BEA Systems Inc, Bangalore V. DDIT, Bangalore

ITA 543/BANG/2011

• Counselvise Citation: 54321114 RSA 2011
• Duration Of Justice: 11 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-04-2012
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 03-04-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 10-05-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: ETWA MUNDA CITIII
• Assessee Lawyers: KOUSHIK MUKHARJEE
• Keywords: Double taxation relief; Permanent establishment; Question of law; Competent authority
• Section: 90; 15

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI N.K. SAINI, ACCOUNTANT MEMBER AND SMT. P. MADHAVI DEVI, JUDICIAL MEMBER ITA NO.543/BANG/2011 ASSESSMENT YEAR : 2007-08 M/S BEA SYSTEMS INC. C/O BEA SYSTEMS INDIA TECHNOLOGY CENTER PVT. LTD., 7 TH FLOOR, COMMERCE @ MANTRI, BANNERGHATTA ROAD, SOUTH TALUK, BANGALORE 560 076. PAN : AADCB 0229J. VS. THE DY. DIRECTOR OF INCOME-TAX (INTERNATIONAL TAXATION), CIRCLE I(1), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI KOUSHIK MUKHARJEE, C.A RESPONDENT BY : SHRI ETWA MUNDA, CIT-III DATE OF HEARING : 03.04.2012 DATE OF PRONOUNCEMENT : 13.04.2012 O R D E R PER N.K. SAINI, ACCOUNTANT MEMBER THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST TH E ORDER DATED 09.02.2011 OF THE LD. CIT(APPEALS)-IV, BANGALORE. 2. FOLLOWING GROUNDS HAVE BEEN RAISED IN THIS APPEA L: 1. THAT THE ORDER OF THE LEARNED COMMISSIONER OF I NCOME-TAX (APPEAL), (HEREINAFTER REFERRED TO AS LEARNED CIT(A )) IS CONTRARY TO THE ITA NO.543/BANG/11 PAGE 2 OF 15 PROVISIONS OF LAW AND ERRONEOUS ON THE FACTS OF THE CASE AND THE LEARNED CIT(A) ERRED IN UPHOLDING THE ORDER OF THE DEPUTY DIRECTOR OF INCOME-TAX (INTERNATIONAL TAXATION), CIRCLE-1(I), B ANGALORE (HEREINAFTER REFERRED TO AS THE LEARNED AO). 2. THAT THE LEARNED CIT(A) ERRED IN TREATING THE AM OUNT OF RS.24,04,22,581/-, RECEIVED BY BEA SYSTEMS INC (BE A) FROM BEA SYSTEMS INDIA PVT. LTD., (BEA SYSTEMS INDIA) ON A CCOUNT OF DISTRIBUTION OF SOFTWARE PRODUCT AS ROYALTY U/S 9(I)(VI) OF TH E INCOME-TAX ACT, 1961 (ACT) READ WITH ARTICLE 12 OF DOUBLE TAXATION AVOID ANCE AGREEMENT BETWEEN INDIA AND USA (TREATY). 3. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE, THE LEARNED CIT(A) ERRED IN NOT APPRECIATING THAT THE A FORESAID RECEIPT OF RS.24,04,22,581/- REPRESENTS MERELY PROCEEDS ON ACCOUNT OF DISTRIBUTION OF PRODUCTS, AND IS NOT FOR ANY TRANS FER OF INTELLECTUAL PROPERTY RIGHT CONTAINED IN THE COPY RIGHT OF THE S OFTWARE. 3. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE, THE LEARNED CIT(A) HAS ERRED IN NOT APPRECIATING THAT B EA RETAINS OWNERSHIP OVER THE COPYRIGHT IN THE SOFTWARE AND BE A SYSTEMS INDIA DOES NOT HAVE ANY RIGHT TO COMMERCIALLY EXPLO IT THE COPYRIGHT IN THE SOFTWARE. 