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

ITA 303/BANG/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 57539 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-03-2012
• 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 CITIII
• Assessee Lawyers: ANAND R BHAT
• Keywords: Double taxation relief; Permanent establishment; Question of law; Competent authority
• Section: 90

Judgement Text

PAGE 1 OF 16 ITA NO. 303/BANG/2011 1 INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES A BEFORE SHRI N K SAINI, ACCOUNANT MEMBER AND SHRI GEORGE GEORGE K, JUDICIAL MEMBER ITA NO.303/BANG/2011 (ASST. YEAR 2005-06) M/S SAMSUNG ELECTRONICS COMPANY LIMITED- INDIA SOFTWARE OPERATIONS, BLOCK B, BAGMANE LAKE VIEW, BAGMANE TECH PARK, C V RAMAN NAGAR, BANGALORE-93. PA NO.AACC8960N VS THE DEPUTY COMMISSIONER OF INCOME TAX, INTERNATIONAL TAXATION, CIRCLE-11(1), BANGALORE. (APPELLANT) (RESPONDENT) DATE OF HEARING : 09.03.20 12 DATE OF PRONOUNCEMENT : .03.2012 APPELLANT BY : SHRI ANAND R BHAT, C.A. RESPONDENT BY : SHRI ETWA MUNDA, CIT-III O R D E R PER GEORGE GEORGE K : THIS APPEAL INSTITUTED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE LD. CIT(A)-IV, BANGALORE DATED 30.12.2 010. THE RELEVANT ASSESSMENT YEAR IS 2005-06. 2. THE GROUNDS RAISED READS AS UNDER:- I) THAT THE ORDER PASSED BY THE COMMISSIONER OF INCOME- TAX (APPEALS)-IV UNDER SECTION 248 RWS 254 OF THE A CT IS NOT BASED ON THE FACTS, CONTRARY TO THE PROVISIONS O F LAW AND IS LIABLE TO BE QUASHED. PAGE 2 OF 16 ITA NO. 303/BANG/2011 2 II) THAT THE LEARNED CIT(A) ERRED IN HOLDING THAT THE APPELLANT IS REQUIRED TO DEDUCT TAX AT SOURCE AND P AY THE SAME TO THE GOVERNMENT IN RESPECT OF PAYMENT OF USD 176,221 PAYABLE TO CADENCE DESIGN SYSTEMS (IRELAND), IRELAND, FOR PURCHASE OF SOFTWARE NAMELY CADENCE NC- VERILOG SIMULATOR AND RS.31,694/- TOWARDS MAINTENAN CE CHARGES. III) THAT THE LEARNED CIT(A) ERRED IN HOLDING THAT THE PAYMENT TO CADENCE DESIGN SYSTEMS (IRELAND), IRELAND, TOWARDS PURCHASE OF SOFTWARE AS WELL AS MAINTENANCE CHARGES ARE IN THE NATURE OF ROYALTY. IV) THAT THE APPELLANT DENIES ITS LIABILITY TO DEDUCT TA X AT SOURCE AND PAY THE SAME TO THE GOVERNMENT IN RESPEC T OF PAYMENT MADE TO CADENCE DESIGN SYSTEMS (IRELAND), IRELAND, TOWARDS PURCHASE OF SOFTWARE AND MAINTENAN CE CHARGES. V) THAT THE LEARNED CIT(A) ERRED IN NOT DIRECTING THE RESPONDENTS TO GRANT REFUND OF THE TAX DEPOSITED BY THE APPELLANT. 3. BRIEFLY STATED THE FACTS ARE AS FOLLOWS:- THE APPELLANT IS A BRANCH OF SAMSUNG ELECTRONICS CO. LTD., KOREA. IT IS ENGAGED IN THE BUSINESS OF DEVELOPMEN T, MANUFACTURE AND EXPORT OF SOFTWARE FOR THE USE BY THE PARENT COMPANY. ACCORDING TO THE APPELLANT, DURING THE FINANCIAL YEAR 2004-05 RELEVAN T TO ASSESSMENT YEAR 2005-06, IT HAD IMPORTED READYMADE SOFTWARE, NAMELY C ADENCE NC-VERILOG SIMULATOR FROM CADENCE DESIGN SYSTEMS (IRELAND), IRE LAND. AT THE TIME OF REMITTANCE OF CONSIDERATION FOR IMPORT OF SOFTWARE, THE APPELLANT HAD DEDUCTED TAX AT THE RATE OF 10% ON THE BASIS OF CER TIFICATE ISSUED BY A CHARTERED ACCOUNTANT. SUBSEQUENTLY, THE APPELLANT COMPANY FILED AN APPEAL BEFORE THE CIT(A) DENYING THE LIABILITY TO DEDUCT TAX AT SOURCE FROM THE PRICE PAID FOR THE PURCHASE OF SOFTWARE ON THE GROU ND THAT THE PAYMENT PAGE 3 OF 16 ITA NO. 303/BANG/2011 3 MADE IS NOT IN THE NATURE OF ROYALTY. THE CIT(A) REJ ECTED THE APPEAL FOR THE REASON THAT THERE WAS NO ORDER PASSED BY THE LOW ER AUTHORITY FOR CONSIDERATION AND HENCE, IN THE ABSENCE OF APPEALAB LE ORDER, THE APPEAL IS NOT MAINTAINABLE. 