M/s. Halliburton Export Inc., New Delhi V. ADIT, New Delhi

ITA 5209/DEL/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 74061 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 1 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-01-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 16-10-2012
• Assessment Year: 2008-2009
• Appeal Filed On: 23-11-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: D K GUPTA
• Assessee Lawyers: ASHUTOSH JAIN
• Keywords: Double taxation relief; Permanent establishment; Advance ruling
• Section: 234B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH C NEW DELHI) BEFORE SHRI U.B.S. BEDI, JUDICIAL MEMBER AND SHRI J.S. REDDY, ACCOUNTANT MEMBER I.T.A. NO.5209/DEL/2011 ASSESSMENT YEAR: 2008-09 M/S HALLIBURTON EXPORT INC. VS. ASSTT. D.I.T., C/O NANGIA & CO., CA CIRCLE-1(2), SUITE 4A, PLAZA M6, JASOLA, INTERNATIONAL NEW DELHI TAXATION, NEW DELHI PAN NO. AABCH 9692 R (APPELLANT) (RESPONDENT) APPELLANT BY : S/SHRI ASHUTOSH JAIN & AMIT ARO RA. CA RESPONDENT BY : SHRI D.K. GUPTA, CIT- DR ORDER PER U.B.S. BEDI, JM: THIS APPEAL OF THE ASSESSEE EMANATES FROM THE ORDER PASSED BY ASSESSING OFFICER U/S 144C(1) READ WITH SECTION 143 (3) DATED 23 RD SEPTEMBER, 2011 RELEVANT TO ASSESSMENT YEAR 2008-09 WHEREBY BESIDES CHALLENGING ACTION OF THE ASSESSING OFFICER IN HOLD ING THAT PAYMENT RECEIVED BY THE ASSESSEE FROM SALE OF SOFTWARE AND PROVISION S OF MAINTENANCE AND OTHER SUPPORTS SERVICES TO CUSTOMERS IN INDIA WERE TAXABLE AS ROYALTY, IN TERMS OF SECTION 9(1)(VI) OF THE INCOME-TAX ACT, 19 61 AS WELL IN ARTICLE 12 OF INDIA US DOUBLE TAXATION AVOIDANCE AGREEMENT, ASSES SEE HAS ALSO CHALLENGED CHARGING OF INTEREST U/S 234B OF THE ACT . I.T.A. NOS.5209 /DEL/2011 2 2. FACTS INDICATE THAT ASSESSEE HAD FILED ORIGINAL RETURN OF INCOME FOR THE RELEVANT ASSESSMENT YEAR ON 29.09.2008 DECLARING NI L INCOME AND CLAIMED A REFUND OF RS.61,58,059/-. THEREAFTER, THE RETURN W AS REVISED ON 19.02.2010 WHEREIN THE ASSESSEE DECLARED NIL INCOME AND CLAIME D A REFUND OF RS.121,24,329/-. NOTICE U/S 143(2) ALONG WITH QUES TIONNAIRE ISSUED WAS DULY SERVED UPON THE ASSESSEE. IN RESPONSE THERETO REPRESENTATIVE OF THE ASSESSEE APPEARED BEFORE THE ASSESSING OFFICER FROM TIME TO TIME, FILED REQUISITE DETAILS AND CASE WAS DISCUSSED WITH HIM B Y THE ASSESSING OFFICER. 2.1 ASSESSING OFFICER NOTED IN THE ASSESSMENT ORDER THAT M/S HALLIBURTON EXPORT INC., (HEREINAFTER REFERRED TO AS THE ASSESS EE) IS A COMPANY INCORPORATED IN THE USA AND IS ENGAGED IN THE BUSIN ESS OF SUPPLYING PRE- PACKAGED SOFTWARE AND PROVIDING MAINTENANCE AND OTH ER SUPPORT SERVICES ASSOCIATED WITH IT. THE ASSESSEE HAS ENTERED INTO A GREEMENTS WITH VARIOUS CUSTOMERS IN INDIA FOR RENDERING THE ABOVE SERVICES . 2.2 THE ASSESSING OFFICER FURTHER NOTED THAT ASSESS EE IS A TAX RESIDENT OF USA AND IT HAS FILED A TAX RETURN RELYING ON THE PR OVISIONS OF DTAA BETWEEN INDIA AND USA. IN THE RETURN OF INCOME, AS SESSEE HAS CLAIMED THAT IT DOES NOT HAVE A PERMANENT ESTABLISHMENT IN INDIA IN TERMS OF ARTICLE 5 OF THE INDIA US DTAA AND ACCORDINGLY, THE INCOME RECEI VED FROM THE AFORESAID SUPPLY/MAINTENANCE OF SOFTWARE IS NOT TAX ABLE IN INDIA. DURING THE ASSESSMENT PROCEEDINGS A LETTER WAS WRITTEN BY THE ASSESSING OFFICER ON 9.12.2010 STATING THEREIN THAT ASSESSEE HAS RECEIVE D A GROSS AMOUNT OF RS. 6,03,64,143/- FOR SALE AND MAINTENANCE OF SOFTWARE FROM ITS INDIAN CUSTOMERS IN RELATION THE AGREEMENTS ENTERED INTO BY IT. DURI NG THE COURSE OF ASSESSMENT PROCEEDINGS, ASSESSEE WAS ASKED TO SHOW CAUSE AS TO WHY RECEIPT IN SALE OF SOFTWARE SHOULD NOT BE REGARDED AS ROYALTY AND RECE IPT IN LIEU OF PROVISION OF MAINTENANCE SERVICES ASSOCIATED WITH IT SHOULD NOT BE REGARDED AS ROYALTY/FEE I.T.A. NOS.5209 /DEL/2011 3 FOR TECHNICAL SERVICES IN TERMS OF THE PROVISIONS O F INCOME TAX READ WITH ARTICLE 12 OF THE INDIAN US DTAA AND TAXED ACCORDIN GLY. 2.3 ASSESSEE FILED REPLY IN RESPONSE TO ABOVE SHOW CAUSE NOTICE AND WHILE ELABORATELY DISCUSSING REQUISITE OF SECTION 9 (1)(VI) OF THE ACT AND ALSO ARTICLE 12 OF THE DTAA AND RELYING UPON VARIOUS CAS E LAW AS NOTED BY THE ASSESSING OFFICER, IT WAS OBSERVED THAT RECEIPT FRO M SALE OF SOFTWARE CANNOT BE CONSTRUED AS INCOME IN THE NATURE OF ROYALTY AND THUS CONCLUDED AS UNDER:- THEREFORE, IN VIEW OF THE FACTS AND THE CIRCUMSTAN CES ABOVE, AND IN THE LIGHT OF THE DECISION OF THE TRIBUNAL IN THE CA SE OF GRACEMAC, THE CONSIDERATION RECEIVED BY THE ASSESSEE IS TAXABLE A S ROYALTY WITHIN THE MEANING OF EXPLANATION 2 TO SECTION 9(1)(VI) OF THE ACT AND UNDER THE DOUBLE TAXATION AVOIDANCE AGREEMENT BETWEEN INDIA A ND USA. CONSIDERATIONS RECEIVED AS A RESULT OF MAINTENANCE OF SOFTWARE ARE ALSO TAXABLE AS ROYALTY AS THESE ARE THE SERVICES I N CONNECTION WITH THE ACTIVITIES WITH RESPECT TO THE TRANSFER OF RIGHTS I NCLUDING THE GRANTING OF A LICENSE. AS PER SECTION 