYM ENT WOULD AMOUNT TO 'ROYALTY' WITHIN THE MEANING OF INCOME TA X ACT AND DTTA. IN THE SAID TCS'S CASE, IT HAS BEEN HELD THAT COPYRIGHT IN COMPUTER PROGRAM MAY REMAIN WITH THE ORIGINATOR OF THE PROGRAM, BUT, THE MOMENT COPIES ARE MADE AND MARKET ED, IF BECOMES GOODS, WHICH ARE SUSCEPTIBLE TO TAX. THE CO NTENTION OF THE ASSESSEE THAT THE CONSIDERATION RECEIVED BY THE NON-RESIDENT SUPPLIER TOWARDS THE SOFTWARE PRODUCTS WOULD AMOUNT TO 'ROYALTY' WITHIN THE MEANING OF DTAA WITH RESPECTIVE COUNTRY WAS NOT AT ALL CONSIDERED IN THE SAID CASE. THEREFORE, THE SAI D DECISION IN TCS'S CASE IS NOT HELPFUL TO THE RESPONDENTS IN THE PRESENT CASES. 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 W HEREFORE, MERE FINDING THAT THE COMPUTER SOFTWARE WOULD BE INCLUDE D WITHIN THE TERM 'SALES TAX' WOULD NOT PRECLUDE THIS COURT FROM HOLDING THAT THE SAID PAYMENTS MADE BY THE RESPONDENTS TO THE NO N-RESIDENT COMPANY IN THE PRESENT CASES WOULD AMOUNT TO 'ROYAL TY' UNLESS THE RESPONDENTS ARE ABLE TO PROVE THAT THE SAID PAY MENT 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) OF THE ACT. 23. IT IS WELL SETTLED THAT IN THE ABSENCE OF ANY DEFI NITION OF 'COPYRIGHT' IN THE INCOME TAX ACT OR DTAA WITH THE RESPECTIVE COUNTRIES, IN VIEW OF CLAUSE 3 OF THE DTAA, REFEREN CE IS TO BE ITA NO.301/BANG/2011 PAGE 8 OF 13 MADE TO THE RESPECTIVE LAW REGARDING DEFINITION OF 'COPYRIGHT', NAMELY, COPYRIGHT ACT, 1957, IN INDIA, WHEREIN IT I S CLEARLY STATED THAT 'LITERARY WORK' INCLUDES COMPUTER PROGRAMMES, TABLES AND COMPILATIONS INCLUDING COMPUTER [DATABASES]. SECTIO N 16 OF THE COPYRIGHT ACT, 1957 STATES THAT NO PERSON SHALL BE ENTITLED TO COPYRIGHT OR ANY SIMILAR RIGHT IN ANY WORK, WHETHER PUBLISHED OR UNPUBLISHED, OTHERWISE THAN UNDER AND IN ACCORDANCE WITH THE PROVISIONS OF THE SAID ACT OR OF ANY OTHER LAW FOR THE TIME BEING IN FORCE, BUT NOTHING IN THIS SECTION SHALL BE CONS TRUED AS ABROGATING ANY RIGHT OR JURISDICTION TO RESTRAIN A BREACH OF TRUST OR CONFIDENCE. SECTION 14 OF THE SAID ACT DEALING WITH MEANING OF 'COPYRIGHT' READS AS FOLLOWS:- '14. MEANING OF COPYRIGHT. - FOR THE PURPOSES OF THIS ACT, 'COPYRIGHT' MEANS THE EXCLUSIVE RIGHT SUBJECT TO TH E PROVISIONS OF THIS ACT, TO DO OR AUTHORISE THE DOING OF ANY OF TH E FOLLOWING ACTS IN RESPECT OF A WORK OR ANY SUBSTANTIAL PART THEREO F, NAMELY: - ( A ) IN THE CASE OF A LITERARY, DRAMATIC OR MUSICAL WO RK, NOT BEING A COMPUTER PROGRAMME,- ( I ) TO REPRODUCE THE WORK IN ANY MATERIAL FORM INCLUD ING THE STORING OF IT IN ANY MEDIUM BY ELECTRONIC MEANS; ( II ) TO ISSUE COPIES OF THE WORK TO THE PUBLIC NOT BEI NG COPIES ALREADY IN CIRCULATION; ( III ) TO PERFORM THE WORK IN PUBLIC, OR COMMUNICATE IT TO THE PUBLIC; ( IV ) TO MAKE ANY