4. AGGRIEVED BY THE ORDER PASSED BY THE CIT(A), THE APPELLANT FILED APPEAL BEFORE THE INCOME TAX APPELLATE TRIBUN AL. THE TRIBUNAL HELD THAT IN VIEW OF THE PROVISIONS OF SECTION 248 OF TH E ACT, THE APPEAL FILED BY THE APPELLANT BEFORE THE CIT(A) IS MAINTAINABLE AND ISSUED DIRECTION TO THE FIRST APPELLATE AUTHORITY TO DISPOSE OFF THE APPEAL ON MERITS. 5. PURSUANT TO THE ORDER OF THE TRIBUNAL, THE MATT ER WAS DISPOSED OFF BY THE CIT(A). THE CIT(A) REJECTED THE APPEAL O F THE APPELLANT BY HOLDING THAT THE PAYMENT MADE FOR THE PURCHASE OF S OFTWARE FROM NON- RESIDENTS ARE LIABLE FOR TAX DEDUCTION UNDER SECTIO N 195 OF THE ACT. 6. AGGRIEVED BY THE DISMISSAL OF THE APPEAL BY THE F IRST APPELLATE AUTHORITY, THE APPELLANT IS IN APPEAL BEFORE US. TH E APPELLANT HAS FILED A PAPER BOOK CONSISTING OF 26 PAGES INTER ALIA CONTAI NING CERTIFICATE OF THE CHARTERED ACCOUNTANT, TAX DEDUCTED AT SOURCE CHALLA N, REMITTANCE DETAILS OF THE PAYMENT MADE FOR THE PURCHASE OF SOFTWARE, INVOI CE ETC. THE LEARNED AR HAS ALSO FILED A DETAILED WRITTEN SUBMISSION RUN NING INTO 16 PAGES. 6.1 THE LEARNED AR SUBMITTED THAT THE ISSUE IN QUE STION IS SQUARELY COVERED BY THE JUDGEMENT OF THE HONBLE DELHI HIGH C OURT IN THE CASE OF DIRECTOR OF INCOME-TAX V ERICSSON, A.B., NEW DELHI (204 TAXMAN 192). HE FURTHER SUBMITTED THAT VARIOUS BENCHES OF THE TRIBU NAL HAVE DECIDED THE PAGE 4 OF 16 ITA NO. 303/BANG/2011 4 ISSUE IN FAVOUR OF THE APPELLANT. HOWEVER, HE FAIR LY CONCEDED THAT THE HONBLE JURISDICTIONAL HIGH COURT IN ASSESSEES OWN CASE (JUDGEMENT DATED 15.10.2011) HAS DECIDED THE ISSUE AGAINST THE ASSES SEE AND THE ASSESSEE HAS PREFERRED SLP BEFORE THE HONBLE SUPREME COURT. 7. THE LEARNED DR SUBMITTED THAT THE ISSUE HAS BEE N CONSIDERED ELABORATELY BY THE RECENT JUDGEMENT OF THE HONBLE JU RISDICTIONAL HIGH COURT IN ASSESSEES OWN CASE (ITA NO.2808/2005 & OTHER, J UDGEMENT DATED 15.10.2011). THE LEARNED DR FURTHER SUBMITTED THAT THE HONBLE JURISDICTIONAL HIGH COURT DISTINGUISHED THE JUDGEME NT OF THE HONBLE DELHI HIGH COURT ON WHICH THE LEARNED AR HAD PLACED STRON G RELIANCE. 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS ON RECORD. THE HONBLE JURISDICTIONAL HIGH COURT I N APPELLANTS OWN CASE CITED SUPRA HAD HELD THAT THE PAYMENT MADE TO NRI FOR THE PURCHASE OF SOFTWARE IS LIABLE FOR TAX DEDUCTION UNDER SECTION 195 OF TH E ACT. THE RELEVANT FINDING OF THE HONBLE JURISDICTIONAL HIGH COURT FR OM PARA 20 TO 25 READS AS FOLLOWS:- 20. HAVING REGARD TO THE ABOVE SAID DEFINITION OF ROYALTY, WE HAVE TO CONSIDER THE CONTENTS OF SOFTWARE LICENCE AGREEMENT ENTERED INTO BY NON-RESIDENT WITH SAMSUNG ELECTRONICS AND