115(1)(B)(A), (AA) OF THE INCOME-TAX ACT, 1961, (1) WHERE THE TOTAL INCOME OF (B) A NON-RESIDENT (NOT BEING A COMPANY) OR A FOREI GN COMPANY, INCLUDES ANY INCOME BY WAY OF ROYALTY OR FEES FOR T ECHNICAL SERVICES OTHER THAN INCOME REFERRED TO IN SUB-SECTION (1) OF SECTION 44DAJ RECEIVED FROM GOVERNMENT OR AN INDIAN CONCERN IN PU RSUANCE OF AN AGREEMENT MADE BY THE FOREIGN COMPANY WITH GOVERNME NT OR THE INDIAN CONCERN AFTER THE 31 ST DAY OF MARCH, 1976, AND WHERE SUCH AGREEMENT IS WITH AN INDIAN CONCERN, THE AGREEMENT IF APPROVED BY THE CENTRAL GOVERNMENT OR WHERE IT RELATES TO A MAT TER INCLUDED IN THE INDUSTRIAL POLICY, FOR THE TIME BEING IN FORCE, OF THE GOVERNMENT OF INDIA, THE AGREEMENT IS IN ACCORDANCE WITH THAT POL ICY, THEN, SUBJECT TO THE PROVISIONS OF SUB-SECTIONS (1A) AND (2), THE INCOME-TAX PAYABLE SHALL BE THE AGGREGATE OF,- (A)THE AMOUNT OF INCOME-TAX CALCULATED ON THE INCOM E BY WAY OF ROYALTY, IF ANY, INCLUDED IN THE TOTAL INCOME, AT T HE RATE OF THIRTY PER CENT IF SUCH ROYALTY IS RECEIVED IN PURSUANCE OF AN AGREEMENT MADE ON I.T.A. NOS.5209 /DEL/2011 4 OR BEFORE THE 31 ST DAY OF MAY, 1997 AND TWENTY PER CENT WHERE SUCH ROYALTY IS RECEIVED IN PURSUANCE OF AN AGREEMENT MA DE AFTER THE 31 ST DAY OF MAY, 1997 (BUT BEFORE THE 1 ST DAY OF JUNE, 2005); (AA)THE AMOUNT OF INCOME-TAX CALCULATED ON THE INCO ME BY WAY OF ROYALTY, IF ANY, INCLUDED IN THE TOTAL INCOME, AT T HE RATE OF TEN PER CENT IF SUCH ROYALTY IS RECEIVED IN PURSUANCE OF AN AGRE EMENT MADE ON OR AFTER 1 ST DAY OF JUNE, 2005:) SINCE THE DATE OF THE AGREEMENTS ARE NOT VERIFIABLE FROM THE AGREEMENTS, SO, IN ORDER TO SAFEGUARD THE INTEREST OF REVENUE, THE GROSS AMOUNT OF `6,03,54,143/- RECEIVED BY THE ASSE SSEE IS HELD TO BE TAXABLE AS ROYALTY AT THE RATE OF 15%. 2.3.1 DRAFT ORDER IN THIS CASE WAS PASSED ON 24.12. 2010 IN WHICH INCOME WAS PROPOSED TO BE ASSESSED AT RS.6,03,54,143/-. S UBSEQUENTLY, AN ORDER DATED 18.01.2011 U/S 154/144C(1) OF THE ACT WAS PAS SED WHEREIN THE INCOME WAS COMPUTED AT RS.11,08,72,926/-. ON RECEIPT OF T HE DRAFT ORDER, THE ASSESSEE FILED ITS OBJECTIONS WITH THE DRP. THE OR DER OF THE DRP WAS RECEIVED IN THIS OFFICE ON 28.09.2011, IN WHICH NO ADVERSE INFERENCE WAS DRAWN AND THE VARIATIONS MADE BY THE ASSESSEE EWER CONFIRMED. THEREFORE, IN VIEW OF THE ABOVE, THE TAXABLE INCOME OF THE ASS ESSEE IS COMPUTED AS UNDER: PARTICULARS AMOUNT (RS.) GROSS AMOUNT RECEIVED BY THE ASSESSEE COMPANY AS ROYALTY 11,08,72,926 TOTAL INCOME ROUNDED OFF 11,08,72,930 INCOME TAX PAYABLE @ 15% 1,66,30,940 HENCE, THE INCOME OF THE ASSESSEE IS ASSESSED AT RS .11,.08,72,930/-. CHARGE INTEREST U/S 234A, 234B AND 234C AS APPLICABLE. I.T.A. NOS.5209 /DEL/2011 5 2.4 AGGRIEVED BY THE ORDER OF THE ASSESSING OFFICER , ASSESSEE HAS COME UP IN APPEAL AND RAISED FOLLOWING GROUNDS:- 1.THAT THE ASSESSING OFFICER HAS ERRED ON FACTS AN D IN LAW IN HOLDING THAT THE PAYMENTS RECEIVED BY THE APPELLANT FROM SA LE OF SOFTWARE AND PROVISION OF MAINTENANCE AND OTHER SUPPORT SERVICES TO CUSTOMERS IN INDIA, WERE TAXABLE AS ROYALTY, IN TERMS OF SECTI ON 9(1)(VI) OF THE INCOME-TAX ACT, 1961 (THE ACT) AS WELL AS ARTICLE 12 OF THE INDIA- US DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA). 1.1 ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE ASSESSING OFFICER FAILED TO APPRECIATE THAT SALE OF SOFTWARE AND PROV ISION OF MAINTENANCE/OTHER SUPPORT SERVICES BY THE APPELLANT HAS NOT RESULTED IN TRANSFER OF ANY RIGHTS IN RELATION TO A COPYRIG HT EMBEDDED IN THE SAID SOFTWARE AND, THEREFORE, THE PAYMENTS, RECEIVE D BY THE APPELLANT DO NOT CONSTITUTE ROYALTY EITHER IN TERMS OF THE ACT OR THE DTAA. 1.2 THE ASSESSING OFFICER HAS ERRED IN LAW AND ON FACTS IN APPLYING THE TAX RATE OF 15% TO THE RECEIPTS OF THE APPELLAN T, IN TERMS OF THE DTAA, AS AGAINST THE TAX RATE OF 10 PERCENT UNDER T HE ACT, BEING MORE FAVOURABLE TO THE APPELLANT ALLEGING THAT THE APPEL LANT FAILED TO SUBSTANTIATE THAT THE RELEVANT AGREEMENTS WITH THE CUSTOMERS WITH ENTERED INTO ON OR AFTER 1 ST JUNE, 2005. 2. THAT THE ASSESSING OFFICER, WHILE HOLDING AS ABOVE, HAS FAILED TO APPRECIATE THAT THE PAYMENTS RECEIVED BY THE APP ELLANT CONSTITUTE BUSINESS PROFITS AND CANNOT BE BROUGHT TO TAX IN IN DIA, AS PER PROVISIONS OF ARTICLE 7 (READ WITH ARTICLE 5) OF TH E DTAA, IN ABSENCE OF A PERMANENT ESTABLISHMENT IN INDIA. 3. THAT THE ASSESSING OFFICER HAS ERRED IN CHARGING IN TEREST U/S 234B OF THE ACT. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, VARY, OMI T, SUBSTITUTE OR AMEND THE ABOVE GROUNDS OF APPEAL AND/OR THE RELIEF CLAIMED, AT ANY TIME BEFORE OR AT THE TIME OF HEARING OF THE APPEAL , SO AS TO ENABLE THE TRIBUNAL TO DECIDE THIS APPEAL ACCORDING TO LAW. 2.5 AS REGARDS GROUND NO.1, 1.1 AND 2 ARE CONCERNED , SAME RELATE TO SALE OF SOFTWARE AND MAINTENANCE SERVICES AND LEARNED CO UNSEL FOR THE ASSESSEE WHILE REITERATING THE SUBMISSION AS MADE BEFORE THE ASSESSING OFFICER HAS LAID STRESS ON THE FOLLOWING, OUT OF EARLIER SUBMIS SIONS AND SUBMITTED THAT: I.T.A. NOS.5209 /DEL/2011 6 HALLIBURTON EXPORT INC. (HEREINAFTER REFERRED TO A S THE ASSESSEE) IS ENGAGED IN THE BUSINESS OF SUPPLYING PRE-PACKAGED S OFTWARE AND PROVIDING MAINTENANCE/SUPPORT SERVICES ASSOCIATED W ITH IT. AS PER THE AGREEMENTS ENTERED INTO BETWEEN THE ASSE SSEE AND ITS CUSTOMER, THE ASSESSEE GRANTS TO ITS CUSTOMERS (THE END-USERS) A NON- EXCLUSIVE AND NON-TRANSFERABLE LICENSE TO USE THE S OFTWARE FOR THE PURPOSE OF ITS BUSINESS. THE MODE OF USE OF THE LIC ENSE BY THE CUSTOMERS HAS BEEN MUTUALLY AGREED UPON BETWEEN THE PARTIES UNDER THE ABOVE CONTRACTS. IT IS PERTINENT TO MENTION THA T THE COPYRIGHT IN THE SOFTWARE LICENSED TO THE CUSTOMERS SHALL, AT ALL TI MES, VEST WITH THE ASSESSEE. FURTHER, ALL SUPPORT SERVICES RELATED TO THE USE OF THE SOFTWARE ARE PROVIDED REMOTELY AND NO PERSONNEL OF THE ASSESSEE VISIT INDIA. IN VIEW OF THE ABOVE FACTUAL BACKGROUND, THE TAXABI LITY OF THE INCOME OF THE ASSESSEE IN INDIA IS DISCUSSED IN THE FOLLOW ING PARAGRAPHS RELEVANT PROVISIONS OF THE ACT THE TAXABILITY OR OTHERWISE, OF THE INCOME OF THE A SSESSEE IN INDIA AS PER THE ACT IS GOVERNED BY THE PROVISIONS OF SECTIO N 5 READ WITH SECTION 9(1) OF THE ACT. EXPLANATION 2 TO SECTION 9(1)(VI) DEFINES ROYALTY TO INCLUDE ANY CONSIDERATION FOR TRANSFER OF ALL OR ANY RIGHTS IN RESPECT OF ANY COPYRIGHT, LITERARY, ARTISTIC OR SCIENTIFIC WORK. THE EXPRESSION COPYRIGHT IS NOT DEFINED IN THE AC T IT MUSTY BE UNDERSTOOD IN ACCORDANCE WITH THE LAW GOVERNING COP YRIGHT IN INDIA, I.E. THE COPYRIGHT ACT, 1957 (HEREINAFTER REFERRED TO AS THE ICA). IN TERMS OF THE ICA, A COPYRIGHT SUBSISTS IN LITERARY WORK, WHICH INCLUDES COMPUTER PROGRAMME. IT IS SUBMITTED THAT ONLY THOSE PAYMENTS IN RELATIO N TO SUPPLY OF SOFTWARE, WHICH RESULT IN TRANSFER OF ANY RIGHTS IN RELATION TO A COPYRIGHT, CAN BE SAID TO BE TAXABLE AS ROYALTY UND ER THE PROVISIONS OF THE ACT. RELEVANT PROVISIONS OF THE INDIA-US DOUBLE TAXATION AVOIDANCE AGREEMENT. IN TERMS OF THE PROVISIONS OF INDIA-US DOUBLE TAXAT ION AVOIDANCE AGREEMENT (HEREINAFTER REFERRED TO AS THE DTAA OR THE TAX TREATY), THE INCOME OF THE ASSESSEE MAY BE TAXED I N INDIA IN EITHER OF THE FOLLOWING WAYS: AS ROYALTY UNDER ARTICLE 12 OR I.T.A. NOS.5209 /DEL/2011 7 AS BUSINESS PROFITS UNDER ARTICLE 7 (READ WITH ARTI CLE 5) ARTICLE 12 DEFINES ROYALTY TO INCLUDE CONSIDERATION RECEIVED FOR THE USE OF, OR THE RIGHT TO USE, ANY COPYRIGHT OR A LITERAR Y, ARTISTIC, OR SCIENTIFIC WORK. A PLAIN READING OF THE DEFINITION SHOWS THAT WHEN THE ASSESSEE TRANSFERS THE RIGHTS OVER A COPYRIGHT, THE SAME SHA LL BE SAID TO BE IN THE NATURE OF ROYALTY. IN CASE THE INCOME OF THE ASSESSEE IS NOT IN THE NA TURE OF ROYALTY, THEN THE SAME MAY BE TAXED UNDER ARTICLE 7 AS BUSINESS I NCOME IF THE ASSESSEE HAS A PERMANENT ESTABLISHMENT (HEREINAFTER REFERRED TO AS THE PE) IN INDIA AND THE ABOVE INCOME IS ATTRIBUT ABLE TO SUCH PE. THE INCOME OF THE ASSESSEE IS NOT IN THE NATURE OF ROYALTY AS SUBMITTED ABOVE, THE REQUISITE CONDITION FOR ANY PAYMENT IN RELATION TO SUPPLY OF SOFTWARE TO BE CLASSIFIED A R OYALTY-BOTH IN TERMS OF THE ACT AND THE DTAA, IT IS NECESSARY THAT THE R IGHT IN RELATION TO THE COPYRIGHT AND NOT THE COPYRIGHTED ARTICLE M UST BE TRANSFERRED. YOUR GOOD SELF WOULD APPRECIATE THAT, PASSING ON A RIGHT TO USE AND FACILITATING THE USE OF A PRODUCT FOR WHICH THE ASS ESSEE HAS A COPYRIGHT IS NOT THE SAME THING AS TRANSFERRING OR ASSIGNING RIGHTS IN RELATION TO THE COPYRIGHT. THE ENJOYMENT OF SOME OR ALL THE RIG HTS OF A COPYRIGHT IS NECESSARY TO TRIGGER THE ROYALTY. HOWEVER, NON-EXCL USIVE AND NON- TRANSFERABLE LICENSE ENABLING THE USE OF A COPYRIGH TED PRODUCT CANNOT BE CONSTRUED AS AN AUTHORITY TO ENJOY ANY OR ALL OF THEM ENUMERATED RIGHTS INGRAINED IN A COPYRIGHT. RATHER SUCH A TRAN SFER OF SOFTWARE LICENSE TANTAMOUNT TO SALE OF COPYRIGHTED ARTICLE AS LAID DOWN BY THE APEX COURT IN THE CASE OF TATA CONSULTANCY SERVICES V. STATE OF ANDHRA PRADESH (2004) 271 ITR 401. RELIANCE IN THIS REGARD MAY ALSO BE PLACED ON THE A UTHORITY FOR ADVANCE RULING DECISION IN THE CASE OF DASSAULT SYSTEMS K.K. VS. DIT 322 ITR 125 WHEREIN IT HAS BEEN EMPHASIZED THAT THE RIGHT TO DOWNLOAD AND STORE A COMPUTER PROGRAMME FOR INTERNA L BUSINESS PURPOSE IS USE OF THE COPYRIGHTED PRODUCT AND PAYME NTS MADE IN THIS REGARD CANNOT BE CONSIDERED AS ROYALTIES TAXABLE UNDER THE PROVISIONS OF THE ACT OR UNDER THE TAX TREATY. ACCO RDINGLY, THE AUTHORITY HELD THAT PAYMENTS RECEIVED FROM SALE OF LICENSED SOFTWARE WOULD BE CHARACTERIZED AS BUSINESS PROFITS, WHICH IN THE ABSENCE OF PE SHALL NOT BE TAXABLE IN INDIA. I.T.A. NOS.5209 /DEL/2011 8 IN THE PRESENT CASE, THE PURPOSE OF THE LICENSE OR THE TRANSACTION IS ONLY TO ESTABLISH ACCESS TO THE COPYRIGHTED