CINEMATOGRAPH FILM OR SOUND RECORDING 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 ADAPTATI ON OF THE WORK, ANY OF THE ACTS SPECIFIED IN RELATION TO THE WORK I N SUB-CLAUSES ( I ) TO ( VI ); ( B ) IN THE CASE OF A COMPUTER PROGRAMME,- ( I ) TO DO ANY OF THE ACTS SPECIFIED IN CLAUSE ( A ); ( II ) TO SELL OR GIVE ON COMMERCIAL RENTAL OR OFFER 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 I S NOT THE ESSENTIAL OBJECT OF THE RENTAL. ( C ) IN THE EASE OF AN ARTISTIC WORK,- ( I ) TO REPRODUCE THE WORK IN ANY MATERIAL FORM INCLUD ING 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 BEI NG COPIES ALREADY IN CIRCULATION; ITA NO.301/BANG/2011 PAGE 9 OF 13 ( 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 AN Y OF THE ACTS SPECIFIED IN RELATION TO THE WORK IN SUB-CLAUSES ( I ) TO ( IV ); ( D ) IN THE CASE OF A CINEMATOGRAPH FILM,- ( I ) TO MAKE A COPY OF THE FILM, INCLUDING A PHOTOGRAP H OF ANY IMAGE FORMING PART THEREOF; ( II ) TO SELL OR GIVE ON HIRE, OR OFFER FOR SALE OR HIR E, ANY COPY OF THE FILM, REGARDLESS OF WHETHER SUCH COPY HAS 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, ON OFFER FOR SALE OR HIR E, ANY COPY OF THE SOUND RECORDING REGARDLESS OF WHETHER SUCH COPY HAS BEEN SOLD OR GIVEN ON HIRE ON EARLIER OCCASIONS; ( III ) TO COMMUNICATE THE SOUND RECORDING TO THE PUBLIC. EXPLANATION .- FOR THE PURPOSES OF THIS SECTION, A COPY WHICH H AS BEEN SOLD ONCE SHALL BE DEEMED TO BE A COPY ALREADY IN CIRCUL ATION. IT MAY ALSO BE NOTED THAT UNDER SECTION 51 OF THE A CT DEALING WITH 'WHEN COPYRIGHT INFRINGED' STATES THAT COPYRIGHT IN A WORK SHALL BE DEEMED TO BE INFRINGED - WHEN ANY PERSON, WITHOU T A LICENCE GRANTED BY THE OWNER OF THE COPYRIGHT OR THE REGIST RAR OF COPYRIGHTS UNDER THE ACT OR IN CONTRAVENTION OF THE CONDITIONS OF A LICENCE SO GRANTED OR OF ANY CONDITION IMPOSED BY A COMPETENT AUTHORITY UNDER THE ACT: DOES ANYTHING, THE EXCLUSI VE RIGHT TO DO WHICH IS BY THE ACT CONFERRED UPON THE OWNER OF THE COPYRIGHT. SECTION 52 OF THE ACT DEALING WITH CERTAIN ACTS NOT TO BE INFRINGEMENT OF COPYRIGHT STATES THAT THE FOLLOWING ACTS SHALL NOT CONSTITUTE AN INFRINGEMENT OF COPYRIGHT, NAMELY- XXXX ( AA ) THE MAKING OF COPIES OR ADAPTATION OF A COMPUTER PROGRAMME BY THE LAWFUL POSSESSOR OF A COPY OF SUCH COMPUTER PROGRAM ME, FROM SUCH COPY. ( I ) IN ORDER TO UTILISE THE COMPUTER PROGRAMME FOR TH E PURPOSE FOR WHICH IT WAS SUPPLIED; OR ( II ) TO MAKE BACK-UP COPIES PURELY AS A TEMPORARY PROT ECTION AGAINST LOSS, DESTRUCTION OR DAMAGE IN ORDER ONLY TO UTILISE THE COMPUTER PROGRAMME FOR THE PURPOSE FOR WHICH IT WAS SUPPLIED .' ITA NO.301/BANG/2011 PAGE 10 OF 13 24. IT IS CLEAR FROM THE ABOVE SAID PROVISIONS OF THE COPYRIGHT ACT THAT THE RIGHT