NOVELL INC, MUMBAI V. DDIT 4(2), MUMBAI

ITA 4368/MUM/2010

• Counselvise Citation: 436819914 RSA 2010
• Duration Of Justice: 1 year(s) 6 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-11-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: L
• Next Hearing Date: 21-11-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 28-05-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: G GURUSWAMI
• Assessee Lawyers: SUNIL LALA; DEVANG SHAH
• Keywords: Business income; Double taxation relief; Deemed to accrue or arise in india; Permanent establishment; Advance ruling; Non-deduction of tax

Judgement Text

IN THE INCOME TAX APPELLATE TRIB UNAL MUMBAI BENCHES L, MUMBAI BEFORE SHRI R.S.SYAL, AM AND SHRI N.V.VASUDEVAN, JM ITA NO.4368/MUM/2010 : ASST.YEAR 2007-2008 M/S.NOVEL INC. C/O.LODHA EXCELLUS, 1 ST FLOOR APOLLO MILLS COMPOUND N.M.JOSHI MARG, MAHALAKSHMI MUMBAI 400 011. PAN : AABCN5034F. THE DEPUTY DIRECTOR OF INCOME-TAX (INTERNATIONAL TAXATION) 4(2) MUMBAI. (APPELLANT) VS. (RESPONDENT) APPELLANT BY : S/SHRI SUNIL LALA & DEVANG SHAH. RESPONDENT BY : SHRI G.GURUSWAMI DATE OF HEARING : 23.11.2011 DATE OF PRONOUNCEMENT : 28.11.2011 O R D E R PER R.S.SYAL, AM : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER PASSED BY THE COMMISSIONER OF INCOME-TAX (APPEALS) ON 23.03.2010 IN RELATION TO THE ASSESSMENT YEAR 2007-2008. 2. THE ONLY ISSUE RAISED THROUGH VARIOUS GROUND IS AGAINST THE TREATMENT TO THE PROCEEDS FROM THE SALE OF SOFTWARE AS ROYALTY I NCOME. BRIEFLY STATED THE FACTUAL MATRIX OF THE CASE IS THAT THE ASSESSEE, A NON-RESIDENT, FILED ITS RETURN DECLARING TOTAL INCOME OF ` 1.76 CRORE. IN A FOOTNOTE TO THE RETURN OF INCOME, IT WAS STATED AS UNDER:- DURING THE PREVIOUS YEAR, NOVELL HAS SOLD SOFTWARE TO NIPL FOR RESALE. THE SAID INCOME IS TAXABLE IN THE HANDS OF NOVELL AS A BUSINESS INCOME. SINCE, NOVELL DOES NOT HAVE ANY PE RMANENT ESTABLISHMENT AS PER ARTICLE 5 OF THE INDIA USA T REATY, INCOME ARISING FROM SUCH SALE OF SOFTWARE AMOUNTING TO ` 58,29,858/- IS NOT CHARGEABLE TO TAX IN INDIA AS PER ARTICLE 7 OF THE INDIA-USA TAX TREATY. ITA NO.4368/MUM/2010 M/S.NOVELL INC. 2 3. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE, A COMPANY INCORPORATED IN THE UNITED STATES AND RESIDENT OF USA FOR TAXATION PURPOSES, IS A LEADING PROVIDER OF INFORMATION SOLUTIONS. THE COMPANY OPERATES GLOBALLY THROUGH TH E PRESENCE OF SUBSIDIARIES IN OTHER COUNTRIES. IN INDIA IT ENTERED INTO JOINT VENTURE COMPANY CALLED ONWARD NOVELL SOFTWARE (INDIA) PRIVATE LIMITED (HEREINAFTE R CALLED NIPL) WHICH ACTS AS A DISTRIBUTOR FOR THE COMPANY AND IMPORTS CERTAI N SOFTWARE FROM THE ASSESSEE AND DUPLICATES AND SELLS OR SOMETIMES RESELLS THE S AME IN THE INDIAN SUB- CONTINENT. IT WAS NOTICED BY THE AO THAT IN THE PRE VIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION, THE ASSESSEE R ECEIVED ROYALTY AS PER THE DISTRIBUTION AGREEMENT AMOUNTING TO ` 1.76 CRORE TOWARDS SALES MADE BY NIPL WHICH WAS OFFERED BY THE ASSESSEE AS ROYALTY INCOME . THERE IS NO DISPUTE ON IT INASMUCH AS THE AO ACCEPTED THE SAID AMOUNT AS ROYA LTY INCOME AND TAXED IT ACCORDINGLY. THE ASSESSEE WAS ALSO FOUND TO HAVE RE CEIVED A SUM OF ` 58,29,858 FROM NIPL TOWARDS THE DIRECT SALE OF SOFTWARE, WHIC H WERE SUBSEQUENTLY RESOLD BY NIPL TO ITS END CUSTOMERS. THE ASSESSEE CLAIMED SUCH AMOUNT FROM SALE OF SOFTWARE AS BUSINESS INCOME AND IN THE ABSENCE OF I T HAVING PERMANENT ESTABLISHMENT AS PER ARTICLE 5 OF INDIA USA TREA TY (HEREINAFTER CALLED THE DTAA), NOT CHARGEABLE TO TAX. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSEE, VIDE ITS LETTER DATED 06.08.2009, STATED THAT THE SALE UNDER THE DISTRIBUTION AGREEMENT TO NIPL WAS DIFFERENT FROM T HE OTHER AGREEMENT AS PER WHICH IT AUTHORIZED NIPL TO DUPLICATE ITS SOFTWARE FOR THE PURPOSES OF FURTHER SALE WHICH RESULTED IN THE ABOVE OFFERED ROYALTY IN COME. ON BEING CALLED UPON TO FURNISH THE DETAILS IN THIS REGARD, THE ASSESSEE FILED COPIES OF INVOICES FROM WHICH IT WAS OBSERVED BY THE A.O. THAT THE ASSESSEE HAD INDICATED THE SALE OF INTELLECTUAL VALUE ON ALL SUCH INVOICES. THE A.O . HELD THAT A SUM OF ` 58.29 LAKH DECLARED BY THE ASSESSEE AS BUSINESS INCOME FR OM THE SALE PROCEEDS OF SOFTWARE ALSO REPRESENTED ROYALTY INCOME COVERED UN DER ARTICLE 12(3) OF THE DTAA. IN HIS OPINION THERE WAS NO DIFFERENCE BETWE EN TWO SITUATIONS VIZ., ITA NO.4368/MUM/2010 M/S.NOVELL INC. 3 FIRSTLY, IN WHICH THE NIPL ACQUIRED THE RIGHT TO DU PLICATE FOR WHICH THE ASSESSEE RECEIVED INCOME OF ` 1.76 CRORE AND; SECONDLY IN WHICH NIPL ACQUIRED SOF TWARE AS SUCH FROM THE ASSESSEE FOR A SALE CONSIDERATION OF ` 58.29 LAKH. HE, THEREFORE, TREATED THE ENTIRE AMOUNT OF ` 2.34 CRORE AS ROYALTY INCOME AND CHARGED TAX ACCORDINGLY. THE LEARNED CIT(A) ECHOED THE ASSESSM ENT ORDER ON THIS ISSUE EXCEPT FOR HOLDING THAT THE AMOUNT COLLECTED FROM V ARIOUS INDIAN PARTIES TOWARDS THE SALE OF INTELLECTUAL VALUE WAS TO BE ASSESSED AS ROYALTY WHEREAS THE AMOUNT COLLECTED FOR CD CASE, COMPACT DISCS AND DVDS ETC. AS BUSINESS RECEIPTS NOT TAXABLE TO INDIA IN VIEW OF THE ASSESS EE NOT HAVING ANY PERMANENT ESTABLISHMENT IN INDIA. THE ASSESSEE IS AGGRIEVED A GAINST THE FINDING GIVEN BY THE LEARNED CIT(A) QUA THE TREATMENT OF AMOUNT COLLECTED FROM INDIAN PART IES TOWARDS INTELLECTUAL VALUE TO BE ASSESSED AS ROYA LTY. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. THE ONLY QUESTION WHICH FALLS FOR OUR CONSI DERATION IN THE PRESENT APPEAL IS TO DECIDE AS TO WHETHER THE SUM OF ` 58.29 LAKH IS ROYALTY OR BUSINESS PROFITS. IF IT IS HELD AS BUSINESS PROFITS, THEN THE ASSESS EE CANNOT BE CHARGED TO TAX ON THIS AMOUNT BECAUSE OF IT HAVING NO PERMANENT ESTAB LISHMENT IN INDIA AS CLAIMED BY THE ASSESSEE AND THE CATEGORICAL FINDIN G RETURNED BY THE LEARNED CIT(A) IN HIS ORDER. IF HOWEVER THE SAID AMOUNT IS HELD AS ROYALTY INCOME, AS HAS BEEN DECIDED BY THE LEARNED CIT(A), THEN THE AS SESSEE WILL BE CHARGEABLE TO TAX ON THIS AMOUNT. 5. SECTION 9(1)(VI) PROVIDES THAT INCOME BY WAY OF ROYALTY SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA WHERE IT IS PAYABLE BY .. (B) A PERSON WHO IS A RESIDENT, EXCEPT WHERE THE ROYALTY IS PAYABLE IN RE SPECT OF ANY RIGHT, PROPERTY OR INFORMATION USED OR SERVICES UTILIZED FOR THE PURPO SES OF A BUSINESS OR PROFESSION CARRIED ON BY SUCH PERSON OUTSIDE INDIA OR FOR THE PURPOSES OF MAKING OR EARNING ANY INCOME FROM ANY SOURCE OUTSID E INDIA. EXPLANATION 2 TO ITA NO.4368/MUM/2010 M/S.NOVELL INC. 4 THIS PROVISION DEFINES ROYALTY TO MEAN CONSIDERA TION (INCLUDING ANY LUMP SUM CONSIDERATION BUT EXCLUDING ANY CONSIDERATION W HICH WOULD BE THE INCOME OF THE RECIPIENT CHARGEABLE UNDER THE HEAD CAPITAL GAINS) FOR - (I) TO (IVA). (V) THE TRANSFER OF ALL OR ANY RIGHTS (INCLUDING THE GRANTING OF A LICENCE) IN RESPECT OF ANY COPYRIGHT , LITERARY, ARTISTIC OR SCIENTIFIC WORK INCLUDING FILMS OR VIDEO TAPES FOR USE IN CONN ECTION WITH TELEVISION OR TAPES FOR USE IN CONNECTION WITH RADI O BROADCASTING, BUT NOT INCLUDING CONSIDERATION FOR THE SALE, DISTR IBUTION OR EXHIBITION OF CINEMATOGRAPHIC FILMS; (EMPHASIS SUPPLIED BY US) 6. IT IS THE CASE OF THE REVENUE THAT CONSIDERATION RECEIVED BY THE ASSESSEE TOWARDS THE SALE OF SOFTWARE PRODUCTS TO NIPL FOR R ESALE IS ROYALTY INCOME SINCE THE CONSIDERATION OF ` 58.29 LAKH IS NOTHING BUT PAYMENT FOR TRANSFER OF COPYRIGHT IN THE COMPUTER PROGRAMME. IT IS NOTED TH AT THE WORD COPYRIGHT HAS NOT BEEN DEFINED IN THE INCOME-TAX ACT, 1961. IN OR DER TO FIND THE MEANING OF THIS WORD, WHICH IS CRUCIAL FOR OUR DECISION, WE NE ED TO REVERT TO THE COPYRIGHT ACT, 1957. SECTION 14(1)(A) GIVES THE MEANING OF CO PYRIGHT AS UNDER:- 14. MEANING OF COPYRIGHT. (1) FOR THE PURPOSES O F THIS ACT, COPYRIGHT MEANS THE EXCLUSIVE RIGHT , SUBJECT TO THE PROVISIONS OF THIS ACT, 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 INCLUDIN G 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; ITA NO.4368/MUM/2010 M/S.NOVELL INC. 5 (IV) TO MAKE ANY CINEMATOGRAPH FILM OR SOUND RECORDING I N 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 WORK IN 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 IS N OT THE ESSENTIAL OBJECT OF THE RENTAL.] (C) TO (E) 7. SEC. 2(Y) OF THE COPYRIGHT ACT DEFINES 'WORK' AS ANY OF THE FOLLOWING