4. THE LEARNED AO ERRED IN INITIATING PENALTY PROCEEDI NGS U/S 271(C) OF THE ACT. 3. FROM THE ABOVE GROUNDS, IT IS GATHERED THAT THE ONLY GRIEVANCE OF THE ASSESSEE RELATES TO THE ACTION OF THE LEARNED CIT(A ) IN CONFIRMING THE VIEW EXPRESSED BY THE AO IN HOLDING THAT THE PAYMENT OF RS.24,04,22,581/- RECEIVED FROM M/S B.E.A SYSTEMS INDIA PVT. LTD., ON ACCOUNT OF DISTRIBUTION OF SOFTWARE PRODUCTS WAS ROYALTY AND THE ASSESSEE WAS REQUIRED TO DEDUCT TAX AT SOURCE AND PAY THE SAME TO THE GOVERNMENT. 4. THE FACTS OF THE CASE IN BRIEF ARE THAT THE ASSE SSEE BEING A NON- RESIDENT INDIAN FILED THE RETURN OF INCOME ON 12.11 .2007 BY DECLARING NIL INCOME. THE SAID RETURN WAS PROCESSED U/S 143(1) OF THE INCOME-TAX ACT 1961 (HEREIN AFTER REFEREED TO AN ACT, IN SHORT). LATER ON, CASE WAS SELECTED FOR SCRUTINY. 5. DURING THE COURSE OF PROCEEDINGS, THE AO OBSERVE D THAT THE ASSESSEE WAS A SOFTWARE COMPANY ENGAGED IN THE BUSI NESS OF RESEARCH, ITA NO.543/BANG/11 PAGE 3 OF 15 CREATION OF SOFTWARE PRODUCTS AND SELLING ITS PRODU CT TO ITS SUBSIDIARIES ACROSS THE GLOBE, THE PRODUCTS WERE IN THE CATEGORY OF MIDDLEWARE PRODUCTS USED TO PROVIDE THE INFRASTRUCTURE BASE FOR APPLIC ATIONS TO ELICIT INFORMATION FROM VARIOUS DATABASE. THE ASSESSEE ENTERED INTO AN AGREEMENT DATED 1 SEPT 2005 WITH ITS SUBSIDIARIES, WHEREIN THE ASSESS EE HAD APPOINTED M/S BEA SYSTEMS INDIA AS AN AUTHORIZED DISTRIBUTOR FOR BEA PRODUCTS IN THE SPECIFIED TERRITORY. ACCORDING TO THE ASSESSEE, IT HAD BEEN GRANTED NON- EXCLUSIVE, NON-TRANSFERABLE RIGHT TO MARKET, SELL, DISTRIBUTE AND SUPPORT BEA PRODUCTS IN ITS TERRITORY. THE ASSESSEE HAD SOLD T HE SOFTWARE AGAINST THE END USERS ORDER TO M/S BEA SYSTEMS INDIA, WHO IN TU RN FINALLY SOLD IT TO THE END USERS. THE AO HELD THAT THE PAYMENT TOWARDS S HRINK WRAPPED SOFTWARE CONSTITUTED ROYALTY PAYMENT. IT WAS ALSO HELD THAT FOR CHARGING ROYALTY WHETHER THE ASSESSEE HAD A PE IN INDIA OR N OT WAS NOT RELEVANT. ACCORDINGLY, THE AO CHARGED TAX @ 10.54% ON SUCH RO YALTY PAYMENTS. 6. BEING AGGRIEVED, THE ASSESSEE CARRIED THE MATTER TO THE LEARNED CIT(A) AND SUBMITTED THAT THE ISSUE HAD BEEN DECIDE D IN FAVOUR OF THE ASSESSEE BY THE JURISDICTIONAL TRIBUNAL, HOWEVER AD MITTED THAT HONBE HIGH COURT OF KARNATAKA IN THE CASE OF SAMSUNG ELECTRON ICS REPORTED IN 320 ITR 209 HAS HELD THE ISSUE AGAINST THE ASSESSEE. I T WAS ALSO STATED THAT THE HONBLE SUPREME COURT IN THE CASE OF GE TECHNOL OGY CENTRE VS. CIT, 327 ITR 456 HAD SET ASIDE THE HONBLE KARNATAKA HIG H COURT JUDGMENT AGAIN FOR RECONSIDERATION. 