TO COPYRIGHT WORK WOULD ALSO CONSTIT UTE EXCLUSIVE RIGHT OF THE COPYRIGHT HOLDER AND ANY VIOLATION OF THE SAID RIGHT WOULD AMOUNT TO INFRINGEMENT UNDER SECTION 51 OF TH E ACT. HOWEVER, IF SUCH COPYING OF COMPUTER PROGRAM IS DON E BY A LAWFUL POSSESSOR OF A COPY OF SUCH COMPUTER PROGRAM ME, THE SAME WOULD NOT CONSTITUTE INFRINGEMENT OF COPYRIGHT AND WHEREFORE, BUT FOR THE LICENCE GRANTED IN THESE CAS ES TO THE RESPONDENT TO MAKE COPY OF THE SOFTWARE CONTAINED I N SHRINK- WRAPPED/OFF-THE-SHELF SOFTWARE INTO THE HARD DISK O F THE DESIGNATED COMPUTER AND TO TAKE, A COPY FOR BACKUP PURPOSES, THE END USER HAS NO OTHER RIGHT AND THE SAID TAKING BAC KUP WOULD HAVE CONSTITUTED AN INFRINGEMENT, BUT FOR THE LICEN CE. THEREFORE, LICENCE IS GRANTED FOR TAKING COPY OF THE SOFTWARE AND TO STORE IT IN THE HARD DISK AND TO TAKE A BACK UP COPY AND RIGHT TO MAKE A COPY ITSELF IS A PART OF THE COPYRIGHT. THEREFORE, WHEN LICENCE TO MAKE USE OF THE SOFTWARE BY MAKING COPY OF THE SAME AND TO STORE IT IN THE HARD DISK OF THE DESIGNATED COMPUTER AND TO TAK E BACK UP COPY OF THE SOFTWARE, IT IS CLEAR THAT WHAT IS TRAN SFERRED IS RIGHT TO USE THE SOFTWARE, AN EXCLUSIVE RIGHT, WHICH THE OWN ER OF THE COPYRIGHT I.E. , THE RESPONDENT-SUPPLIER OWNS AND WHAT IS TRANSFERRED IS ONLY RIGHT TO USE COPY OF THE SOFTWA RE FOR THE INTERNAL BUSINESS AS PER THE TERMS AND CONDITIONS O F THE AGREEMENT. THE DECISION OF THE DELHI HIGH COURT IN DYNAMIC VERITCAL SOFTWARE INDIA (P.) LTD.'S CASE ( SUPRA ) RELIED UPON BY SRI ARAVIND DATTAR, LEARNED SENIOR COUNSEL APPEARING FO R THE RESPONDENTS IN SOME OF THE CASES IN SUPPORT OF HIS CONTENTION THAT BY NO STRETCH OF IMAGINATION, PAYMENT MADE BY THE R ESPONDENTS TO THE NON-RESIDENT SUPPLIERS CAN BE TREATED AS 'ROYAL TY' IS NOT HELPFUL TO THE RESPONDENTS IN THE PRESENT CASES AS IN THE S AID CASE, DELHI HIGH COURT WAS CONSIDERING THE PROVISIONS OF SECTIO N 40(A)(I) OF THE ACT AND THE ORDER OF THE HIGH COURT READS AS FO LLOWS :- 'WHAT IS FOUND, AS A MATTER OF FACT, IS THAT THE AS SESSEE HAS BEEN PURCHASING THE SOFTWARE FROM MICROSOFT AND SOLD IT FURTHER IN INDIAN MARKET BY NO STRETCH OF IMAGINATION, IT WOUL D BE TERMED AS ROYALTY.' THEREFORE, THE CONTENTION OF THE LEARNED SENIOR COU NSEL APPEARING FOR THE RESPONDENTS THAT THERE IS NO TRANSFER OF AN Y PART OF COPYRIGHT OR COPYRIGHT UNDER THE IMPUGNED AGREEMENT S OR LICENSES CANNOT BE ACCEPTED. ACCORDINGLY, WE HOLD T HAT 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 ACT AND LICENCE IS GRANTED TO USE THE SOFTWARE BY MAKING CO PIES, WHICH ITA NO.301/BANG/2011 PAGE 11 OF 13 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 LEARNED SENIOR COUNSEL APPEARING FOR THE RESPONDENTS THAT THERE IS NO TRANSFER OF ANY PART