NAMELY:- (I) A LITERARY, DRAMATIC, MUSICAL OR ARTIS TIC WORK; (II) A CINEMATOGRAPH FILM; (III) A RECORD. SECTION 2(O), DEFINES A `LIT ERARY WORK AS INCLUDING COMPUTER PROGRAMMES, TABLES AND COMPILATIONS INCLUD ING COMPUTER DATABASES. SEC. 2(FFC) DEFINES A COMPUTER PROGRAMME AS A SET OF INSTRUCTIONS EXPRESSED IN WORDS, CODES, SCHEMES OR IN ANY OTHER FORM INCLUDIN G A MACHINE READABLE MEDIUM, CAPABLE OF CAUSING A COMPUTER TO PERFORM A PARTICULAR TASK OR ACHIEVE A PARTICULAR RESULT. THUS `COMPUTER PROGRAMMES DR OP IN THE MEANING OF `LITERARY WORK, WHICH, IN TURN, FALLS IN CLAUSE (I ) OF SECTION 2(Y) OF THE COPYRIGHT ACT DEFINING `WORK. A CLOSE LOOK AT THE MEANING O F COPYRIGHT OF A COMPUTER PROGRAMME AS PER SECTION 14(B) OF THE COPYRIGHT ACT , 1957 INDICATES THAT IT REFERS TO THE EXCLUSIVE RIGHT TO DO OR AUTHORIZE TO DO IN RESPECT OF A WORK, MAINLY, TO REPRODUCE THE WORK IN ANY MATERIAL FORM INCLUDING THE STORING OF IT IN ANY MEDIUM BY ELECTRONIC MEANS OR TO ISSUE COPIES O F THE WORK TO THE PUBLIC NOT ITA NO.4368/MUM/2010 M/S.NOVELL INC. 6 BEING COPIES ALREADY IN CIRCULATION ETC. AS PER CLA USE (A) OR TO SELL OR GIVE ON COMMERCIAL RENTAL OR OFFER FOR SALE OR FOR COMMERCI AL RENTAL ANY COPY OF THE COMPUTER PROGRAMME. ON READING SECTION 14 OF THE CO PYRIGHT ACT IN JUXTAPOSITION TO SECTION 9(1)(VI) OF THE INCOME-TAX ACT, 1961, THE POSITION WHICH EMERGES IS THAT ANY CONSIDERATION RECEIVED FOR TRAN SFER OF ALL OR ANY RIGHTS IN RESPECT OF COPYRIGHT SHALL BE CONSIDERED AS ROYALTY . THUS, ONLY IF THE CONSIDERATION RECEIVED IS TOWARDS TRANSFER OF ALL O R ANY RIGHTS IN RESPECT OF COPYRIGHTS, IT SHALL BE ROYALTY AND IN ANY OTHER CA SE IT SHALL CEASE TO BE SO . 8. ADVERTING TO THE FACTS OF THE INSTANT CASE IT IS OBSERVED THAT THE ASSESSEE HAD TWO TYPES OF TRANSACTIONS IN INDIA WITH NIPL. F IRST, BEING THE GIVING OF RIGHT TO NIPL TO COPY ITS CERTAIN SPECIFIED SOFTWAR E FOR SALE BY THEM IN INDIAN MARKET. FOR THIS PURPOSE THE ASSESSEE ENTERED INTO SOFTWARE LICENSE AND DISTRIBUTION AGREEMENT (HEREINAFTER CALLED AGREEMEN T A) WITH NIPL, A COPY OF WHICH IS AVAILABLE ON PAGES 47 TO 75 OF THE PAPER B OOK. CLAUSE 3(3) OF THIS AGREEMENT STIPULATES THAT THE ASSESSEE GRANTS A NON -EXCLUSIVE AND NON- TRANSFERABLE LICENSE TO NIPL TO DUPLICATE, DISTRIBU TE AND MARKET THE DUPLICATED PRODUCTS SOLELY IN THE DEFINED AREAS WITHOUT MODIFY ING OR CREATING ANY DERIVATIVE WORKS OF THE DUPLICATED PRODUCTS. CLAUSE 3(4) OF THIS AGREEMENT PROVIDES THAT THE ROYALTY SHALL BECOME DUE TO THE A SSESSEE FROM NIPL FOR EACH COPY OF THE DUPLICATED PRODUCTS DISTRIBUTED BY IT. CLAUSE 6.1 OF THE AGREEMENT PROVIDES THAT THE SOFTWARE ACQUIRED UNDER THE AGREE MENT IS TO ENABLE NIPL TO MARKET THE DUPLICATED PRODUCTS ONLY UNDER THE PROVI SIONS OF THE AGREEMENT AND FURTHER ALL THE END CUSTOMERS RECEIVING THE DUPLICA TED PRODUCTS AGREE TO BE BOUND BY THE SOFTWARE LICENSE AGREEMENT. FROM DIFFE RENT CLAUSES OF THIS AGREEMENT A, IT DIVULGES THAT THE ASSESSEE HOLDS I NTELLECTUAL PROPERTY RIGHTS IN THE SOFTWARE. IT SIMPLY GRANTED LICENSE TO NIPL TO DUPLICATE, DISTRIBUTE AND MARKET THE DUPLICATED PRODUCTS WITHOUT ANY MODIFICA TION TO THE INTELLECTUAL PROPERTY OF THE ASSESSEE IN THE FORM OF SOFTWARE. F URTHER NIPL IS LIABLE TO PAY ITA NO.4368/MUM/2010 M/S.NOVELL INC. 7 ROYALTY TO THE ASSESSEE AT THE RATE OF 35% OF ITS N ET REVENUES FROM OFFERING DUPLICATED PRODUCTS TO THE END USERS IN THE SPECIFI ED TERRITORIES. THIS SUM AMOUNTED TO ` 1.76 CRORE, WHICH WAS DULY OFFERED BY THE ASSESSEE AS ROYALTY INCOME IN ITS RETURN. 9. NOW LET US EXAMINE THE SECOND AGREEMENT, THE PRO CEEDS FLOWING FROM WHICH HAVE BECOME THE BONE OF CONTENTION. A COPY OF THIS AGREEMENT CALLED NOVELL DISTRIBUTOR AGREEMENT (HEREINAFTER CALLED A GREEMENT B) IS AVAILABLE AT PAGES 76 TO 92 OF THE PAPER BOOK. THE PREAMBLE O F THIS AGREEMENT IS AS UNDER:- NOVELL DEVELOPS, MANUFACTURES AND SELLS COMPUTER SO FTWARE PRODUCTS. DISTRIBUTOR IS IN THE BUSINESS OF DISTRIB UTING COMPUTER SOFTWARE PRODUCTS. THIS AGREEMENT AUTHORIZES DISTRI BUTOR TO ACQUIRE FROM NOVELL THE COMPUTER SOFTWARE PRODUCTS IDENTIFIED AS ELIGIBLE IN EXHIBIT A AND TO MARKET THEM THROUGH AN IDENTIFIED MARKETING CHANNEL. 