ALSO RESPONDENTS IN THE CASE REPRES ENTED BY SHRI GANESH, LEARNED SENIOR COUNSEL AND SRI ARAVI ND DATTAR, WHEREIN IT IS A CASE OF PURCHASE, SALE OR DISTRIBUTION OR OTHERWISE OF THE OFF-THE-SHELF SOFT WARE. IT IS DESCRIBED AS A SOFTWARE LICENCE AGREEMENT, WHEREIN IT IS AVERRED THAT CUSTOMER ACCEPTS AN INDIVIDUAL, NON- TRANSFERABLE AND NON EXCLUSIVE LICENCE TO USE THE L ICENSED SOFTWARE PROGRAM(S) (PROGRAM(S) ON THE TERMS AND PAGE 5 OF 16 ITA NO. 303/BANG/2011 5 CONDITIONS ENUMERATED IN THE AGREEMENT. IT IS FURT HER AVERRED THAT THE CUSTOMER SAMSUNG ELECTRONICS SHA LL PROTECT CONFIDENTIAL INFORMATION AND SHALL NOT REMO VE ANY COPYRIGHT, CONFIDENTIALITY OR OTHER PROPRIETARY 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 RI GHT FOR MAKING ANY ALTERATION OR REVERSE ENGINEERING OR CREATING SUB-LICENCES. WHAT IS TRANSFERRED UNDER T HE SAID LICENCE IS THE LICENCE TO USE THE SOFTWARE AND COPYRIGHT CONTINUE TO BE WITH THE NON-RESIDENT AS PE R THE AGREEMENT. EVEN AS PER THE AGREEMENT ENTERED INTO WITH THE OTHER DISTRIBUTORS AS ALSO THE END USER LICENCE AGREEMENT, IT IS CLEAR THAT THE DISTRIBUTOR WOULD G ET 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 EXHIBIT A TO THE AGREEMEN T ONLY TO END USERS PURSUANT TO A VALID ACTUATE SHRINKWRAP OR OTHER ACTUATE LICENSE AGREEMENT AND EXCEPT AS EXPRE SSLY SET FORTH IN THE SAID AGREEMENT, DISTRIBUTOR MAY NOT RENT, LEASE, LOAN, SELL OR OTHERWISE DISTRIBUTE THE SOFTWARE THE DOCUMENTATION OR ANY DERIVATIVE WORKS BASED UPON THE SOFTWARE OR DOCUMENTATION IN WHOLE O R IN PART. DISTRIBUTOR SHALL NOT REVERSE ENGINEER, DECO MPILE OR OTHERWISE ATTEMPT TO DERIVE OR MODIFY THE SOURCE CODE FOR THE SOFTWARE. DISTRIBUTOR SHALL HAVE NO R IGHTS TO THE SOFTWARE OTHER THAN THE RIGHTS EXPRESSLY SET FORTH IN THE AGREEMENT. DISTRIBUTOR SHALL NOT MODI FY OR COPY ANY PART OF THE SOFTWARE OR DOCUMENTATION. DISTRIBUTOR MAY NOT USE SUBDISTRIBUTORS FOR FURTHER DISTRIBUTION OF THE SOFTWARE AND DOCUMENTATION WITH OUT THE PRIOR CONSENT OF ACTUATE. WHAT IS CHARGED IS T HE LICENCE FEE TO BE PAID BY THE DISTRIBUTOR OF THE SOF TWARE AS ENUMERATED IN EXHIBIT A TO THE AGREEMENT. FURTH ER, CLAUSE 6.01 OF THE AGREEMENT DEALING WITH TITLE STA TES THAT THE DISTRIBUTOR ACKNOWLEDGES THAT ACTUATE AND ITS SUPPLIERS RETAIN ALL RIGHT, TITLE AND INTEREST IN A ND TO THE PAGE 6 OF 16 ITA NO. 303/BANG/2011 6 ORIGINAL, AND ANY COPIES (BY WHOMEVER PRODUCED), OF T HE SOFTWARE OR DOCUMENTATION AND OWNERSHIP OF ALL PATE NT, COPYRIGHT, TRADEMARK, TRADE SECRET AND OTHER INTELLE CTUAL PROPERTY RIGHTS PERTAINING THERETO, SHALL BE AND REM AIN THE SOLE PROPERTY OF ACTUATE. DISTRIBUTOR SHALL NOT BE AN OWNER OF ANY COPIES OF, OR ANY INTEREST IN, THE SOFTW ARE, BUT RATHER, IS LICENCED PURSUANT TO THE AGREEMENT T O USE AND DISTRIBUTE SUCH COPIES. ACTUATE REPRESENTS THA T 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 T HE RESPECTIVE AGREEMENT ENTERED INTO BY THE RESPONDENT& WITH THE RON-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 REFERR ED TO ABOVE AND THE NON-RESIDENT SUPPLIER CONTINUES TO BE THE OWNER OF THE COPYRIGHT