PRODUCT FOR INTERNAL BUSINESS PURPOSE. THUS IT CANNOT BE SAID THAT THE C OPYRIGHT ITSELF HAS BEEN TRANSFERRED TO ANY EXTENT. IT DOES NOT MAKE AN Y DIFFERENCE EVEN IF THE COMPUTER PROGRAMME PASSED ON TO THE USE IS A HI GHLY SPECIALIZED ONE. THE PARTING OF INTELLECTUAL PROPERTY RIGHTS, I NHERENT IN AND ATTACHED TO THE SOFTWARE PRODUCT, IN FAVOUR OF THE LICENSEE/ CUSTOMER IS MANDATORY REQUIREMENT BY THE ACT AND THE TAX TREATY TO CONSIDER IT AS ROYALTY. ACCORDINGLY, MERELY AUTHORIZING OR ENABLING A CUSTO MER TO HAVE THE BENEFIT OF THE INSTRUCTIONS/ PROGRAMME CONTAINED TH EREIN WITHOUT ANY FURTHER RIGHT TO DEAL WITH THEM INDEPENDENTLY DOES NOT AMOUNT TO TRANSFER OF RIGHTS IN RELATION TO COPYRIGHT OR CONF ERMENT OF THE RIGHT OF USING THE COPYRIGHT. YOUR GOOD SELF WOULD APPRECIATE THAT THE PRINCIPLE THAT THE PAYMENTS FROM SALE OF LICENSED SOFTWARE, BEING SALE OF A COP YRIGHTED ARTICLE, CANNOT BE REGARDED AS ROYALTY HAS BEEN TIME AND A GAIN EMPHASIZED BY VARIOUS COURTS. AN ILLUSTRATIVE LIST OF SUCH CAS ES IS GIVEN BELOW: MOTOROLA INC. V. DCIT (2005) 95 ITD 269 (SB) DDIT V. ALCATEL USA INTERNATIONAL MARKETING INC. (2 009- +ITOL-733-ITAT-MUM) INFRASOFT LIMITED V. ADIT (2009) 28 SOT 179 (DEL) LUCENT TECHNOLOGIES HINDUSTAN LTD. V. ITO (2009) 28 SOT 98 (DEL) RATIONAL SOFTWARE CORPN. (INDIA) LTD. V. ITO ITA NO S. 608 TO 610/BANG/2008 SONATA INFORMATION TECHNOLOGY LTD. V. ACIT (2006) 1 03 ITD 324 (BANG) HEWLETT-PACKARD (INDIA) (P) LTD. V. ITO (2006) 5 SO T 660 (BANG) WIPRO LTD. V. DCIT (2006) 5 SOT 508 (BANG) FACTSET RESEARCH SYSTEMS INC. (2009) 317 ITR 169 (A AR) IN VIEW OF THE ABOVE, IT IS SUBMITTED THAT THE RECE IPTS OF THE ASSESSEE ARE NOT IN THE NATURE OF ROYALTY AND ARE NOT TAXABL E AS PER THE PROVISIONS OF THE ACT AS WELL AS THE DTAA. THE INCOME OF THE ASSESSEE IS NOT IN THE NATURE OF BUSINESS PROFITS I.T.A. NOS.5209 /DEL/2011 9 AS SUBMITTED ABOVE, THE RECEIPTS IN RELATION TO USE OF A COPYRIGHT SHALL CONSTITUTE BUSINESS PROFITS AND CAN BE BROUGHT TO T AX IN INDIA ONLY IN CASES WHERE THE ASSESSEE HAS A PERMANENT ESTABLISHM ENT (HEREINAFTER REFERRED TO AS THE PE ) IN THE COUNTRY. IT IS FURTHER SUBMITTED THAT THE ASSESSEE DOES NOT HAVE ANY BUSINESS PRESENCE IN INDIA AND ALL SERVICES IN RELATION TO S UPPLY AND/OR MAINTENANCE OF PRE-PACKAGED SOFTWARE ARE RENDERED O UTSIDE INDIA. THUS THE ASSESSEE CANNOT BE SAID TO BE HAVING A PE IN INDIA. IN THE PRESENT CASE, THE ASSESSEE HAS ENTERED INTO AGREEMENTS WITH ITS CUSTOMERS FOR SUPPLYING PRE-PACKED SOFTWARE. AS PER TERMS OF THE SAID AGREEMENTS, THE ASSESSEE GRANTS TO ITS CUSTOMERS (T HE END-USERS) A NON-EXCLUSIVE AND NON-TRANSFERABLE LICENSE TO USE T HE SOFTWARE FOR THE PURPOSE OF THEIR BUSINESS. THE MODE OF USE OF THE L ICENSE BY THE CUSTOMER HAS BEEN MUTUALLY AGREED UPON BETWEEN THE PARTIES UNDER THE ABOVE AGREEMENTS. ROYALTY IS DEFINED UNDER EXPLANATION 2 TO SECTION 9(1)(VI) OF THE ACT, TO INCLUDE ANY CONSIDERATION FOR TRANSFER OF ALL OR ANY RIGHTS IN RESPECT OF COPYRIGHT, LITERARY, ARTISTIC OR SCIENTIFIC WORK . FOR THE PURPOSE OF THIS DISCUSSION, IT IS RELEVANT TO CONSIDER WHETHER THE SALE OF SOFTWARE BY ASSESSEE AMOUNT TO TRANSFER OF ANY COPYRIGHT SO AS TO BE TAXABLE AS ROYALTY. COPYRIGHT HAS NOT BEEN DEFINED UNDER THE ACT AND TH US, THE DEFINITION PROVIDED UNDER THE LAW GOVERNING COPYRIGHT IN INDIA I.E. THE COPYRIGHT ACT, 1957 (THE ICA) MAY BE REFERRED. IN TERMS OF THE ICA, COMPUTER PROGRAMME IS CONSIDERED AS A LITERARY WORK AND IS A SUBJECT MATTER OF COPYRIGHT. ROYALTY HAS BEEN DEFINED IN A SIMILAR MANNER UNDER ARTICLE 13 OF THE DTAA TO INCLUDE CONSIDERATION RECEIVED FOR THE USE OF, OR THE RIGHT TO USE, ANY COPYRIGHT OR A LITERARY, ARTISTIC, OR SCIE NTIFIC WORK. FROM THE ABOVE, IT MAY BE INFERRED THAT THE REQUISI TE CONDITION FOR ANY PAYMENT IN RELATION TO SUPPLY OF SOFTWARE TO BE CLA SSIFIED AS ROYALTY- BOTH IN TERMS OF THE ACT AND THE DTAA, IS THAT THE RIGHTS IN RELATION TO THE COPYRIGHT AND NOT THE COPYRIGHTED ARTICLE M UST BE TRANSFERRED. RIGHTS IN RELATION TO A COPYRIGHT WOULD INCLUDE RIG HT TO REPRODUCE WORK, ISSUE COPIES TO PUBLIC, ETC. IN OTHER WORDS, WHEN THE ASSESSEE TRANSFERS ONLY THE RIGHTS OVER THE USE OF COPYRIGHT , THE SAME CANNOT BE SAID TO BE IN THE NATURE OF ROYALTY. I.T.A. NOS.5209 /DEL/2011 10 REFERENCE IN THIS RESPECT MAY BE DRAWN FORM APEX CO URT DECISION IN THE CASE OF TATA CONSULTANCY SERVICES VS. STATE OF ANDHRA PRADE SH (2004) 271 ITR 401 WHEREIN IT HAS BEEN HELD THAT TRANSFER OF SOFTWARE LICENSE TANTAMOUNT TO SALE OF COPYRIGHTED ARTICLE WHICH WOULD BE SUBJECT TO SALES TAX. IN THIS LANDMARK JUDGEMENT, T HE COURT HAS OBSERVED THAT NON-EXCLUSIVE AND NON-TRANSFERABLE LI CENSE ENABLING THE USE OF A COPYRIGHTED PRODUCT CANNOT BE CONSTRUED AS AN AUTHORITY TO ENJOY ANY OR ALL OF THE ENUMERATED RIGHTS INGRAINED IN A COPYRIGHT. HENCE PASSING ON A RIGHT TO USE AND FACILITATING TH E USE