10. DISTRIBUTOR IN THIS AGREEMENT HAS BEEN REFERRED TO AS NIPL AND THE COMPUTER SOFTWARE PRODUCTS HAVE BEEN DEFINED TO M EAN THE INTELLECTUAL PROPERTY OF THE ASSESSEE IN THE FORM OF COMPUTER SO FTWARE, WHICH NIPL SHALL SELL IN THE DEFINED MARKET TO THE END CUSTOMERS. A S PER THIS AGREEMENT NIPL HAS BEEN APPOINTED AS DISTRIBUTOR OF THE ASSESSEE TO MARKET THE NOVELL PRODUCTS ACQUIRED UNDER THE AGREEMENT WITHIN THE DE FINED AREA. CLAUSE 3 OF THE AGREEMENT PROVIDES THAT NIPL MAY ACQUIRE NOVELL PRODUCTS AT THE PRICE LISTED IN THE APPROPRIATE NOVELL PRODUCT PRICE LIST LESS THE DISCOUNT SET FORTH. AS PER THIS AGREEMENT, NIPL IS TO SECURE ORDERS FOR TH E NOVELL PRODUCTS AND AFTER PURCHASING THE SAME FROM THE ASSESSEE IT HAS TO SEL L THE SAME PRODUCTS AS SUCH TO THE END USERS. IT HAS FURTHER BEEN SET OUT IN THE A GREEMENT THAT EACH NOVELL PRODUCT DISTRIBUTED BY NIPL WILL BE PROVIDED TO END USERS SUBJECT TO SOFTWARE LICENSE AGREEMENT WHICH ACCOMPANIES THE NOVELL PROD UCTS. STILL FURTHER CLAUSE ITA NO.4368/MUM/2010 M/S.NOVELL INC. 8 6(E) OF THIS AGREEMENT PROVIDES THAT NO TITLE TO OR OWNERSHIP OF NOVELL PRODUCTS ACQUIRED UNDER THE AGREEMENT IS TRANSFERRED TO NIPL . FROM THE PERUSAL OF THE ABOVE TERMS OF THE AGREEMENT, IT IS DISCERNIBLE THA T THE ASSESSEE SOLD ITS COMPUTER SOFTWARE PRODUCTS TO NIPL, WHO IN TURN SOL D IT TO END USERS AFTER MARKING UP TOWARDS ITS COSTS AND PROFIT. 11. WHEN WE VIEW AGREEMENT A IN CONJUNCTION WITH AG REEMENT B, THE DISTINCTION BETWEEN THE TWO BECOMES QUITE APPARENT AND GLARING. WHEREAS UNDER AGREEMENT A, THE ASSESSEE HAS GRANTED A LICENSE TO NIPL TO DUPLICATE, DISTRIBUTE AND MARKET THE DUPLICATED PRODUCTS IN THE DEFINITE AREA, UNDER AGREEMENT B, THE PRODUCT AS SUCH HAS BEEN ACQUIRED BY NIPL FROM THE ASSESSEE WHICH IS FURTHER SOLD WITHOUT ANY MODIFICATION OR ALTERATION. THUS U NDER AGREEMENT A, THE ASSESSEE DOES NOT SUPPLY ITS COMPUTER SOFTWARE PROD UCTS TO NIPL BUT GRANTS LICENSE TO DUPLICATE FROM ITS INTELLECTUAL PROPERTY IN THE SOFTWARE FOR MAKING SALES IN THE MARKET. ON THE OTHER HAND, UNDER AGREE MENT B NO LICENSE IS GRANTED TO NIPL FOR DUPLICATING COMPUTER SOFTWARE PRODUCTS OF THE ASSESSEE BUT THE PRODUCTS AS SUCH ARE SOLD TO NIPL WHO THEN SELLS TH EM TO THE END USERS ON PROFIT. 12. COMING BACK TO THE DEFINITION OF COPYRIGHT U/S 14 OF THE COPYRIGHT ACT, 1957, IT IS SEEN THAT COPYRIGHT IS A CONCEPT GIVING THE CREATOR OF ORIGINAL WORK AN EXCLUSIVE RIGHT TO DO CERTAIN SPECIFIED ACTS IN RESPECT OF ITS WORK SUCH AS ` TO REPRODUCE THE WORK IN ANY MATERIAL FORM INCLUDING THE STORING OF IT IN ANY MEDIUM BY ELECTRONIC MEANS OR ` TO ISSUE COPIES OF THE WORK TO THE PUBLIC ETC. IT IS THUS SEEN THAT IN ESSENCE COPYRIGHT MEANS THE RIGHT TO COPY THE WORK WHICH MAY BE IN THE NATURE OF INTELLECTUAL PROPERTY LIKE PATENT, TRADEMARK, TRADE SECRET ETC. REPRODUCTION OF THE WORK OR TO ISSUE CO PIES OF THE WORK IN THE CONTEXT OF COMPUTER PROGRAMMES IS AKIN TO MAKING CO PIES OF IT. THUS COPYRIGHT OF A COMPUTER PROGRAMME MEANS THE EXCLUSIVE RIGHT T O REPRODUCE IT IN ANY ITA NO.4368/MUM/2010 M/S.NOVELL INC. 9 MATERIAL FORM OR COPY IT. WHEN WE READ SECTION 9(1) (VI) IN THE SETTING OF ROYALTY FROM COPYRIGHT OF COMPUTER PROGRAMMES, IT BECOMES M ANIFEST THAT THE CONSIDERATION PAID ASSUMES THE CHARACTER OF ROYALT Y IF IT IS FOR REPRODUCING THE SAME IN ANY MATERIAL FORM OR ISSUING COPIES OF IT E TC. AS PER AGREEMENT A, THE ASSESSEE AUTHORIZED NIPL TO DUPLICATE ITS COMPUTER SOFTWARE PROGRAMME, WHICH IS THE SAME THING AS REPRODUCING IT IN ANY MATERIAL FORM OR ISSUING COPIES OF IT. THE DUPLICATED PRODUCTS SO MADE BY NIPL WERE AS A R ESULT OF GRANT OF EXCLUSIVE RIGHT BY THE ASSESSEE TO REPRODUCE A WORK IN ANY MA TERIAL FORM, THEREBY COMING WITHIN THE AMBIT OF TRANSFER OF COPYRIGHT IN THE CO MPUTER PROGRAMME. THE CONSIDERATION SO PAID APPARENTLY FELL WITHIN SECTIO N 9(1)(VI), AS RIGHTLY DECLARED BY THE ASSESSEE. HOWEVER COMING TO THE AGREEMENT B, BY WHICH THE ASSESSEE DID NOT ALLOW NIPL TO REPRODUCE THE COMPUTER SOFTWARE P ROGRAMME OR TO ISSUE ITS COPIES, BUT