AND ALL OTHER INTELLECTUA L 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 I N RESPECT OF SHRINK WRAPPED SOFTWARE I OFF-THE- SHELF SOFTWARE UNDER THE RESPECTIVE AGREEMENT, WHICH AUTHORIZES THE END USER I.E., THE CUSTOMER TO MAKE USE OF THE COPYRIGHT SOFTWARE CONTAINED IN THE SAID SOFTWAR E, WHICH IS PURCHASED OFF THE SHELF OR IMPORTED AS SHR INK WRAPPED SOFTWARE AND THE SAME WOULD AMOUNT TO TRANS FER OF PART OF THE COPYRIGHT AND TRANSFER OF RIGHT TO U SE THE COPYRIGHT FOR INTERNAL BUSINESS AS PER THE TERMS AND CONDITIONS OF THE AGREEMENT. THEREFORE, THE CONTENT ION OF THE LEARNED SENIOR COUNSEL APPEARING FOR THE RESPONDENT& THAT THERE IS NO TRANSFER OF COPYRIGHT O R ANY PART THEREOF UNDER THE AGREEMENTS ENTERED INTO B Y THE RESPONDENT WITH THE NONRESIDENT SUPPLIER OF SOF TWARE CANNOT BE ACCEPTED. 21. IT IS FURTHER CONTENDED BY THE LEARNED SENIOR C OUNSEL APPEARING FOR THE RESPONDENT & THAT IN VIEW OF THE PAGE 7 OF 16 ITA NO. 303/BANG/2011 7 FAD THAT WHAT IS SUPPLIED BY THE NON-RESIDENT TO THE RESPONDENT IN INDIA IS ONLY A SHRINK WRAPPED SOFTWAR E / OFF THE-SHELF SOFTWARE, WHICH IS NOT CUSTOMISED TO SUIT THE NEEDS OF THE RESPONDENT, THE SAID SOFTWARE IS T O BE TREATED AS GOODS AND THERE IS SALE OF THE SOFTWARE AND COPY OF THE SOFTWARE. THEREFORE, THE QUESTION OF PAYI NG ANY ROYALTY WOULD NOT ARISE. IN SUPPORT OF THE SAID CONTENTION, THE LEARNED SENIOR COUNSEL APPEARING FO R THE RESPONDENTS HAS STRONGLY RELIED UPON THE DECISION O F THE HONBLE SUPREME COURT IN TATA CONSULTA.NCY SERVICES VS. STATE OF ANDHRA PRADESH (2004 ITR (VOL. 271) 401) (HEREINAFTER REFERRED TO AS THE TCSS CASE), WHEREIN THE HONBLE 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 T HE ANDHRA PRADESH GENERAL SALES TAX ACT, 1957. HAVING REGARD TO THE BROAD DEFINITION OF GOOD& UNDER SECT ION 2(H) OF THE SAID ACT AND ALSO THE PROVISIONS OF ART ICLE 366(12) OF THE CONSTITUTION OF INDIA, THE HON NE SUPREME COURT WAS PLEASED TO ANSWER THE SAID QUESTION FOR DETERMINATION BY HOLDING THAT ONCE THE INFORMA TION OR KNOWLEDGE IS &M1SFONED INTO PHYSICAL EXISTENCE AND RECORDED IN PHYSICAL FORM, IT IS CORPOREAL PROPERTY. THE PHYSICAL RECORDING OF THE SOFTWARE IS NOT AN INCORPO REAL RIGHT TO HE COMPREHENDED AND ACCORDINGLY, HELD THAT THE SOFTWARE MARKETED BY THE APPELLANTS THEREIN INDISPUT ABLY WAS CANNED SOFTWARE AND THUS, SALE OF THE SAME WOUL D ATTRACT THE PROVISIONS OF THE ANDHRA PRADESH GENERA L SALES TAX ACT, 1957. 22. THE QUESTION AS TO WHETHER THE PAYMENT MADE FO R IMPORT OF SOFTWARE OR SUPPLY OF SOFTWARE BY THE NONRESIDENT COMPANIES WAS ROYALTY OR NOT WAS NOT AT ALL IN ISSUE IN ITS S CASE AND THE QUESTION WAS WHETHER CANNED SOFTWARE SOLD BY THE APPELLANTS THEREIN AMOUNTED TO SALE OF G OODS UNDER THE ANDHRA PRADESH GENERAL SALES TAX ACT. FURTHER, THE ISSUE OF TRANSFER OF RIGHT TO USE THE GOODS PAGE 8 OF 16 ITA NO. 303/BANG/2011 8 AS PER THE EXPANDED DEFINITION OF SALE DID NOT COME UP FOR CONSIDERATION IN THAT CASE. ON THE OTHER HAND, THE ISSUE IN THE PRESENT CASE IS AS TO WHETHER THE PAYME NT WOULD AMOUNT TO ROYALTY WITHIN THE MEANING OF INCOME