O F COPYRIGHT OR COPYRIGHT AND TRANSACTION ONLY INVOLVES SALE OF COP Y OF THE COPYRIGHT SOFTWARE CANNOT BE ACCEPTED. IT IS ALSO T O BE NOTED THAT WHAT IS SUPPLIED IS THE COPY OF THE SOFTWARE OF WHI CH THE RESPONDENT-SUPPLIER CONTINUES TO BE THE OWNER OF TH E COPYRIGHT AND WHAT IS GRANTED UNDER THE LICENCE IS ONLY RIGHT TO COPY THE SOFTWARE AS PER THE TERMS OF THE AGREEMENT, WHICH, BUT FOR THE LICENCE WOULD AMOUNT TO INFRINGEMENT OF COPYRIGHT A ND IN VIEW OF THE LICENCE GRANTED, THE SAME WOULD NOT AMOUNT T O INFRINGEMENT UNDER SECTION 52 OF THE COPYRIGHT ACT AS REFERRED TO ABOVE. THEREFORE, THE AMOUNT PAID TO THE NON-RESIDE NT SUPPLIER TOWARDS SUPPLY OF SHRINK-WRAPPED SOFTWARE, OR OFF-T HE-SHELF SOFTWARE IS NOT THE PRICE OF THE C.D. ALONE NOR SOF TWARE ALONE NOR THE PRICE OF LICENCE GRANTED. THIS IS A COMBINATION OF ALL AND IN SUBSTANCE, UNLESS LICENCE IS GRANTED PERMITTING THE END USER TO COPY AND DOWNLOAD THE SOFTWARE, THE DUMB C.D. CONTA INING THE SOFTWARE WOULD NOT IN ANY WAY BE HELPFUL TO THE END USER AS SOFTWARE WOULD BECOME OPERATIVE ONLY IF IT IS DOWNL OADED TO THE HARDWARE OF THE DESIGNATED COMPUTER AS PER THE TERM S AND CONDITIONS OF THE AGREEMENT AND THAT MAKES THE DIFF ERENCE BETWEEN THE COMPUTER SOFTWARE AND COPYRIGHT IN RESP ECT OF BOOKS OR PRERECORDED MUSIC SOFTWARE AS BOOK AND PRERECORD ED MUSIC C.D. CAN BE USED ONCE THEY ARE PURCHASED, BUT SO FA R AS SOFTWARE STORED IN DUMB C.D. IS CONCERNED, THE TRANSFER OF D UMB C.D. BY ITSELF WOULD 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 IN THE HARD DISK OF THE DESIGNATED COMPUTER IF LICENCE IS GRANTED IN THAT BEHALF AND I N THE ABSENCE OF LICENCE, THE SAME WOULD AMOUNT TO INFRINGEMENT OF C OPYRIGHT, WHICH IS EXCLUSIVELY OWNED BY NON-RESIDENT SUPPLIER S, WHO WOULD CONTINUE TO BE THE PROPRIETOR OF COPYRIGHT. THEREFO RE, THERE IS NO SIMILARITY BETWEEN THE TRANSACTION OF PURCHASE OF T HE BOOK OR PRERECORDED MUSIC C.D. OR THE C.D. CONTAINING SOFTW ARE AND IN VIEW OF THE SAME, THE LEGISLATURE IN ITS WISDOM, HA S TREATED THE LITERARY WORK LIKE BOOKS AND OTHER ARTICLES SEPARAT ELY FROM 'COMPUTER' SOFTWARE WITHIN THE MEANING OF THE 'COPY RIGHT' AS REFERRED TO ABOVE UNDER SECTION 14 OF THE COPYRIGHT ACT. 25. IT IS ALSO CLEAR FROM THE ABOVE SAID ANALYSIS OF T HE DTAA INCOME TAX ACT, COPYRIGHT ACT THAT THE PAYMENT WOUL D CONSTITUTE 'ROYALTY' WITHIN THE MEANING OF ARTICLE 12(3) OF THE DTAA AND EVEN AS PER THE PROVISIONS OF 9(1)( VI ) OF THE ACT AS THE ITA NO.301/BANG/2011 PAGE 12 OF 13 DEFINITION OF 'ROYALTY' UNDER CLAUSE 9(1)( VI ) OF THE ACT IS BROADER THAN THE DEFINITION OF 'ROYALTY' UNDER THE DTAA AS THE RIGHT THAT IS TRANSFERRED IN THE PRESENT CASE IS THE TRANSFER OF COPYRIGHT INCLUDING THE RIGHT TO