ONLY TO RE-SELL THE SOFTWARE MADE AND S OLD BY THE ASSESSEE TO IT FROM THE INTELLECTUAL PROPERTY OF COMPUTER SOFTWARE PROG RAMME. THE ASSESSEE SIMPLY TRANSFERRED ITS COMPUTER SOFTWARE PRODUCTS TO NIPL FOR CONSIDERATION FOR THE PURPOSES OF RESALE WITHOUT GIVING ANY RIGHT TO DUPL ICATE THE SAME IN ANY MANNER. IT IS A CLEAR CUT CASE OF CONSIDERATION RECEIVED FO R THE TRANSFER OF COPYRIGHTED PRODUCTS AND NOT FOR THE TRANSFER OF COPYRIGHTS IN THE COMPUTER SOFTWARE PROGRAMME. THE DISTINCTION BETWEEN THE TRANSFER OF A COPYRIGHT AND THE TRANSFER OF A COPYRIGHTED PRODUCT IS PROMINENT. WHERE THE C REATOR OF AN INTELLECTUAL PROPERTY ALLOWS ANOTHER TO EXPLOIT IT COMMERCIALLY BY TAKING COPIES AND SELLING IT, BUT RETAINING THE DOMINION OVER SUCH PROPERTY W ITH HIMSELF, THE SAME IS A CASE OF TRANSFER OF COPYRIGHT. IF HOWEVER, THE CREA TOR HIMSELF EXPLOITS HIS WORK BY CONVERTING IT INTO END PRODUCTS READY FOR USE AN D TRANSFERS THE RIGHT TO USE SUCH END PRODUCTS TO ANOTHER BUT NOT THE FURTHER RI GHT TO COPY THE SAME, IT WOULD BE A CASE OF TRANSFER OF A COPYRIGHTED PRODUC T. THE CONSIDERATION IN THE FORMER CASE WOULD BE ROYALTY, BUT THAT IN THE LATTE R WOULD BE BUSINESS PROFIT. 13. COMING BACK TO THE FACTS OF THE INSTANT CASE IT IS NOTICED THAT THE ASSESSEE RECEIVED ` 58.29 LAKH FROM NIPL TOWARDS THE SALE OF ITS SOFTWA RE PRODUCTS. ITA NO.4368/MUM/2010 M/S.NOVELL INC. 10 NEITHER NIPL NOR ITS END USERS WERE PERMITTED TO CO PY THE SAME AND EXPLOIT SUCH PRODUCTS FOR COMMERCIAL PURPOSES. THE CUSTOMER S WERE BOUND TO USE SUCH SOFTWARE ONLY FOR THEIR OWN BUSINESS PURPOSE. THEY DID NOT HAVE ANY RIGHT TO MAKE ANY FURTHER COPIES OF THE PRODUCT. IT CAN FURT HER BE SEEN THAT THE END USERS WERE BOUND BY THE SOFTWARE LICENSE AGREEMENT. THESE CLAUSES FAIRLY INDICATE THAT NIPL SIMPLY ACQUIRED THE POSSESSION OF THE SOF TWARE AND THE END USERS ACQUIRED THE RIGHT TO INSTALL SUCH SOFTWARE ON THEI R COMPUTERS FOR PERSONAL USE. THE END USERS WERE NOT ENTITLED TO COPY OR SELL OR OTHERWISE TRANSFER THE SOFTWARE ACQUIRED FROM NIPL. FROM HERE IT CLEARLY FOLLOWS THAT BY ACQUIRING THE NOVELL PRODUCTS FROM THE ASSESSEE, NEITHER THE END USERS NOR NIPL ACQUIRED ANY COPYRIGHT OVER THE COMPUTER SOFTWARE OF THE ASS ESSEE. SINCE THE CONSIDERATION OF ` 58.29 LAKH IN QUESTION IS SALE PRICE OF THE COPYRI GHTED PRODUCT AND NOT A CONSIDERATION FOR TRANSFER OF COP YRIGHT IN THE SOFTWARE OF THE ASSESSEE, IN OUR CONSIDERED OPINION, THE AUTHORITIE S BELOW WERE NOT JUSTIFIED IN TREATING IT AS ROYALTY INCOME. 14. THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS PLA CED STRONG RELIANCE ON THE RULING GIVEN BY THE AUTHORITY FOR ADVANCE RULIN GS IN MILLENNIUM IT SOFTWARE LTD., IN RE [(2011) 338 ITR 391 (AAR)] . IT WAS ARGUED THAT IN THIS CASE IT HAS BEEN HELD IN PARA 41 THAT : WHEN THAT RIGHT OF USER IS GIVEN, THE RIGHT TO USE THE COPYRIGHT IS ALSO GIVEN. ON THE TERMS OF TH E INCOME-TAX ACT, READ IN THE LIGHT OF THE COPYRIGHT ACT, THE RIGHT GRANTED FOR U SE OF A COPYRIGHTED ARTICLE FOR CONSIDERATION, WOULD ALSO BE ROYALTY SINCE GOING BY THE RELEVANT DEFINITION, THE GRANT OF RIGHT TO USE THE COPYRIGHTED ARTICLE WOULD ALSO BE A LICENCE BY THE OWNER OF THE COPYRIGHT, THOUGH LIMITED IN NATURE, L IMITED TO THE USE OF THE OTHER CONTRACTING PARTY ALONE, WITHOUT ENTITLING THE GRAN TEE TO FURTHER EXPLOIT THE COPYRIGHT. IT IS IN THIS LIGHT OF THE AFORESAID OB SERVATIONS OF THE AUTHORITY THAT THE LEARNED DEPARTMENTAL REPRESENTATIVE FORCEFULLY ARGUED THAT EVEN THE CONSIDERATION FOR TRANSFER OF A COPYRIGHTED ARTICLE SHALL BE CONSIDERED AS ROYALTY. ITA NO.4368/MUM/2010 M/S.NOVELL INC. 11 LET US EXAMINE THE FACTS OF THAT CASE. THE APPLICAN T THEREIN ENTERED INTO A SOFTWARE LICENCE AND MAINTENANCE AGREEMENT WITH IND IAN COMMODITY AND EXCHANGE LIMITED (ICEL). UNDER THE AGREEMENT, THE A PPLICANT ALLOWED ICEL TO USE THE SOFTWARE PRODUCT (THE LICENSED PROGRAMME) O WNED BY IT. THE LICENSED PROGRAMME WAS TO BE INSTALLED INTO THE COMPUTER MAC HINES DESIGNATED BY ICEL. THE APPLICANT WAS TO DEPLOY ITS PERSONNEL TO THE DE SIGNATED SITE TO TRAIN THE EMPLOYEES OF ICEL. THE APPLICANT WAS