TAX ACT AND DTTA. IN THE SAID TCSS CASE, IT HAS BE EN HELD THAT COPYRIGHT IN COMPUTER PROGRAM MAY REMAIN WI TH THE ORIGINATOR OF THE PROGRAM, BUT, THE MOMENT COPI ES ARE MADE AND MARKETED, IT BECOMES GOODS, WHICH ARE SUSCEPTIBLE TO TAX, THE CONTENTION OF THE ASSESSEE THAT THE CONSIDERATION RECEIVED BY THE NON RESIDENT SUPPL IER TOWARDS THE SOFTWARE PRODUCTS WOULD AMOUNT TO ROYAL TY WITHIN THE MEANING OF DTAA WITH RESPECTIVE COUNTRY W AS NOT AT ALL CONSIDERED IN THE SAID CASE. THEREFORE, THE SAID DECISION IN TCSS CASE IS NOT HELPFUL TO THE RESPON DENTS IN THE PRESENT CASES. IT IS WELL SETTLED THAT THE I NTENT OF THE LEGISLATURE IN IMPOSING. SALES TAX AND INCOME T AX ARE ENTIRELY DIFFERENT AS INCOME TAX IS A DIRECT TAX AND SALES TAX IS AN INDIRECT TAX AND WHEREFORE, MERE FI NDING THAT THE COMPUTER SOFTWARE WOULD BE INCLUDED WITHIN THE TERM SALES TAX WOULD NOT PRECLUDE THIS COURT FROM HOLDING THAT THE SAID PAYMENTS MADE BY THE RESPONDENT S TO THE NON-RESIDENT COMPANY IN THE PRESENT CASES WOU LD AMOUNT TO ROYALTY UNLESS THE RESPONDENTS ARE ABLE TO PROVE THAT THE SAID PAYMENT IS FOR THE SALE OF COMPU TER SOFTWARE, WHEREIN THE INCOME WOULD BE FROM THE BUSI NESS AND IN THE ABSENCE OF ANY PERMANENT ESTABLISHMENT OF THE NON-RESIDENT SUPPLIER, THERE IS NO OBLIGATION O N THE PART OF THE PAYEE TO MAKE DEDUCTION UNDER SECTION 19 5(1) OF THE ACT. 23. IT IS WELL SETTLED THAT IN THE ABSENCE OF ANY D EFINITION OF COPYRIGHT IN THE INCOME TAX ACT OR DTAA WITH THE RESPECTIVE COUNTRIES, IN VIEW OF CLAUSE 3 OF THE DT AA, REFERENCE IS TO BE MADE TO THE RESPECTIVE LAW REGAR DING DEFINITION OF COPY RIGHT, NAMELY, COPYRIGHT ACT, 1957, IN INDIA, WHEREIN IT IS CLEARLY STATED THAT LITERARY WO RK INCLUDES COMPUTER PROGRAMMES, TABLES AND COMPILATIO NS INCLUDING COMPUTER [DATABASES[ SECTION 16 OF THE PAGE 9 OF 16 ITA NO. 303/BANG/2011 9 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 UN DER AND IN ACCORDANCE WITH THE PROVISIONS OF THE SAID A CT OR OF ANY OTHER LAW FOR THE TIME BEING IN FORCE, BUT NO THING IN THIS SECTION SHALL BE CONSTRUED AS ABROGATING AN Y 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 S UBJECT TO THE PROVISIONS OF THIS ACT, TO DO OR AUTHORISE T HE 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 COMMUNICAT E IT TO THE PUBLIC: (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 ADAPTATIO N OF THE WORK, ANY OF THE ACTS SPECIFIED IN RELATION TO THE W ORK IN SUB-CLAUSES (1) TO (VI); PAGE 10 OF 16 ITA NO .303/BANG/2011 10 (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 PROGRAMME: 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 CASE OF AN ARTISTIC WORK, (I) TO REPRODUCE THE WORK IN ANY MATERIAL FORM INCLUDING 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 NO T 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 WOR K ANY 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 PHOTOGR APH OF ANY IMAGE FORMING PART THEREOF; PAGE 11 OF 16 ITA NO .303/BANG/2011 11 (II) TO SELL OR GIVE ON HIRE, OR OFFER FOR SALE OR HIRE, ANY COPY OF THE FILM, REGARDLESS OF WHETHER SUCH COPY HAS BEE N 