MAKE COPY OF SOFTWARE FOR IN TERNAL BUSINESS, AND PAYMENT MADE IN THAT REGARD WOULD CONSTITUTE 'R OYALTY' FOR IMPARTING OF ANY INFORMATION CONCERNING TECHNICAL, INDUSTRIAL, COMMERCIAL OR SCIENTIFIC KNOWLEDGE, EXPERIENCE OR S KILL AS PER CLAUSE ( IV ) OF EXPLANATION 2 TO SECTION 9(1)( VI ) OF THE ACT. IN ANY VIEW OF THE MATTER, IN VIEW OF THE PROVISIONS OF SE CTION 90 OF THE ACT, AGREEMENTS WITH FOREIGN COUNTRIES DTAA WOULD O VERRIDE THE PROVISIONS OF THE ACT. ONCE IT IS HELD THAT PAYMENT MADE BY THE RESPONDENTS TO THE NON-RESIDENT COMPANIES WOULD AMO UNT TO 'ROYALTY' WITHIN THE MEANING OF ARTICLE 12 OF THE D TAA WITH THE RESPECTIVE COUNTRY, IT IS CLEAR THAT THE PAYMENT MA DE BY THE RESPONDENTS TO THE NON-RESIDENT SUPPLIER WOULD AMOU NT TO ROYALTY. IN VIEW OF THE SAID FINDING, IT IS CLEAR THAT THERE IS OBLIGATION ON THE PART OF THE RESPONDENTS TO DEDUCT TAX AT SOURCE UNDER SECTION 195 OF THE ACT AND CONSEQUENCES WOULD FOLLOW AS HEL D BY THE HON'BLE SUPREME COURT WHILE REMANDING THESE APPEALS TO THIS COURT. ACCORDINGLY, WE ANSWER THE SUBSTANTIAL QUEST ION OF LAW IN FAVOUR OF THE REVENUE AND AGAINST THE ASSESSEE BY H OLDING THAT ON FACTS AND CIRCUMSTANCES OF THE CASE, THE ITAT WAS N OT JUSTIFIED IN HOLDING THAT THE AMOUNT(S) PAID BY THE RESPONDENT(S ) 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 RESPONDENT(S) WERE NOT LIABLE TO DEDUCT ANY TAX AT SOURCE AND PASS THE FOLLOWING ORDER:- ALL THE APPEALS ARE ALLOWED. THE ORDER PASSED BY TH E INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH 'A' IMPUGNED IN THESE APPEALS IS SET ASIDE AND THE ORDER PASSED BY THE CO MMISSIONER OF INCOME TAX (APPEALS) CONFIRMING THE ORDER PASSED BY THE ASSESSING OFFICER (TDS)-I IS RESTORED . (EMPHASIS SUPPLIED). 8. FROM THE AFORESAID REFERRED TO JUDGMENT DATED 15 .10.2011 IN ITA NO.2808/2005 & OTHERS, IT IS CRYSTAL CLEAR THAT THE ISSUE UNDER CONSIDERATION HAS BEEN SETTLED BY THE HONBLE JURIS DICTIONAL HIGH COURT IN ASSESSEES OWN CASE AND IT HAS BEEN HELD THAT PAYME NT MADE BY THE ASSESSEE TO NON-RESIDENT COMPANIES WOULD AMOUNT TO ROYALTY WITHIN THE MEANING OF ARTICLE 12 OF THE DTAA WITH THE RESPECTI VE COUNTRIES AND THERE ITA NO.301/BANG/2011 PAGE 13 OF 13 WAS OBLIGATION ON THE PART OF THE ASSESSEE TO DEDUC T TAX AT SOURCE U/S. 195 OF THE I.T. ACT. WE THEREFORE DO NOT SEE ANY INFI RMITY IN THE ORDER OF THE LD. CIT(A), AS SUCH WE DO NOT FIND ANY MERIT IN THIS AP PEAL OF THE ASSESSEE. 9. IN THE RESULT, THE APPEAL IS DISMISSED. PRONOUNCED IN THE OPEN COURT ON THIS 22 ND DAY OF MARCH, 2012. SD/- SD/- ( GEORGE GEORGE K. ) ( N.K. SAINI ) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE, DATED, THE 22 ND MARCH , 2012. DS/- COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.