REQUIRED TO PR OVIDE AT ITS OWN COST, MAINTENANCE AND SUPPORT SERVICES. FOR INSTALLATION AND IMPLEMENTATION OF THE LICENSED PROGRAMME, THE APPLICANT WAS TO BE PAID ` 4 CRORE. THE LICENCE TO USE THE LICENSED PROGRAMME WAS FOR FOUR YEARS AND THERE AFTER ITS RENEWAL WAS LEFT TO THE DISCRETION OF ICEL. IT WAS UNDER THESE FACTS TH AT THAT QUESTION BEFORE THE HONBLE AUTHORITY FOR ADVANCE RULINGS WAS WHETHER T HE FEES PAID BY ICEL TO THE APPLICANT WOULD BE TAXABLE AS ROYALTY OR BUSINE SS PROFITS. THE HONBLE AUTHORITY HELD SUCH PAYMENT AS ROYALTY AND NOT AS B USINESS PROFIT BY NOTING THAT THE ICEL HAS ALSO BEEN GRANTED THE RIGHT TO TAKE CO PIES OF THE LICENSED PROGRAMME. IT HAS FURTHER BEEN ACCENTUATED IN PARA 40 THAT :` WHEN A SOFTWARE DEVELOPED OVER WHICH A COPYRIGHT IS ACQUIRED, IS PERMITTED TO BE USED BY ANOTHER FOR A CONSIDERATION OR ANOTHER IS GIVEN A RIGHT TO USE IT INCLUDING THE TA KING OF COPIES FOR THE PURPOSE OF ITS BUSINESS, FOR CONSIDERATION, IT APPEARS TO ME TO B E A CASE OF RECEIVING ROYALTY FOR ENABLING THAT PERSON TO EXERCISE THE RIGHT TO USE T HE PROGRAMME OR LITERARY WORK. THUS IT IS ABUNDANTLY MANIFEST FROM THE FACTS OF TH AT CASE THAT NOT ONLY RIGHT OF USER WAS GIVEN BUT ALSO THE RIGHT TO USE THE COPYRIGHT A LSO. THIS FACT IS FURTHER CORROBORATED FROM PARA 45 THAT :`IN THE PRESENT CASE, NOT MERELY THE USE IS LICENSED BUT THE LICENSEE IS GIVEN THE RIGHT TO COPY IT AND USE IT WHEREVER I T IS NEEDED BY IT FOR ITS BUSINESS. THE RIGHT GIVEN FOR A CONSIDERATION TO COPY THE COPYRIG HTED SOFTWARE AND USE IT FOR ITS OWN PURPOSES BY ICEL WHENEVER AND WHEREVER NEEDED BY IT , CLEARLY ATTRACTS THE DEFINITION OF ROYALTY TO THE CONSIDERATION PAID BY ICEL TO THE APPLICANT.. IT IS THUS AMPLY BORNE OUT THAT THE FACTS OF THE INSTANT CASE ARE MA TERIALLY DIFFERENT FROM THOSE CONSIDERED BY THE AUTHORITY FOR ADVANCE RULING IN T HE CASE OF MILLENNIUM IT SOFTWARE (SUPRA) . NEITHER IT IS THE CASE OF THE AO/CIT(A) NOR ANY MATERIAL HAS BEEN ITA NO.4368/MUM/2010 M/S.NOVELL INC. 12 BROUGHT TO OUR NOTICE BY THE LD. DR TO DISCLOSE THA T THE END USERS OF THE NOVELL PRODUCTS WERE ENTITLED TO COPY IT AND USE IT WHERE VER NEEDED. WHEN THE RIGHT TO COPY A PRODUCT IS ASSIGNED, THE PAYMENT OBVIOUSLY ASSUME S THE CHARACTER OF ROYALTY. BUT IF IT IS CONSIDERATION ONLY FOR THE USE OF A COPYRIGH TED PRODUCT DIVORCED FROM THE RIGHT TO COPY THE SAME, IT, BY NO STRETCH OF IMAGINATION , CAN BE CONSTRUED AS ROYALTY FOR THE OBVIOUS REASON THAT THE RIGHT TO COPY, WHICH IS SINE QUA NON OF COPYRIGHT, IS LACKING. 15. IT IS OBSERVED THAT THE ASSESSEE IS A RESIDENT OF USA. IN THAT VIEW OF THE MATTER, IT WOULD BE APPOSITE TO CONSIDER THE DTAA. THE ASSESSING OFFICER HAS ALSO CONSIDERED ARTICLE 12 OF THE TREATY WHICH DEAL S WITH ROYALTIES AND FEES FOR INCLUDED SERVICES. CLAUSE 3 OF ARTICLE 12 DEFINES R OYALTIES AS UNDER:- 3. THE TERM ROYALTIES AS USED IN THIS ARTICLE ME ANS: (A) PAYMENTS OF ANY KIND RECEIVED AS CONSIDERATION FOR THE USE OF, OR THE RIGHT TO USE, ANY COPYRIGHT OF A LITERAR Y, ARTISTIC, OR SCIENTIFIC WORK, INCLUDING CINEMATOGRAPH FILMS OR W ORK ON FILM, TAPE OR OTHER MEANS OF REPRODUCTION FOR USE IN CONN ECTION WITH RADIO OR TELEVISION BROADCASTING, ANY PATENT, TRADE MARK, DESIGN OR MODEL, PLAN SECRET FORMULA OR PROCESS, OR FOR IN FORMATION CONCERNING INDUSTRIAL COMMERCIAL OR SCIENTIFIC EXPE RIENCE, INCLUDING GAINS DERIVED FROM THE ALIENATION OF ANY SUCH RIGHT OR PROPERTY WHICH ARE CONTINGENT ON THE PRODUCTIVITY, USE OR DISPOSITION THEREOF; AND (B) PAYMENTS OF ANY KIND RECEIVED AS CONSIDERATION FOR THE USE OF, OR THE RIGHT TO USE, ANY INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EQUIPMENT, OTHER THAN PAYMENTS DERIVED BY AN ENTERP RISE DESCRIBED IN PARAGRAPH 1 OF ARTICLE 8 (SHIPPING AND AIR TRANSPORT) FROM ACTIVITIES DESCRIBED IN PARAGRAPH 2 (C) OR 3 OR ARTICLE 8. 