7. THE LEARNED CIT(A) AFTER CONSIDERING THE SUBMIS SIONS OF THE ASSESSEE OBSERVED THAT THE HONBLE SUPREME COURT IN THE CASE OF G.E TECHNOLOGY CENTRE (CITED SUPRA) HAS REFERRED THE M ATTER BACK TO THE ITA NO.543/BANG/11 PAGE 4 OF 15 HONBLE HIGH COURT TO DECIDE ON THE CHARGEABILITY BEFORE CONCLUDING THAT ALL THE PAYMENTS MADE TO NON-RESIDENT REQUIRED DEDU CTION U/S 195 OF THE ACT. HE FURTHER OBSERVED THAT STILL IN THE CASE OF M/S SAMSUNG ELECTRONICS CO. LTD. & ORS. (CITED SUPRA) IT WAS HELD THAT PAYM ENT MADE TOWARDS SHRINK WRAPPED SOFTWARE WAS LIABLE FOR WITH HOLD ING TAX. THE LEARNED CIT(A) CATEGORICALLY STATED THAT IT WAS OBLIGATORY ON THE PART OF THE LOWER AUTHORITIES TO FOLLOW THE ORDER OF THE JURISDICTION AL HIGH COURT UNLESS THE SAID JUDGMENT IS REVERSED. THE LEARNED CIT(A) BY FOLLOW ING THE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF M/ S SAMSUNG ELECTRONIS CO. LTD. & ORS. HELD THAT THE PAYMENT MADE FOR PURC HASE OF SHRINK WRAPPED SOFTWARE BY INDIAN COMPANY TO THE ASSESSEE AMOUNTED TO ROYALTY AND THE AO WAS CORRECT IN TREATING THE SAME AS ROYALTY. ACCORDINGLY, THE ASSESSMENT ORDER PASSED BY THE AO WAS CONFIRMED. 8. NOW THE ASSESSEE IS IN APPEAL BEFORE US. 9. THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW BUT COULD NOT CON TROVERT THIS SUBMISSION OF THE LEARNED DR THAT THIS ISSUE HAS BEEN COVERED AGAINST THE ASSESSEE BY THE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT DATED 15/10/2010 IN I.T.A NOS.2008/2005 & OTHERS. 10. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND CAREFULLY GONE THROUGH THE MATERIAL AVAILABLE ON RE CORD. IT IS NOTICED THAT A SIMILAR ISSUE HAVING IDENTICAL FACTS WAS SUBJECT MA TTER OF ADJUDICATION BEFORE THIS BENCH OF THE TRIBUNAL IN THE CASE OF M/ S. SAMSUNG ELECTRONICS CO. LTD. & ORS. V. DCIT (INTERNATIONAL TAXATION), CIRCLE 2(1), BANG ALORE IN ITA NO.299/BANG/2011 FOR THE A.Y. 2005-06 WHEREIN V IDE ORDER DATED ITA NO.543/BANG/11 PAGE 5 OF 15 22.03.2012, THE ISSUE HAS BEEN DECIDED AGAINST THE ASSESSEE BY FOLLOWING THE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COU RT IN ITA NO.2808/2005 & ORS., ORDER DATED 15.10.2011 AND THE RELEVANT FIN DINGS ARE GIVEN IN PARAS 7 & 8 OF THE AFORESAID REFERRED TO ORDER DATED 22.0 3.2012 WHICH READ AS UNDER: 7. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND CAREFULLY GONE THROUGH THE MATERIAL AVAILABLE O N RECORD. IN THE PRESENT CASE, IT IS NOT IN DISPUTE THAT IN ASSE SSEES OWN CASE, IDENTICAL ISSUE HAS BEEN DECIDED BY THE HONBLE JUR ISDICTIONAL HIGH COURT AND THEIR LORDSHIPS IN THE JUDGMENT DATE D 15.10.2011 WHILE DECIDING THE ITA NO.2808/2005 & OR S., OBSERVED IN PARAS 20 TO 25 AS UNDER: 20. HAVING REGARD TO THE ABOVE SAID DEFINITION OF 'ROYALTY', WE HAVE TO CONSIDER THE CONTENTS OF SOFT WARE LICENCE AGREEMENT ENTERED INTO BY NON-RESIDENT WITH SAMSUNG ELECTRONICS AND ALSO RESPONDENTS IN THE CAS E REPRESENTED BY SRI GANESH, LEARNED SENIOR COUNSEL A ND SRI ARAVIND DATTAR, WHEREIN IT IS A CASE OF PURCHAS E, SALE OR DISTRIBUTION OR OTHERWISE OF THE OFF-THE-SHELF S OFTWARE. IT IS DESCRIBED AS A 'SOFTWARE LICENCE AGREEMENT', WHEREIN IT IS AVERRED THAT CUSTOMER ACCEPTS AN INDIVIDUAL, NON-TRANSFERABLE AND NON-EXCLUSIVE LICE NCE TO USE THE LICENSED SOFTWARE PROGRAM(S) PROGAM(S) O N THE TERMS AND CONDITIONS ENUMERATED IN THE AGREEMEN T. IT IS FURTHER AVERRED THAT THE CUSTOMER - SAMSUNG ELECTRONICS SHALL PROTECT CONFIDENTIAL INFORMATION AND SHALL NOT REMOVE ANY COPYRIGHT, CONFIDENTIALITY OR OTHER PROPRIETARY RIGHTS PROVIDED BY THE NON-RESIDENT. HOWEVER, WHAT IS GRANTED UNDER THE SAID LICENCE IS ONLY A LICENCE TO USE THE SOFTWARE FOR INTERNAL BUSINESS WITHOUT HAVING ANY RIGHT FOR MAKING ANY ALTERATION OR REVERSE ENGINEERING OR CREATING SUB-LICENCES. WHAT IS TRANSFERRED UNDER THE SAID LICENCE IS THE LICENCE T O USE THE SOFTWARE AND COPYRIGHT CONTINUE TO BE WITH THE NON- RESIDENT AS PER THE AGREEMENT. EVEN AS PER THE AGREEMENT ENTERED INTO WITH THE OTHER DISTRIBUTORS AS ALSO THE END-USER LICENCE AGREEMENT, IT IS CLEAR TH AT THE DISTRIBUTOR WOULD GET EXCLUSIVE NON-TRANSFERABLE LI CENCE WITHIN THE TERRITORY FOR WHICH HE IS APPOINTED AND HE HAS GOT RIGHT TO DISTRIBUTE VIA RESELLERS THE SOFTWARE, UPON PAYMENT OF THE LICENSES SET FORTH IN EXHIBIT A TO T HE ITA NO.543/BANG/11 PAGE 6 OF 15 AGREEMENT ONLY TO END USERS PURSUANT TO A VALID ACT UATE SHRINKWRAP OR OTHER ACTUATE LICENSE AGREEMENT AND EXCEPT AS EXPRESSLY SET FORTH IN THE SAID AGREEMENT , DISTRIBUTOR MAY NOT RENT, LEASE, LOAN, SELL OR OTHE RWISE DISTRIBUTE THE SOFTWARE THE DOCUMENTATION OR ANY DERIVATIVE WORKS BASED UPON THE SOFTWARE OR DOCUMENTATION IN WHOLE OR IN PART. DISTRIBUTOR SHAL L NOT REVERSE ENGINEER, DECOMPILE, OR OTHERWISE ATTEMPT T O DERIVE OR MODIFY THE SOURCE CODE FOR THE SOFTWARE. DISTRIBUTOR SHALL HAVE NO RIGHTS TO THE SOFTWARE OT HER THAN THE RIGHTS EXPRESSLY SET FORTH IN THE AGREEMEN T. DISTRIBUTOR SHALL NOT MODIFY OR COPY ANY PART OF TH E SOFTWARE OR DOCUMENTATION. DISTRIBUTOR MAY NOT USE SUB-DISTRIBUTORS FOR FURTHER DISTRIBUTION OF THE SO FTWARE AND DOCUMENTATION WITHOUT THE PRIOR CONSENT OF ACTU ATE. WHAT IS CHARGED IS THE LICENCE FEE TO BE PAID BY TH E DISTRIBUTOR OF THE SOFTWARE AS ENUMERATED IN EXHIBI T A TO THE AGREEMENT. FURTHER, CLAUSE 6.01 OF THE AGREE MENT DEALING WITH TITLE STATES THAT