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 HIRE, ANY COPY OF THE SOUND RECORDING REGARDLESS OF WHETHER SUCH C OPY HAS BEEN SOLD OR GIVEN ON HIRE ON EARLIER OCCASIONS : (III) TO COMMUNICATE THE SOUND RECORDING TO THE PU BLIC. EXPLANATION. - FOR THE PURPOSES OF THIS SECTION. A COPY WHICH HAS BEEN SOLD ONCE SHALL BE DEEMED TO BE A COPY ALREADY IN CIRCULATION. IT MAY ALSO BE NOTED THAT UNDER SECTION 51 OF THE AC T DEALING WITH WHEN COPYRIGHT INFRINGED STATES THAT COPYRIGH T IN A WORK SHALL BE DEEMED TO BE INFRINGED - WHEN ANY PERSON, W ITHOUT A LICENCE GRANTED BY THE OWNER OF THE COPYRIGHT OR THE REGISTRAR OF COPYRIGHTS UNDER THE ACT OR IN CONTRAVENTION OF THE CONDITIONS OF A LICENCE SO GRANTED OR OF ANY CONDITI ON IMPOSED BY A COMPETENT AUTHORITY UNDER THE ACT DOES ANYTHING, THE EXCLUSIVE RIGHT TO DO WHICH IS BY THE ACT CONFERRED UPON THE OWNER OF THE COPYRIGHT. SECTION 52 OF THE ACT DEALIN G WITH CERTAIN ACTS NOT TO BE INFRINGEMENT OF COPYRIGHT STA TES THAT THE FOLLOWING ACTS SHALL NOT CONSTITUTE AN INFRINGE MENT OF COPYRIGHT, NAMELY XXX (AA) THE MAKING OF COPIES OR ADAPTATION OF A COMPU TER PROGRAMME BY THE LAWFUL POSSESSOR OF A COPY OF SUCH COMPUTER PROGRAMME, FROM SUCH COPY PAGE 12 OF 16 ITA NO .303/BANG/2011 12 (I) IN ORDER TO UTILISE THE COMPUTER PROGRAMME FOR THE PURPOSE FOR WHICH IT WAS SUPPLIED: OR (II) TO MAKE BACK-UP COPIES PURELY AS A TEMPORARY PROTECTI ON AGAINST LOSS, DESTRUCTION OR DAMAGE IN ORDER ONLY TO UTILISE THE COMPUTER PROGRAMME FOR THE PURPOSE FOR WHICH IT WAS SUPPLIED. 24. IT IS CLEAR FROM THE ABOVE SAID PROVISIONS OF THE COPYRIGHT ACT THAT THE RIGHT TO COPYRIGHT WORK WOULD ALSO CONSTITUTE EXCLUSIVE RIGHT OF THE COPYRIGHT HOLDER A ND ANY VIOLATION OF THE SAID RIGHT WOULD AMOUNT TO INFRINGEMENT UNDER SECTION 51 OF THE ACT. HOWEVER, IF SUCH COPYING OF COMPUTER PROGRAM IS DONE BY A LAWFUL 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 CAS ES TO THE RESPONDENT TO MAKE COPY OF THE SOFTWARE CONTAINE D IN SHRINK-WRAPPED/OFF-THE-SHELF SOFTWARE INTO THE H ARD DISK OF THE DESIGNATED COMPUTER AND TO TAKE A COPY F OR BACKUP PURPOSES, THE END USER HAS NO OTHER RIGHT AN D THE SAID TAKING BACKUP WOULD HAVE CONSTITUTED AN INFRINGEMENT, BUT, FOR THE LICENCE. THEREFORE, LICE NCE 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 T O MAKE A COPY ITSELF IS A PART OF THE COPYRIGHT. THEREF ORE, WHEN LICENCE TO MAKE USE OF THE SOFTWARE BY MAKING C OPY 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 R IGHT 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 SOFTW ARE FOR THE INTERNAL BUSINESS AS PER THE TERMS AND COND ITIONS OF THE AGREEMENT. THE DECISION OF THE DELHI HIGH CO URT IN COMMISSIONER OF INCOME TAX DELHI-V VS. M/S DYNAMIC VER1TCAL SOFTWARE INDIA PVT. LTD IN ITA NO.1692/2010 DATED 22.02.2011 RELIED UPON BY SRI ARAVIND DATTAR, LEARNED SENIOR COUNSEL APPEARING FO R THE PAGE 13 OF 16 ITA NO .303/BANG/2011 13 RESPONDENTS IN SOME OF THE CASES IN SUPPORT OF HIS CONTENTION THAT BY NO STRETCH OF IMAGINATION. PAYMENT MADE BY THE RESPONDENTS TO THE NON-RESIDENT SUPPLIER S CAN BE TREATED AS ROYALTY