16. IT CAN BE SEEN FROM THE ABOVE ARTICLE 12(3) THA T CLAUSE (B) IS NOT ATTRACTED IN THE PRESENT CASE. CLAUSE (A) IS RELEVANT FOR OUR PURPOSE AS PER WHICH PAYMENTS OF ANY KIND RECEIVED AS CONSIDERATION FOR THE USE O F OR THE RIGHT TO USE ANY COPYRIGHT OF A LITERARY WORK ETC. IS ROYALTY. IN CORPORATION OF THE WORDS ANY ITA NO.4368/MUM/2010 M/S.NOVELL INC. 13 COPYRIGHT OF A .. AFTER THE EXPRESSION FOR THE USE, OR THE RIGHT TO USE FAIRLY BRINGS OUT THAT WHEN THE PAYMENT IS FOR THE USE OF ANY COPYRIGHT, IT IS A ROYALTY AND NOT OTHERWISE. FROM HERE IT FOLLOWS TH AT UNLESS PAYMENT IS FOR USING OR ACQUIRING THE RIGHT TO USE THE COPYRIGHT OF A WO RK, IT CANNOT BE CHARACTERIZED AS ROYALTY. HERE IT IS PERTINENT TO NOTE THAT THE R EQUIREMENT IS THE USE OF `COPYRIGHT OF WORK AND NOT THAT OF THE PRODUCT DE RIVED FROM SUCH COPYRIGHT. SO IN ORDER TO BE COVERED UNDER THIS CLAUSE, IT IS IMPERATIVE THAT THE PAYMENT MUST BE MADE `TO USE THE `COPYRIGHT OR THE `RIG HT TO COPY THE WORK. THE DISTINCTION BETWEEN `USE OR THE `RIGHT TO USE A C OPYRIGHT AND THE `USE OR THE `RIGHT TO USE A COPYRIGHTED ARTICLE IS REQUIRED TO BE KEPT IN MIND. ONCE THE LANGUAGE OF ARTICLE 12(3) UNEQUIVOCALLY CO-RELATES THE PAYMENT FOR `USE OF THE `RIGHT TO COPY THE `WORK AS A PRE-CONDITION FOR FALLING WITHIN THE DOMAIN OF `ROYALTY, IT IS DIFFICULT TO HOLD THAT THE PAYMENT FOR THE `USE OF COPYRIGHTED ARTICLE FINALLY DRAWN FROM THE `WORK ALSO QUALIFY IES FOR ROYALTY. AS IN THE INSTANT CASE THE SAID SUM OF ` 58.29 LAKH HAS BEEN RECEIVED BY THE ASSESSEE NOT AS A CONSIDERATION FOR THE USE OF, OR THE RIGHT TO USE ANY COPYRIGHT OF A COMPUTER SOFTWARE BUT IS A CONSIDERATION FOR ACQUIS ITION OF THE COMPUTER SOFTWARE MEANT FOR THE EXCLUSIVE USE OF THE END USE RS, IT CANNOT BE BROUGHT WITHIN THE AMBIT OF ARTICLE 12(3). 17. IT WOULD BE RELEVANT TO NOTE AT THIS JUNCTURE T HAT THE AUTHORITIES BELOW APPEAR TO HAVE BEEN SWAYED BY THE NOMENCLATURE OF ` INTELLECTUAL VALUE GIVEN IN THE INVOICES RAISED BY THE ASSESSEE ON NIPL. IT IS AN ELEMENTARY PRINCIPLE, WHICH IS FAIRLY SETTLED THAT IN ORDER TO CONSTRUE A N AGREEMENT, ONE HAS TO LOOK AT THE ESSENCE OF IT RATHER THAN ITS FORM. NO PARTY CAN GET RID OF THE CONSEQUENCES MERELY FOR DESCRIBING A PARTICULAR ITEM IN A PARTI CULAR FORM THOUGH IN ESSENCE AND IN SUBSTANCE IT MAY BE A DIFFERENT TRANSACTION . GOING BY THE SAME LOGIC, IF AN ITEM OF EXPENDITURE IS GIVEN THE NAME OF AN ASSE T, IT SHALL REMAIN EXPENDITURE AND WILL NOT FIND ITS PLACE IN THE BALANCE SHEET. S IMILARLY IF AN ITEM OF INCOME IS ITA NO.4368/MUM/2010 M/S.NOVELL INC. 14 GIVEN THE NAME OF LIABILITY, IT SHALL NOT SHED ITS CHARACTER OF INCOME MERELY FOR THE REASON THAT THE ASSESSEE DESCRIBED IT AS LIABIL ITY. THERE IS NO DEARTH OF JUDGMENTS LAYING DOWN THIS PROPOSITION. THE HONB LE SUPREME COURT IN CBDT VS. OBEROI HOTELS (1998) 231 ITR 148 (SC) HAS HELD THAT :`IT IS THE SUBSTANCE OF THE CASE WHICH MATTERS AND NOT THE NAME. SIMILA R VIEW HAS BEEN REITERATED BY THE MUMBAI BENCH OF THE TRIBUNAL IN A THIRD MEMB ER CASE IN NICHOLAS APPLEGATE SOUTH EAST ASIA FUND LTD. VS. ADI (INTER NATIONAL TAXATION) (2009) 117 ITD 299 (MUM) (TM). 18. THUS IT FOLLOWS THAT THE RELEVANT THING TO BE E XAMINED IS THE TRUE NATURE OF TRANSACTION DEVOID OF THE NAME GIVEN. IF THE TRUE N ATURE OF A PAYMENT IS ROYALTY, IT WILL REMAIN THE SAME NOTWITHSTANDING THE FACT TH AT THE PARTIES PREFERRED TO REFER IT AS SALE AND VICE VERSA . WHEN WE SLIP BACK TO THE FACTS OF THE INSTANT CASE, WE FIND THAT THE TRUE NATURE OF PAYMENT IS SA LE OF COPYRIGHTED ARTICLES AND NOT THE TRANSFER OF COPYRIGHT. AS SUCH, IT WOULD PA RTAKE OF THE CHARACTER OF BUSINESS PROFITS AND NOT ROYALTIES REGARDLESS OF TH E FACT THAT THE ASSESSEE CHOSE TO DESCRIBE ITS PRODUCT AS `INTELLECTUAL VALUE IN ITS INVOICES. 