THE DISTRIBUTOR ACKNOWLEDGES THAT ACTUATE AND ITS SUPPLIERS RETAIN ALL RIGHT, TITLE AND INTEREST IN AND TO THE ORIGINAL, A ND ANY COPIES (BY WHOMEVER PRODUCED), OF THE SOFTWARE OR DOCUMENTATION AND OWNERSHIP OF ALL PATENT COPYRIGHT , TRADEMARK, TRADE SECRET AND OTHER INTELLECTUAL PROP ERTY RIGHTS PERTAINING THERETO, SHALL BE AND REMAIN THE SOLE PROPERTY OF ACTUATE. DISTRIBUTOR SHALL NOT BE AN OW NER OF ANY COPIES OF, OR ANY INTEREST IN, THE SOFTWARE, BU T RATHER IS LICENCED PURSUANT TO THE AGREEMENT TO USE AND DISTRIBUTE SUCH COPIES. ACTUATE REPRESENTS THAT IT HAS THE RIGHT TO ENTER INTO THE AGREEMENT AND GRANT THE LIC ENCES PROVIDED THEREIN AND CONFIDENTIALITY IS PROTECTED. THEREFORE, ON READING THE CONTENTS OF THE RESPECTIV E AGREEMENT ENTERED INTO BY THE RESPONDENTS WITH THE NON- RESIDENT, IT IS CLEAR THAT UNDER THE AGREEMENT, WHA T IS TRANSFERRED IS ONLY A LICENCE TO USE THE COPYRIGHT BELONGING TO THE NON-RESIDENT SUBJECT TO THE TERMS AND CONDITIONS OF THE AGREEMENT AS REFERRED TO ABOVE AN D THE NON-RESIDENT SUPPLIER CONTINUES TO BE THE OWNER OF THE COPYRIGHT AND ALL OTHER INTELLECTUAL PROPERTY RIGHT S. IT IS WELL SETTLED THAT COPYRIGHT IS A NEGATIVE RIGHT. IT IS AN UMBRELLA OF MANY RIGHTS AND LICENCE IS GRANTED FOR MAKING USE OF THE COPYRIGHT IN RESPECT OF SHRINK WR APPED SOFTWARE/OFF-THE-SHELF SOFTWARE UNDER THE RESPECTIV E AGREEMENT, WHICH AUTHORIZES THE END USER I.E., THE CUSTOMER TO MAKE USE OF THE COPYRIGHT SOFTWARE CONTAINED IN THE SAID SOFTWARE, WHICH IS PURCHASED OFF ITA NO.543/BANG/11 PAGE 7 OF 15 THE SHELF OR IMPORTED AS SHRINK WRAPPED SOFTWARE AN D THE SAME WOULD AMOUNT TO TRANSFER OF PART OF THE COPYRIGHT AND TRANSFER OF RIGHT TO USE THE COPYRIGH T FOR INTERNAL BUSINESS AS PER THE TERMS AND CONDITIONS O F THE AGREEMENT. THEREFORE, THE CONTENTION OF THE LEARNED SENIOR COUNSEL APPEARING FOR THE RESPONDENTS THAT T HERE IS NO TRANSFER OF COPYRIGHT OR ANY PART THEREOF UND ER THE AGREEMENTS ENTERED INTO BY THE RESPONDENT WITH THE NON- RESIDENT SUPPLIER OF SOFTWARE CANNOT BE ACCEPTED. 21. IT IS FURTHER CONTENDED BY THE LEARNED SENIOR COUN SEL APPEARING FOR THE RESPONDENTS THAT IN VIEW OF THE F ACT THAT WHAT IS SUPPLIED BY THE NON-RESIDENT TO THE RESPONDENT IN INDIA IS ONLY A SHRINK WRAPPED SOFTWARE/OFF-THE-SHELF SOFTWARE, WHICH IS NOT CUSTO MISED TO SUIT THE NEEDS OF THE RESPONDENT, THE SAID SOFTW ARE IS TO BE TREATED AS GOODS AND THERE IS SALE OF THE SOF TWARE AND COPY OF THE SOFTWARE. THEREFORE, THE QUESTION O F PAYING ANY ROYALTY WOULD NOT ARISE. IN SUPPORT OF T HE SAID CONTENTION, THE LEARNED SENIOR COUNSEL APPEARI NG FOR THE RESPONDENTS HAS STRONGLY RELIED UPON THE DE CISION