OF A PRODUCT FOR WHICH THE ASSESSEE HAS A COPYRIGHT IS NOT THE S AME THING AS TRANSFERRING OR ASSIGNING RIGHTS IN RELATION TO THE COPYRIGHT. YOUR KIND ATTENTION IS ALSO INVITED TO THE DECISION OF AUTHORITY FOR ADVANCE RULING IN THE CASE OF DASSAULT SYSTEMS KK VS. DIT 322 ITR 125 WHEREIN IT HAS BEEN EMPHASIZED THAT THE RIGHT TO DO WNLOAD AND STORE A COMPUTER PROGRAMME FOR INTERNAL BUSINESS PU RPOSE IS USE OF THE COPYRIGHTED PRODUCT AND PAYMENTS MADE IN THIS R EGARD CANNOT BE CONSIDERED AS ROYALTIES TAXABLE UNDER THE PROVISI ONS OF THE ACT OR UNDER THE TAX TREATY. SIMILAR VIEWS HAVE BEEN EXPRESSED TIME AND AGAIN BY VARIOUS COURTS. AN ILLUSTRATIVE LIT OF SUCH CASES IS GIVEN BELOW: MOTOROLA INC. V. DCIT (2005) 95 ITD 269 (SB) DDIT V. ALCATEL USA INTERNATIONAL MARKETING INC. (2 009- ITOL-733-ITAT-MUM) INFRASOFT LIMITED V. ADIT (2009) 28 SOT 179 (DEL) LUCENT TECHNOLOGIES HINDUSTAN LTD. V. ITO (2009) 28 SOT 98 (DEL) RATIONAL SOFTWARE CORPN. (INDIA) LTD. V. ITO ITA NO S. 608 TO 610/BANG/2008 SONATA INFORMATION TECHNOLOGY LTD. V. ACIT (2006) 1 03 ITD 324 (BANG) HEWLETT-PACKARD (INDIA) (P) LTD. V. ITO (2006) 5 SO T 660 (BANG) WIPRO LTD. V. DCIT (2006) 5 SOT 508 (BANG) FACTSET RESEARCH SYSTEMS INC. (2009) 317 ITR 169 (A AR) SINCE THE ASSESSEE MERELY AUTHORIZES OR ENABLES A CUSTOMER TO HAVE THE BENEFIT OF THE SOFTWARE WITHOUT ANY FURTHER RIG HT TO DEAL WITH IT INDEPENDENTLY, SALE OF THE SAME CANNOT AMOUNT TO TR ANSFER OF RIGHTS IN I.T.A. NOS.5209 /DEL/2011 11 RELATION TO COPYRIGHT OR CONFERMENT OF THE RIGHT OF USING THE COPYRIGHT. ACCORDINGLY, RECEIPTS FROM SALE OF SOFTWARE CANNOT BE CONSTRUED AS INCOME IN NATURE OF ROYALTY. IN VIEW OF THE ABOVE, THE RECEIPTS FROM SALE OF SO FTWARE SHALL CONSTITUTE BUSINESS PROFITS AND CAN BE BROUGHT TO T AX IN INDIA ONLY IN CASES WHERE THE ASSESSEE HAS A PE IN THE COUNTRY. IN THIS REGARD, IT IS SUBMITTED THAT THE ASSESSEE D OES NOT HAVE ANY BUSINESS PRESENCE IN INDIA AND ALL SERVICES IN RELA TION TO SUPPLY AND/OR MAINTENANCE OF PRE-PACKAGED SOFTWARE ARE REN DERED OUTSIDE INDIA. ACCORDINGLY, THE ASSESSEE CANNOT BE SAID TO BE HAVING A PE IN INDIA AND RECEIPTS FROM SALE OF SOFTWARE ARE NOT TA XABLE AS PER THE PROVISIONS OF THE ACT AS WELL AS THE DTAA. IN THE FACTS OF THE INSTANT CASE, THE ASSESSEE PRO VIDES MAINTENANCE SERVICES IN RELATION TO THE PRE-PACKAGED SOFTWARE S UPPLIED BY IT. PROVISION OF THESE SERVICES PRIMARILY INVOLVES UTIL IZATION OF TECHNICAL KNOW-HOW/ SKILL, ETC. DURING THE PROCESS OF RENDERI NG OF SERVICES AND NO KNOWLEDGE OR SKILL FOR FURTHER USE OF THE CUSTOM ER IS PROVIDED. THEREFORE IT CANNOT BE SAID THAT ANY TECHNICAL KNOW HOW OR SKILL HAS BEEN MADE AVAILABLE TO THE CUSTOMER. IN VIEW OF THE ABOVE FACTUAL AND LEGAL POSITION, IT CAN BE SAID THAT RECEIPTS IN RELATION TO PROVISION OF MAINTENANCE AN D OTHER SERVICES IN RELATION TO SOFTWARE SUPPLIED SHALL NOT BE IN NATUR E FIS IN TERMS OF THE DTAA. THESE SHALL BE IN NATURE OF BUSINESS PROFITS, WHICH CAN BE BROUGHT TO TAX IN INDIA ONLY IN CASES WHERE THE ASS ESSEE HAS A PE IN INDIA. AS SUBMITTED BEFORE, THE ASSESSEE DOES NOT H AVE ANY PE IN INDIA AND ACCORDINGLY, THE RECEIPTS FROM PROVISION OF ANC ILLARY SERVICES IN RELATION TO SUPPLY OF SOFTWARE ARE NOT TAXABLE IN I NDIA 2.6 IT WAS FURTHER SUBMITTED THAT THE TITLE REMAINS WITH THE ASSESSEE ALL THE TIME AND IT HAS ONLY TO BE USED FOR INTERNAL PURPOS E. RELYING UPON MOTORALAS CASE REPORTED IN 95 ITD 269 (SB) AND ERR ICSONS CASE AS REPORTED IN 343 ITR 470 (DELHI) AND RELEVANT PROVISIONS OF S OFTWARE MAINTENANCE AGREEMENT, FURTHER, RELIANCE WAS PLACED ON THE CASE OF INFRASOFT LTD. VS ADIT AS REPORTED IN 125 TTJ 53 (DELHI), OBJECTIONS FILED BEFORE DRP, IT WAS PLEADED THAT THE RECEIPTS FROM PROVISIONS OF ANCILL ARY IN RELATION OF SUPPLY OF I.T.A. NOS.5209 /DEL/2011 12 SOFTWARE ARE NOT TAXABLE IN INDIA. THEREFORE, ORDER OF THE AO NEEDS TO BE REVERSED BY ALLOWING THE APPEAL. IT WAS, THUS, PLEA DED FOR ACCEPTING THE PLEA OF THE ASSESSEE TO DELETE THE ADDITION MADE. 2.7 LD. DR WHILE SUPPORTING THE ORDER OF AO HAS STR ONGLY PLEADED THAT THERE WAS A TRANSFER OF RIGHT TO USE WHEN OWNERSHIP OF THE COPYRIGHT HAS NOT BEEN TRANSFERRED AND SIMPLY USE HAS BEEN ALLOWED AN D FOR THAT LD. DR REFERRED TO CLAUSE 6.1 OF AGREEMENT AND FURTHER SUB MITTED THAT PERIOD OF LICENSE WAS FOR ONE YEAR AS PER CLAUSE 6.3 AND CLAU SE 7 AND 7.1 DEALS WITH TERMINATION AND SINCE SOFTWARE WAS NOT SOLD BUT LIC ENSE WAS TO BE USED AND USE OF COPYRIGHT IS EMBEDDED THEREIN. SO, SOFTWARE HAS BEEN GIVEN FOR USE. ITS LICENSE ONLY CANNOT SAID TO BE A TRANSFER. MEN HAVE COME TO INDIA, IT WAS COMPOSITE CONTRACT, AND SOFTWARE COMPONENT WAS NOT SEPARABLE. NOKIAS CASE OF DELHI HIGH COURT IS NOT APPLICABLE. KARNATA KA HIGH COURT IN THE CASE OF CIT VS. SUN COMPUTER IS DIRECTLY APPLICABLE TO T HE FACTS OF THE CASE AND REFERENCE WAS ALSO MADE IN THE CASE OF CITRIC SYSTE MS ASIA PACIFIC PVT. LTD. REPORTED IN 2012-TII-04-ARA-INTL AAR NO. 822 DATED 06.02.2012. SO IT WAS PLEADED FOR CONFIRMATION OF THE IMPUGNED ORDER. 