19. IT IS INTERESTING TO EXAMINE THE ISSUE UNDER CONSIDERATION FROM ANOTHER ANGLE ALSO. NIPL FILED ITS RETURN DECLARING PAYMENTS TO THE ASS ESSEE AS ROYALTY ON THE SALE OF DUPLICATE SOFTWARE AT ` 1.76 CRORE AND PURCHASE OF SOFTWARE AT ` 58.29 LAKH. THESE TRANSACTIONS WERE DULY REFLECTED IN FORM NO.3 CEB. APPENDIX B TO THE REPORT CONTAINS PARTICULARS IN RESPECT OF TRANSACTIONS IN TANGIBLE PROPERTY FROM ASSESSEE. DESCRIPTION OF TRANSACTIONS HAS BEEN GIVEN AS PURC HASE OF SOFTWARE AND THE AMOUNT IS DECLARED AT ` 58.29 LAKH. IN ANNEXURE-C DESCRIPTION HAS BEEN GIVE N AS ROYALTY ON SALE OF DUPLICATED SOFTWARE TO THE ASSESSEE WITH A CONSIDERATION OF ` 1.76 CRORE. WHEN THE CASE OF NIPL CAME UP FOR SCRUTINY ASSESSMENT BE FORE THE A.O., HE REFERRED THE MATTER TO THE TPO, WHO VIDE HIS ORDER DATED 27.04.2 010 ACCEPTED THE ALP DECLARED BY THE ASSESSEE IN RESPECT OF ROYALTY AND PURCHASES MA DE BY THE NIPL FROM THE ASSESSEE. THE AO, IN TURN, NOT ONLY ACCEPTED THE EXERCISE DON E BY THE TPO AND GAVE EFFECT TO ITA NO.4368/MUM/2010 M/S.NOVELL INC. 15 THE SAME IN THE ASSESSMENT ORDER, BUT ALSO ACCEPTED THE PURCHASE TRANSACTIONS DONE BY NIPL FROM THE ASSESSEE AS SUCH. HE DID NOT HOLD THE PURCHASE TRANSACTIONS AS THE PAYMENT OF ROYALTY. IT IS AXIOMATIC THAT PROFIT FRO M OFF-SHORE SALE MADE BY A NON- RESIDENT DOES NOT RESULT INTO ACCRUAL OF ANY INCOME TO THE NON-RESIDENT U/S 9(1)(I) OF THE INCOME-TAX ACT. BUT IF THE NON-RESIDENT EARNS R OYALTY INCOME FROM INDIA, IT IS CHARGEABLE TO TAX U/S 9(1)(VI) IN HIS HANDS DESPITE HIS STATUS OF NON-RESIDENT. ONCE A PAYMENT MADE BY AN INDIAN TO A NON-RESIDENT IS CHAR GEABLE TO TAX IN HIS HANDS, IT BECOMES THE DUTY OF THE INDIAN PAYER TO DEDUCT TAX AT SOURCE IN TERMS OF SECTION 195. IF THE PAYER FAILS TO DEDUCT TAX AT SOURCE, THE MANDAT E OF SECTION 40(A)(I) IS ATTRACTED AND AS SUCH THE PAYER SUFFERS DISALLOWANCE OF THE AMOUN T PAID IN ITS ASSESSMENT. CLAUSE (I) OF SECTION 40(A) SPECIFICALLY PROVIDES THAT ANY ROYALTY ETC. CHARGEABLE UNDER THIS ACT, WHICH IS PAYABLE OUTSIDE INDIA OR IN INDIA TO A NON-RESIDENT, NOT BEING A COMPANY OR A FOREIGN COMPANY, ON WHICH TAX IS DEDUCTIBLE A T SOURCE UNDER CHAPTER XVII-B AND SUCH TAX HAS NOT BEEN DEDUCTED OR, AFTER DEDUCTION HAS NOT BEEN PAID DURING THE PREVIOUS YEAR, OR IN THE SUBSEQUENT YEAR BEFORE TH E EXPIRY OF THE TIME PRESCRIBED U/S 200(1), SHALL BE DISALLOWED. THUS IT FOLLOWS THAT IF ROYALTY IS PAID BY AN ASSESSEE TO A NON-RESIDENT WHICH IS CHARGEABLE TO TAX IN THE HAND S OF SUCH NON-RESIDENT, IT IS THE DUTY OF THE PAYER TO DEDUCT TAX AT SOURCE. IN CASE OF H IS FAILURE TO DEDUCT TAX AT SOURCE, THE AMOUNT PAID, SUFFERS DISALLOWANCE U/S 40(A)(I). CO MING BACK TO THE FACTS OF THE INSTANT CASE IT IS NOTED THAT FROM THE ASSESSMENT ORDER OF THE NIPL THAT NO DISALLOWANCE U/S 40(A)(I) HAS BEEN MADE, WHICH IMPLIES, THAT THE AO ACCEPTED SUCH PAYMENT TO THE ASSESSEE BY NIPL AS HAVING BEEN MADE ON TRANSACTION OF PURCHASE AND NOT AS ROYALTY. ONCE A PARTICULAR STAND HAS BEEN TAKEN BY THE REVEN UE IN ONE TRANSACTION IN THE HANDS OF THE PAYER, IT IS IMPERMISSIBLE TO TAKE DIAGONALL Y CONTRARY STAND ON THE SAME TRANSACTION IN THE HANDS OF THE PAYEE. SINCE THE D EPARTMENT ACCEPTED SUCH PAYMENT OF ` .58. LACS AS HAVING BEEN MADE BY NIPL ON ACCOUNT OF TRANSACTION OF PURCHASE FROM THE ASSESSEE, IT CANNOT NOW TURN AROUND TO HOLD TH AT THE VERY SAME PAYMENT IS ROYALTY IN THE HANDS OF PAYEE. WE JETTISON THE VIEWPOINT O F THE REVENUE ON THIS SCORE AS WELL. 20. IN VIEW OF THE FOREGOING REASONS WE ARE SATISFI ED THAT THE LEARNED CIT(A) WAS NOT JUSTIFIED IN HOLDING THAT THE AMOUNT COLLEC TED BY THE ASSESSEE TOWARDS ITA NO.4368/MUM/2010 M/S.NOVELL INC. 16 THE INTELLECTUAL PROPERTY BE ASSESSED AS ROYALTY. THE IMPUGNED ORDER ON THIS ISSUE IS, THEREFORE, OVERTURNED AND IT IS HELD THA T THE ENTIRE AMOUNT OF ` 58.29 LAKH BE CONSIDERED AS BUSINESS PROFITS. THE LEARNED CIT(A) HAS RECORDED A CATEGORICAL FINDING THAT THE ASSESSEE DOES NOT HAVE A PERMANENT ESTABLISHMENT IN INDIA AND THUS ITS BUSINESS PROFIT CANNOT BE TAXED IN INDIA. NO APPEAL HAS BEEN PREFERRED BY THE REVENUE TO CHALLENGE THIS FINDING GIVEN BY THE LEARNED CIT(A). EX CONSEQUENTI THE BUSINESS PROFITS AMOUNTING TO ` 58.29 LAKH CANNOT BE CHARGED TO TAX IN INDIA IN VIEW OF THE ASSESSEE NOT HAVING ANY PE IN INDIA. 21. IN THE RESULT, THE APPEAL IS ALLOWED. ORDER PRONOUNCED ON THIS 28 TH DAY OF NOVEMBER, 2011. SD/- SD/- (N.V.VASUDEVAN) (R.S.SYAL) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI : 28 TH NOVEMBER, 2011. DEVDAS* COPY TO : 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT CONCERNED 4. THE CIT(A) - II, MUMBAI. 5. THE DR/ITAT, MUMBAI. 6. GUARD FILE. TRUE COPY. BY ORDER ASSISTANT REGISTRAR, ITAT, MUMBAI.