OF THE HON'BLE SUPREME COURT IN TATA CONSULTANCY SERVICES' CASE (SUPRA) (HEREINAFTER REFERRED TO AS THE TCS'S CASE), WHEREIN THE HON'BLE SUPREME COURT WAS CONSIDERING THE QUESTION AS TO WHETHER THE CANNED SOFTWARE SOLD BY THE APPELLANTS CAN BE TERMED TO BE 'GOODS' AND AS SUCH ASSESSABLE TO SALES TAX UNDER T HE ANDHRA PRADESH GENERAL SALES TAX ACT, 1957. HAVING REGARD TO THE BROAD DEFINITION OF 'GOODS' UNDER SEC TION 2(H) OF THE SAID ACT AND ALSO THE PROVISIONS OF ART ICLE 366(12) OF THE CONSTITUTION OF INDIA, THE HON'BLE SUPREME COURT WAS PLEASED TO ANSWER THE SAID QUESTI ON FOR DETERMINATION BY HOLDING THAT ONCE THE 'INFORMA TION' OR 'KNOWLEDGE' IS TRANSFORMED INTO PHYSICAL EXISTEN CE AND RECORDED IN PHYSICAL FORM, IT IS CORPOREAL PROP ERTY. THE PHYSICAL RECORDING OF THE SOFTWARE IS NOT AN INCORPOREAL RIGHT TO BE COMPREHENDED AND ACCORDINGL Y, HELD THAT THE SOFTWARE MARKETED BY THE APPELLANTS T HEREIN INDISPUTABLY WAS CANNED SOFTWARE AND THUS, SALE OF THE SAME WOULD ATTRACT THE PROVISIONS OF THE ANDHRA PRADESH GENERAL SALES TAX ACT, 1957. 22. THE QUESTION AS TO WHETHER THE PAYMENT MADE FOR IMPORT OF SOFTWARE OR SUPPLY OF SOFTWARE BY THE NON - RESIDENT COMPANIES WAS ROYALTY OR NOT WAS NOT AT AL L IN ISSUE IN TCS'S CASE AND THE QUESTION WAS WHETHER CANNED SOFTWARE SOLD BY THE APPELLANTS THEREIN ITA NO.543/BANG/11 PAGE 8 OF 15 AMOUNTED TO SALE OF GOODS UNDER THE ANDHRA PRADESH GENERAL SALES TAX ACT. FURTHER, THE ISSUE OF TRANSF ER OF RIGHT TO USE THE GOODS AS PER THE EXPANDED DEFINITI ON OF 'SALE' DID NOT COME UP FOR CONSIDERATION IN THAT CA SE. ON THE OTHER HAND THE ISSUE IN THE PRESENT CASE IS AS TO WHETHER THE PAYMENT WOULD AMOUNT TO 'ROYALTY' WITHI N THE MEANING OF INCOME TAX ACT AND DTTA. IN THE SAID TCS'S CASE, IT HAS BEEN HELD THAT COPYRIGHT IN COMP UTER PROGRAM MAY REMAIN WITH THE ORIGINATOR OF THE PROGR AM, BUT, THE MOMENT COPIES ARE MADE AND MARKETED, IF BECOMES GOODS, WHICH ARE SUSCEPTIBLE TO TAX. THE CONTENTION OF THE ASSESSEE THAT THE CONSIDERATION RECEIVED BY THE NON-RESIDENT SUPPLIER TOWARDS THE SOFTWARE PRODUCTS WOULD AMOUNT TO 'ROYALTY' WITHIN THE MEANING OF DTAA WITH RESPECTIVE COUNTRY WAS NOT AT ALL CONSIDERED IN THE SAID CASE. THEREFORE, THE SAID DE CISION IN TCS'S CASE IS NOT HELPFUL TO THE RESPONDENTS IN THE PRESENT CASES. IT IS WELL SETTLED THAT THE INTENT O F THE LEGISLATURE IN IMPOSING SALES TAX AND INCOME TAX AR E ENTIRELY DIFFERENT AS INCOME TAX IS A DIRECT TAX AN D SALES TAX IS AN INDIRECT TAX AND WHEREFORE, MERE FINDING THAT THE COMPUTER SOFTWARE WOULD BE INCLUDED WITHIN THE TERM 'SALES TAX' WOULD NOT PRECLUDE THIS COURT FROM HOLD ING THAT THE SAID PAYMENTS