2.7.1 RELIANCE PLACED ON VARIOUS DECISIONS BY THE LD. A.R. FOR THE ASSESSEE HAS BEEN DISTINGUISHED BY LD. D.R. AS UNDER: (I) DIT VS. ERICSSON AB, (DELHI):- IT HAS BEEN ARGU ED BY THE AR THAT THE TAX PAYER'S CASE IS COVERED BY THE AFORESAID DE CISION OF THE HON'BLE DELHI HIGH COURT. AS SUBMITTED AT THE TIME OF HEARING BEFORE THE HON'BLE BENCH THE ERICSSON'S CASE IS DISTINGUIS HABLE ON FACTS. AT THE TIME OF HEARING REFERENCE WAS MADE TO PARAGRAPH S 54 TO 61 (PAGE 15 TO 17) OF THE DECISION WHEREFROM IT CAN BE SEEN THAT THE MAJOR THRUST OF THE DECISION WAS ON THE FACT THAT THE SOF TWARE THAT WAS LOADED ON THE HARDWARE DID NOT HAVE ANY INDEPENDENT EXISTE NCE AND NO SEPARATE PAYMENT WAS AGREED FOR IT: ON THESE FACTS IT WAS HELD BY THE HIGH COURT THAT THE PAYMENT FOR SOFTWARE WAS NOT RO YALTY. I.T.A. NOS.5209 /DEL/2011 13 IN THE PRESENT CASE THE SOFTWARE IS NOT EMBEDDED IN ANY HARDWARE. THE ASSESSEE HAS SUPPLIED THE SOFTWARE ON STANDALON E BASIS. ALSO, AS SUBMITTED IN DETAIL AT THE TIME OF HEARING, THERE I S NO SALE OF SOFTWARE AND ONLY LICENSE WAS GIVEN TO USE IT. THE SOFTWARE HAD TO BE RETURNED TO THE TAXPAYER AFTER THE EXPIRY OF THE LICENSE WHI CH WAS NORMALLY FOR ONE YEAR. THUS, .THERE WAS -NO SALE OF ANY COPYRIGH TED ARTICLE. (II) NOKIA NETWORKS: IN THE AFORESAID CASE THE DELH I HIGH COURT HAS GIVEN THE DECISION VIDE ORDER DATED-07-09-2012. TH E ISSUE REGARDING TAXABILITY OF PAYMENT FOR SOFTWARE HAS BEEN DISCUSS ED IN PARA 23 TO 30 (PAGE 26-4;0 36) OF THE DECISION. AS-THE FACTS OF T HE AFORESAID CASE WERE EXACTLY SIMILAR TO THAT OF ERICSSON'S CASE THE HIGH COURT-HAS FOLLOWED THE ERICSSON'S DECISION. (III) INFRASOFT LTD. VS. ADIT, ITAT, DELHI: THE AFO RESAID DECISION IS PRIMARILY BASED ON THE SPECIAL BENCH DECISION OF TH E ITAT IN THE CASE OF MOTOROLA AND ITAT, BANGALORE'S DECISION IN THE C ASE OF SAMSUNG ELECTRONICS ( PARA 43 TO 46, PAGE 16 & 17). SINCE S UBSEQUENTLY HIGH COURTS' DECISIONS HAVE COME BOTH IN THE CASE OF MOT OROLA (VIZ. ERICSSON AND NOKIA ) AND SAMSUNG ELECTRONICS ( KARN ATAKA HIGH COURT) THE ISSUE IS TO BE DECIDED IN THE LIGHT OF T HE AFORESAID HIGH COURTS DECISIONS. WHILE THE DELHI HIGH COURT HAS AP PROVED MOTOROLA'S DECISION IN THE CASE OF ERICSSON AND NOK IA THE KARNATAKA HIGH COURT HAS REVERSED THE ITAT'S DECISION IN THE CASE OF SAMSUNG AND HAS DECIDED THE ISSUE IN THE FAVOUR OF THE REVE NUE: (IV) -AD IT VS. TII TEAM TELECOM: IN THIS DECISION ALSO THE ITAT HAS FOLLOWED SPECIAL BENCH DECISION IN THE CASE OF MOTOROLA AND HAS NOT FOLLOWED ITAT, DELHI DECISION IN THE CASE OF GRACEMAC CORPOR ATION. 2.7.2 DECISIONS RELIED UPON BY THE REVENUE:- (J) SAMSUNG ELECTRONICS LTD. { KARNATAKA HIGH COURT U2011- TII-43- HC-KAR-INTLL:... THE HIGH COURT IN PARA 15 ( PAGE 3 9) HAS REFERRED TO SUPREME COURT'S DECISION THE CASE OF SUN ENGINEE RING WORKS TO REITERATE THE SETTLED POSITION OF LAW THAT A DECIS ION IS IN AUTHORITY FOR WHAT IT DECIDES. IN PARA 19 (PAGE 43) THE HIGH COUR T HAS HELD THAT A LITERARY WORK IS ENTITLED TO COPYRIGHT AND COMPUTER SOFTWARE HAS BEEN RECOGNISED AS A COPYRIGHT WORK IN INDIA. IN PARA 20 ( PAGE 44) AFTER REFERRING TO THE TERMS OF-THE SOFTWARE LICENCE AGRE EMENT THE HIGH COURT HAS HELD THAT WHAT IS TRANSFERRED IS ONLY A L ICENCE TO USE THE I.T.A. NOS.5209 /DEL/2011 14 COPYRIGHT BELONGING TO THE SUPPLIER AND THE SUPPLIE R CONTINUES TO BE THE OWNER OF THE COPYRIGHT AND ALL OTHER IPRS. THE HIGH COURT DID NOT ACCEPT ,THE CONTENTION OF THE TAX PAYER THAT THERE IS NO TRANSFER OF COPYRIGHT OR ANY PART THEREOF. IN PARA 21 AND 22 THE HIGH COURT HAS CONSIDERED THE ISSUE AS TO WHETHER THE SOFTWARE IS TO BE TREATED AS GOODS AND WHETHER THERE IS SALE OF THE SOFTWARE. THE SUPREME COURT'S DECISION IN THE CASE OF TCS HAS ALSO BEEN-DISCUSSED. THE HIGH COURT HAS HELD TH AT THE AFORESAID DECISION OF THE SUPREME COURT IS NOT APPLICABLE AS THE QUESTION WHETHER THE PAYMENT MADE FOR SUPPLY OF SOFTWARE WAS ROYALTY OR NOT WAS NOT AT ALL THE ISSUE IN TCS CASE. THE COURT HEL D THAT THE AFORESAID DECISION WOULD NOT PRECLUDE IT FROM HOLDING THAT TH E PAYMENT RECEIVED BY THE SUPPLIER WOULD AMOUNT TO ROYALTY UNLESS IT I S PROVED THAT THE PAYMENT IS FOR THE SALE OF SOFTWARE. IN PARA 23 (PAGE 45) THE HIGH COURT HAD REFERRED TO THE DEFINITION OF COPYRIGHT UNDER THE COPYRIGHT ACT, 1957 WHEREIN IT IS CLEARLY STATED THAT 'LITERARY WORK' INCLUDES COMPUTER PROGRAMMES E TC. IN PARA 24 ( PAGE 47)THE HIGH COURT AFTER REFERRING TO SECTION 5 1 AND 52 OF THE COPYRIGHT ACT HAS HELD THAT LICENCE IS GRANTED FOR TAKING COPY OF SOFTWARE AND TO STORE IT IN THE HARD DISK AND TO TA KE A BACKUP COPY AND RIGHT TO MAKE AND-COPY ITSELF IS A PART OF THE COPY RIGHT. THE HIGH COURT FURTHER HELD THAT WHEN LICENCE TO MAKE