IS NOT HELPFUL TO THE RESPONDENTS IN THE PRESENT CASES AS IN THE SAID CAS E, DELHI HIGH COURT WAS CONSIDERING THE PROVISIONS OF SCT1ONS 40(A)(1) OF THE ACT AND THE ORDER OF THE HI GH COURT READS AS FOLLOWS: WHAT IS FOUND, AS A MATTER OF FACT, IS THAT THE ASSESSEE HAS BEEN PURCHASING THE SOFTWARE FROM MICROSOFT AND SOLD IT FURTHER IN INDIAN MARKET. BY NO STRETCH OF IMAGINATION, IT WOULD BE TERMED AS ROYALTY. THEREFORE, THE CONTENTION OF THE LEARNED SENIOR COU NSEL APPEARING FOR THE RESPONDENTS THAT THERE IS NO TRAN SFER OF ANY PART OF COPYRIGHT OR COPYRIGHT UNDER THE IMPUGN ED AGREEMENTS OR LICENSES CANNOT BE ACCEPTED. ACCORDI NGLY, WE HOLD THAT RIGHT TO MAKE A COPY OF THE SOFTWARE AN D USE IT FOR INTERNAL BUSINESS BY MAKING COPY OF THE SA ME AND STORING THE SAME IN THE HARD DISK OF THE DESIGN ATED COMPUTER AND TAKING BACK UP COPY WOULD ITSELF AMOUN T TO COPYRIGHT WORK UNDER SECTION 14 (1) OF THE ACT AND LICENCE IS GRANTED TO USE THE SOFTWARE BY MAKING COP IES, WHICH WORK, BUT FOR THE LICENCE GRANTED WOULD HAVE CONSTITUTED INFRINGEMENT OF COPYRIGHT AND LICENCEE I S IN POSSESSION OF THE LEGAL COPY OF THE SOFTWARE UNDER T HE LICENCE. THEREFORE, THE CONTENTION OF THE LEARNED S ENIOR COUNSEL APPEARING FOR THE RESPONDENTS THAT THERE IS NO TRANSFER OF ANY PART OF COPYRIGHT OR COPYRIGHT AND TRANSACTION ONLY INVOLVES SALE OF COPY OF THE COPYRIGH T SOFTWARE CANNOT BE ACCEPTED. IT IS ALSO TO BE NOTED THAT WHAT IS SUPPLIED IS THE COPY OF THE SOFTWARE OF WHIC H THE RESPONDENT SUPPLIER CONTINUES TO BE THE OWNER OF THE COPYRIGHT AND WHAT IS GRANTED UNDER THE LICENCE IS O NLY RIGHT TO COPY THE SOFTWARE AS PER THE TERMS OF THE AGREEMENT, WHICH, BUT FOR THE LICENCE WOULD AMOUNT TO INFRINGEMENT OF COPYRIGHT AND IN VIEW OF THE LICENCE PAGE 14 OF 16 ITA NO .303/BANG/2011 14 GRANTED, THE SAME WOULD NOT AMOUNT TO 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 O R 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 LI CENCE IS GRANTED PERMITTING THE END USER TO COPY AND DOWNLOA D THE SOFTWARE, THE DUMB CD. CONTAINING THE SOFTWARE WOULD NOT IN ANY WAY BE HELPFUL TO THE END USER AS SOFTWARE WOULD BECOME OPERATIVE ONLY IF IT IS DOWNLO ADED TO THE HARDWARE OF THE DESIGNATED COMPUTER AS PER T HE TERMS AND CONDITIONS OF THE AGREEMENT AND THAT MAKE S THE DIFFERENCE BETWEEN THE COMPUTER SOFTWARE AND COPYRIGHT IN RESPECT OF BOOKS OR PRERECORDED MUSIC, SOFTWARE AS BOOK AND PRERECORDED MUSIC C.D. CAN BE USED ONCE THEY ARE PURCHASED, BUT SO FAR AS SOFTWARE STOR ED IN DUMB C.D. IS CONCERNED. THE TRANSFER OF DUMB CD. BY ITSELF WOULD NOT CONFER ANY RIGHT UPON THE END USER AND THE PURPOSE OF THE CD. IS ONLY TO ENABLE THE END USE R TO TAKE A COPY OF THE SOFTWARE AND TO STORE IT IN THE H ARD DISK OF THE DESIGNATED COMPUTER IF LICENCE IS GRANT ED IN THAT BEHALF AND IN THE ABSENCE OF LICENCE, THE SAME WOULD AMOUNT TO INFRINGEMENT OF COPYRIGHT, WHICH IS EXCLUSIVELY OWNED BY NON-RESIDENT SUPPLIERS, WHO WOUL D CONTINUE TO BE THE PROPRIETOR OF COPYRIGHT. THEREFO RE, THERE IS NO SIMILARITY BETWEEN THE TRANSACTION OF PURCHASE OF THE BOOK OR PRERECORDED