USE OF THE SOFTWARE BY MAKING COPY OF THE SAME AND TO STORE IT TO THE HARD DISK IS GIVEN THEN WHAT IS TRANSFERRED IS RIGHT TO USE THE SOFTWARE, A N EXCLUSIVE RIGHT, WHICH THE OWNER OF COPYRIGHT OWNS AND WHAT IS TRANS FERRED IS ONLY RIGHT TO USE COPY OF THE SOFTWARE. THE HIGH COURT T HUS DID NOT ACCEPT THE TAXPAYER'S CONTENTION THAT THERE WAS NO TRANSFE R OF ANY PART OF COPYRIGHT OR COPYRIGHT UNDER THE AGREEMENTS OR LICE NCES. THE HIGH COURT HELD THAT RIGHT TO MAKE A COPY OF THE SOFTWAR E AND USE IT FOR INTERNAL BUSINESS ITSELF AMOUNTS TO COPYRIGHT WORK U/S. 14(1) OF THE COPYRIGHT ACT. ACCORDING TO THE HIGH COURT WHAT S G RANTED UNDER THE LICENCE IS ONLY RIGHT TO COPY OF THE SOFTWARE AND T HERE IS NO SALE INVOLVED IN THE TRANSACTIONS. THE1IIGH COURT HELD-T HAT AMOUNT PAID TO THE SUPPLIER FOR THE SUPPLY OF SHRINK WRAPPED SOFTW ARE WAS NOT THE PRICE OF THE CD ALONE OR SOFTWARE ALONE NOR THE PRI CE OF LICENCE GRANTED. THIS IS COMBINATION OF ALL: IN THE AFORESA ID PARA THE HIGH COURT HAS ALSO HIGHLIGHTED THE DIFFERENCE BETWEEN T HE COMPUTER SOFTWARE AND COPYRIGHT IN RESPECT OF BOOKS ETC. IN PARA 25 (PAGE 48) THE HIGH COURT HAS CONCLUDED T HAT PAYMENT FOR SUPPLY OF SOFTWARE WOULD CONSTITUTE ROYALTY WITHIN THE MEANING OF THE I.T.A. NOS.5209 /DEL/2011 15 D~ AND UNDER THE I.T. ACT AS THE RIGHT THAT IS TRAN SFERRED IN SUCH A CASE IS TRANSFER OF COPYRIGHT. THE HIGH COURT HAS A LSO HELD THAT THE PAYMENT WOULD CONSTITUTE ROYALTY FOR IMPARTING OF - ANY INFORMATION CONCERNING TECHNICAL; INDUSTRIAL,' COMMERCIAL OR S CIENTIFIC KNOWLEDGE, EXPERIENCE OR SKILL. BEFORE THE HIGH COURT THE TAXPAYER. HAD REFERRED TO THE DECO COMMENTARY, OBSERVATION OF, KLAUS VOGEL , THE DECIS ION OF AAR IN THE CASE OF DASSAULT SYSTEMS AND GEOQUEST SYSTEM, SALE OF COPYRIGHTED ARTICLE (PARA 6 TO 9). (II) SUNRAY COMPUTERS LTD: & LUCENT TECHNOLOGY ( IT A NOS. 756/2006 { KARNATAKA HIGH COURT DATED 21ST OCT., 2011: IN TH IS CASE THE TAXPAYER HAD IMPORTED COMPUTER SOFTWARE IH INDIA. T -HE ~ASSESSEE HAD ALSO IMPORTED HARDWARE SEPARATELY. IT INTEGRATE D THE SOFTWARE AND HARDWARE AND SUPPLIED THE SAME TO TELECOMMUNICATION DEPARTMENT ( PARA 5,PAGE 9). THE ITAT HELD THAT THE PAYMENT FOR SOFTWARE WAS NOT ROYALTY AS THE ASSESSEE HAD NOT ACQUIRED RIGHTS IN THE COPYRIGHT PROGRAMME AND HENCE THE SAME COULD NOT BE EXPLOITED COMMERCIALLY (PARA 7,PAGE 10). THE HIGH COURT HELD THAT SINCE SU PPLY OF SOFTWARE WAS AN INDEPENDENT TRANSACTION THE PAYMENT FOR IT A MOUNTED TO ROYALTY ( PARA 10-11, PAGE 12). (III) CITRIX SYSTEMS ASIA (2012-TII-04-ARA-INTL.: T HIS DECISION OF THE AAR ALSO PERTAINS TO THE PAYMENT FOR SUPPLY OF SHRI NK WRAPPED SOFTWARE. IN PARA 1 & 6 (PAGE 8 & 9) THE TERMS OF AGREEMENT ARE MENTIONED. IN PARAGRAPH 10 TO 12 ( PAGE 10) THE SUBMISSIONS OF THE TAX PAYERS, REFERENCE TO DECO COMMENTARY, DISTINCTION BETWEEN COPYRIGHT AND COPYR IGHTED ARTICLE, ETC. ARE MENTIONED. IN PARA 15 TO 17 ( PAGE 11 & 12 ) THE AAR HAS DISCUSSED THE VARIOUS PROVISIONS OF THE COPYRIGHT A CT. IN PARA. 18 PAGE 12 THE AAR HAS STATED THAT USE OF A COPYRIGHT EITHER BY A OWNER OR A LICENSEE WOULD NOT BE AN INFRINGEMENT OF A CO PYRIGHT. THE TRANSFER OF OWNERSHIP CAN BE BY AN ASSIGNMENT OF TH E COPYRIGHT EITHER WHOLLY OR PARTIALLY. A LICENCE CAN BE GRANTED BY TH E OWNER OF COPYRIGHT OF ANY .INTEREST IN THE RIGHT. THE AAR HA S HELD THAT WHEN A LICENSEE ACQUIRES A COMPUTER PROGRAMME HE ALSO GETS THE RIGHT TO USE THAT PROGRAMME TO A LIMITED EXTENT. HE ALSO GETS TH E RIGHT, ABSOLUTE OR LIMITED TO USE THE COPYRIGHT. IN PARA 19 .( PAGE 13) THE AAR HAS HELD THAT WHEN A SOFTWARE IS CREATED BY A PERSON WHO ACQUIRES A COPYRIGHT FOR IT , HE BECOMES THE OWNER OF THAT COPYRIGHT AND HE CAN TRANSFER OR LICE NCE THAT RIGHT. I.T.A. NOS.5209 /DEL/2011 16 WHILE SELLING OR LICENSING THE SOFTWARE THE OWNER I S ALSO SELLING OR LICENSING THE RIGHT TO USE THE COPY RIGHT EMBEDDED THEREIN. IT WAS FURTHER HELD THAT SOFTWARE IS A LITERARY WORK AND C OPYRIGHT OF THE CREATOR OVER THE SOFTWARE IS AN IMPORTANT AND COMME RCIALLY VALUABLE RIGHT AND THEREFORE WHENEVER A SOFTWARE IS ASSIGNED OR LICENSED FOR USE, THERE IS AN ASSIGNMENT OF THE RIGHT TO USE THE EMBEDDED COPYRIGHT IN THE SOFTWARE OR A LICENSE TO USE THE EMBEDDED CO PYRIGHT. THE AAR THUS HELD THAT IT IS NOT POSSIBLE TO DIVORCE THE SO FTWARE FROM THE IPR OF THE CREATOR OF THE SOFTWARE EMBEDDED THEREIN. IN PARA 21 ( PAGE 13) THE AAR HAS HELD THAT SALE OR LICENSING OF A SOFTWARE FOR USE PASSES TO THE GRANTEE A COPYRIGHT AS DEFINED IN SECTION 14 OF THE COPYRIGHT ACT. IN PARA 22 ( PAGE 13) AFTER HOLDING THAT LICENSE IS NOT CONFINED TO AN EXCLUSIVE LICENS E, THE AAR HAS HELD THAT WHERE A SOFTWARE IS ACQUIRED THE LICENSEE OR P URCHASER GETS THE RIGHT TO USE IT WITHOUT BEING HELD GUILTY OF INFRIN GEMENT OF THE COPYRIGHT THE AAR HAS HELD THAT SALE OR LICENSING O F THE SOFTWARE INVOLVES THE GRANT OF A RIGHT TO USE THE COPYRIGHT EMBEDDED IN THE SOFTWARE. THE AUTHORITY THUS DID NOT ACCEPT THE TAX PAYER'S ARGUMENT THAT LICENSING OF THE SOFTWARE IS THE MERE SALE OF A COPYRIGHTED ARTICLE AND DOES NOT INVOLVE THE GRANT OF A RIGHT TO USE TH E COPYRIGHT IN THE SOFTWARE. IN PARA 23 TO 27 ( PAGE 14 & 15) AND PARA 43 ( PAGE 17) THE AAR REFERRED TO THE DECISIONS IN THE CASE FACTSET SYSTE M, M/S. DASSAULT, GEOQUEST AND TCS AND HAS DISAGREED/DISTINGUISHED TH E DECISIONS. THE AUTHORITY HAS HELD THAT WHENEVER A SOFTWARE IS TRAN SFERRED OR LICENSE FOR USED, IT TAKES WITHIN IT THE COPYRIGHT EMBEDDED IN THE SOFTWARE AND THE ONE CANNOT BE DIVORCED FROM THE OTHER. IN PARAGRAPH 32 (PAGE 16) THE AR HAS HELD THAT THE DISTINCTION BETWEEN COPYRIGHT AND COPYRIGHTED ARTICLE IS ILLUSO RY AS WHEN A COPYRIGHTED ARTICLE IS PERMITTED OR LICENSED THE PE RMISSION INVOLVES NOT ONLY THE PHYSICAL OR ELECTRONIC MANIFESTATION O F A PROGRAMME, BUT ALSO THE USE OF OR THE RIGHT TO USE THE COPYRIGHT E MBEDDED THEREIN. IN PARA 39 (PAGE 17) THE AAR HAS REITERATED THAT THE S ALE OR LICENSE FOR USE OF A COPYRIGHT SOFTWARE AMOUNTS TO OR AMOUNTS A LSO TO THE GRANT OF A RIGHT TO USE OF A COPYRIGHT. IN PARA 42 & 43 ( PAGE 17) THE AAR HAS HELD THAT PA YMENT FOR SUPPLY OF SOFTWARE WOULD BE ROYALTY BOTH UNDER THE I.T.ACT AND UNDER THE DTAA. I.T.A. NOS.5209 /DEL/2011 17 2.8 IN ORDER TO COUNTER THE SUBMISSION OF LD. DR, L D. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THIS IS NOT SALE OF SOFTWA RE BY ANY COMPANY AND THERE IS TERMINATION CLAUSE AND TCS NEEDS TO BE APP LIED AND IT IS A CASE WHERE COPYRIGHTED ARTICLE IS TRANSFERRED AND NOT CO PYRIGHT AS ADMITTED BY THE DR. NO PERSON VISITED INDIA AND REFERENCE WAS MADE TO PAPER BOOK PAGE 156, 157, 181 AND 182. IT WAS SUBMITTED THAT ONLY P LAN WAS TRANSFERRED BUT NOBODY VISITED INDIA AND ASSESSEE HAS ENTERED INTO SEPARATE AGREEMENT. UNDER THE TREATY, ASSESSEE IS LIABLE TO BE TAXED. 2.9 THIS CASE WAS EARLIER HEARD AND DRAFT ORDER WAS PREPARED AND DISCUSSED BY BOTH THE MEMBERS BUT FRESH DEVELOPMENT AFTER LATEST DECISION ON THE SUBJECT HAS COME TO THE NOTICE OF THE MEMBER S OF THE BENCH. SO, THE CASE WAS REFIXED FOR CLARIFICATION AND THE SAME WAS HEARD AGAIN. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ISSUE R AISED IN THIS APPEAL IS NOW SQUARELY COVERED BY THE LATEST DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF DIT VS INFRASOFT LTD. DATED NOV. 22, 2013 A ND REPORTED IN 2013-TII- 15-HC DEL-INTL, IS IN FAVOUR OF THE ASSESSEE, A CO PY OF WHICH ODER HAS BEEN FILED AND IT WAS PLEADED THAT SUCH ISSUE IS NO LONGER RES-INTEGRA AS THE SAME IS COVERED BY JURISDICTIONAL HIGH COURT DECISI ON, THEREFORE, IT SHOULD BE DECIDED IN FAVOUR OF THE ASSESSEE BY ACCEPTING I TS APPEAL. 3. LD. D.R. WHILE SUBMITTING THAT SIMILAR ISSUE WAS DEALT BY ITAT MUMBAI BENCH L, MUMBAI IN GROUP OF CASES DDIT (IT )-2(1) VS RELIANCE INFOCOM LTD AND OTHERS DATED 06 TH SEP., 2013 BUT SINCE THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY JURISDICTIONAL HIGH COURT DECISION SO, SUCH PRECEDENT OF A TRIBUNAL LOSSES ITS IMPORTANCE AND THE PRECEDENT OF I.T.A. NOS.5209 /DEL/2011 18 JURISDICTIONAL HIGH COURT WILL PREVAIL, THEREFORE T HE MATTER CAN BE DECIDED ACCORDINGLY. 4. WE HAVE HEARD BOTH THE SIDES, CONSIDERED THE MAT ERIAL ON RECORD AS WELL AS THE PRECEDENT ALREADY RELIED UPON AT THE TI ME OF ORIGINAL HEARING AND MUMBAI BENCH DECISION IN GROUP OF CASES DDIT(IT)-2( 1) VS RELIANCE INFOCOM LTD. AND OTHERS (SUPRA) AND JURISDICTIONAL HIGH COURT DECISION IN THE CASE OF DIT VS INFRASOFT LTD. (SUPRA) CITED BY THE DEPARTMENT AND LD. COUNSEL FOR THE ASSESSEE RESPECTIVELY AT THE TIME O F FRESH HEARING, WE FIND THAT SINCE THE ISSUE IS COVERED IN FAVOUR OF THE AS SESSEE AS CONTENDED BY THE LD. A.R. AND THE SAME WAS NOT DISPUTED BY THE LD. D .R., THEREFORE, FOLLOWING THE JURISDICTIONAL HIGH COURTS DECISION, WE DECIDE THE ISSUE IN FAVOUR OF THE ASSESSEE AND ALLOW THE APPEAL OF THE ASSESSEE ON THIS ISSUE AND DIRECT TO DELETE THE IMPUGNED ADDITION MADE FOR SAL E OF SOFTWARE AND PROVISIONS OF MAINTENANCE / OTHER SUPPORT SERVICES TO THE CUSTOMERS IN INDIA BEING NOT TAXABLE. 4.1 AS REGARDS CHARGING OF INTEREST U/S 234B OF THE ACT IS CONCERNED, THE SAME IS CONSEQUENTIAL BUT SINCE THE ADDITION AS MAD E BY THE A.O. HAS ALREADY BEEN DELETED BY US, THEREFORE, QUESTION OF CHARGING OF INTEREST DOES NOT ARISE WHICH IS DIRECTED TO BE DELETED. 5. AS A RESULT THE APPEAL OF THE ASSESSEE GETS ACCE PTED. 6. ORDER PRONOUNCED IN THE OPEN COURT ON 14 TH FEB., 2014. SD./- SD./- (J.S. REDDY) ( U.B.S. BEDI ) ACCOUANTANT MEMBER JUDICIAL MEMBER DT. 14 .02.2014 NS/ A K KEOT/SP. I.T.A. NOS.5209 /DEL/2011 19 COPY FORWARDED TO:- 1. THE APPELLANT 2. THE RESPONDENT 3. THE DRP-I 4. THE DRP-I, NEW DELHI. 5. THE DR, ITAT, LOKNAYAK BHAWAN, KHAN MARKET, NEW DEL HI. TRUE COPY. ASSISTANT REGISTRAR (ITAT, NEW DELHI)