MUSIC CD. OR TH E CD. CONTAINING SOFTWARE AND IN VIEW OF THE SAME. TH E LEGISLATURE IN ITS WISDOM, HAS TREATED THE LITERARY WORK LIKE BOOKS AND OTHER ARTICLES SEPARATELY FROM COMPUT ER SOFTWARE WITHIN THE MEANING OF THE COPYRIGHT AS REFERRED TO ABOVE UNDER SECTION 14 OF THE COPYRIGHT ACT. 25. IT IS ALSO CLEAR FROM THE ABOVE SAID ANALYSIS OF THE DTAA INCOME TAX ACT, COPYRIGHT ACT THAT THE PAYMENT WOULD CONSTITUTE ROYALTY WITHIN THE MEANING OF ARTICLE 12 (3) OF THE DTAA AND EVEN AS PER THE PROVISIONS OF 9(1)(VI) OF PAGE 15 OF 16 ITA NO .303/BANG/2011 15 THE ACT AS THE DEFINITION OF ROYALTY UNDER CLAUSE 9 (1)(VI) OF THE ACT IS BROADER THAN THE DEFINITION OF ROYALT Y 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 INTERNAL BUSINESS , AND PAYMENT MADE IN THAT REGARD WOULD CONSTITUTE ROYALTY FOR IMPARTING OF ANY INFORMATION CONCERNING TECHNICA L, INDUSTRIAL, COMMERCIAL OR SCIENTIFIC KNOWLEDGE, EXP ERIENCE OR SKILL AS PER CLAUSE (IV) OF EXPLANATION 2 TO SEC TION 9(1)(VI) OF THE ACT. IN ANY VIEW OF THE MATTER, IN VIEW OF THE PROVISIONS OF SECTION 90 OF THE ACT, AGREEMENTS WITH FOREIGN COUNTRIES DTAA WOULD OVERRIDE THE PROVISION S 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 DTAA WITH THE RESPECTIVE COUNTRY. IT IS CLEAR THAT THE P AYMENT MADE BY THE RESPONDENTS TO THE NON-RESIDENT SUPPLIER WOULD AMOUNT 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 1 95 OF THE ACT AND CONSEQUENCES WOULD FOLLOW AS HELD BY THE HONBLE SUPREME COURT WHILE REMANDING THESE APPEALS TO THIS COURT. ACCORDINGLY, WE ANSWER THE SUBSTANTIAL QUESTION OF LAW IN FAVOUR OF THE REVENUE AND AGAINS T THE ASSESSEE BY HOLDING THAT ON FACTS AND CIRCUMSTANCES OF THE CASE, THE ITAT WAS NOT JUSTIFIED IN HOLDING THA T THE AMOUNT(S) PAID BY THE RESPONDENT(S) TO THE FOREIGN SOFTWARE SUPPLIERS WAS NOT ROYALTY AND THAT THE SAM E DID NOT GIVE RISE TO ANY INCOME TAXABLE IN INDIA A ND WHEREFORE, THE RESPONDENT(S) WERE NOT LIABLE TO DED UCT 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 ORDE R PASSED BY THE COMMISSIONER OF INCOME TAX (APPEALS) CONFIRMING THE ORDER PASSED BY THE ASSESSING OFFICER (TDS) IS RESTORED. PAGE 16 OF 16 ITA NO .303/BANG/2011 16 8.1 SINCE THE FACTS IN THE INSTANT CASE ARE IDENTI CAL TO THE FACTS CONSIDERED BY THE HONBLE JURISDICTIONAL HIGH COURT, RESPECTFULLY FOLLOWING THE DICTUM LAID DOWN BY THE HONBLE JURISDICTIONAL H IGH COURT, WE HOLD THAT THE CIT(A) IS JUSTIFIED IN HIS CONCLUSION THAT THE PAYMENT MADE FOR THE PURCHASE OF SOFTWARE FROM THE NON RESIDENT IS LIABL E FOR DEDUCTION OF TAX UNDER SECTION 195 OF THE ACT. THEREFORE, WE ARE OF THE VIEW THAT THE CIT(A)S ORDER IS CORRECT AND IN ACCORDANCE WITH LA W AND NO INTERFERENCE IS CALLED FOR. IT IS ORDERED ACCORDINGLY. 9. IN THE RESULT, THE APPEAL FILED BY THE APPELLANT IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 27 TH DAY OF MARCH, 2012 SD/- SD/- (N K SAINI) (GEORGE GEORGE K) ACCOUNTANT MEMBER JUDICIAL MEMBER COPY TO:- 1. THE REVENUE 2. THE ASSESSEE 3. THE CIT CONC ERNED 4. THE CIT(A) CONCERNED 5. THE DR 6. GF MSP/- BY ORDER ASST. REGISTRAR, ITAT, BANGALORE.