MADE BY THE RESPONDENTS TO T HE NON-RESIDENT COMPANY IN THE PRESENT CASES WOULD AMOUNT TO 'ROYALTY' UNLESS THE RESPONDENTS ARE ABLE TO PROVE THAT THE SAID PAYMENT IS FOR THE SALE OF COMP UTER SOFTWARE, WHEREIN THE INCOME WOULD BE FROM THE BUSINESS AND IN THE ABSENCE OF ANY PERMANENT ESTABLISHMENT OF THE NON-RESIDENT SUPPLIER, THERE I S NO OBLIGATION ON THE PART OF THE PAYEE TO MAKE DEDUCTI ON UNDER SECTION 195(1) OF THE ACT. 23. IT IS WELL SETTLED THAT IN THE ABSENCE OF ANY DEFI NITION OF 'COPYRIGHT' IN THE INCOME TAX ACT OR DTAA WITH T HE RESPECTIVE COUNTRIES, IN VIEW OF CLAUSE 3 OF THE DT AA, REFERENCE IS TO BE MADE TO THE RESPECTIVE LAW REGAR DING DEFINITION OF 'COPYRIGHT', NAMELY, COPYRIGHT ACT, 1 957, IN INDIA, WHEREIN IT IS CLEARLY STATED THAT 'LITERA RY WORK' INCLUDES COMPUTER PROGRAMMES, TABLES AND COMPILATIO NS INCLUDING COMPUTER [DATABASES]. SECTION 16 OF THE COPYRIGHT ACT, 1957 STATES THAT NO PERSON SHALL BE ENTITLED TO COPYRIGHT OR ANY SIMILAR RIGHT IN ANY W ORK, 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 N OTHING ITA NO.543/BANG/11 PAGE 9 OF 15 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 SUBJECT TO TH E PROVISIONS OF THIS ACT, TO DO OR AUTHORISE THE DOIN G OF ANY OF THE FOLLOWING ACTS IN RESPECT OF A WORK OR ANY SUBS TANTIAL 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 COMMUNICATE 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 ADAP TATION 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 PROGRAMME: PROVIDED THAT SUCH COMMERCIAL RENTAL DOES NOT APPLY IN RESPECT OF COMPUTER PROGRAMMES WHERE THE PROGRAMME ITSELF IS NOT THE ESSENTIAL OBJECT OF THE RENTAL. (C) IN THE EASE OF AN ARTISTIC WORK,- (I) TO REPRODUCE THE WORK IN ANY MATERIAL FORM INCL UDING DEPICTION IN THREE DIMENSIONS OF A TWO-DIMENSIONAL WORK OR IN TWO DIMENSIONS OF A THREE-DIMENSIONAL WORK; (II) TO COMMUNICATE THE WORK TO THE PUBLIC: (III) TO ISSUE COPIES OF THE WORK TO THE PUBLIC NOT BEING COPIES ALREADY IN CIRCULATION; (IV) TO INCLUDE THE WORK IN ANY CINEMATOGRAPH FILM; (V) TO MAKE ANY ADAPTATION OF THE WORK; ITA NO.543/BANG/11 PAGE 10 OF 15 (VI) TO DO IN RELATION TO AN ADAPTATION OF THE WORK ANY OF THE ACTS SPECIFIED IN RELATION TO THE WORK IN SUB-CLAUS ES (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; (II) TO SELL OR GIVE ON HIRE, OR OFFER FOR SALE OR HIRE, ANY COPY OF THE FILM, REGARDLESS OF WHETHER SUCH COPY HAS BE EN 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 PUB LIC. EXPLANATION.- FOR THE PURPOSES OF THIS SECTION, A C OPY WHICH HAS BEEN SOLD ONCE SHALL BE DEEMED TO BE A COPY ALR EADY IN CIRCULATION. IT MAY ALSO BE NOTED THAT UNDER SECTION 51 OF THE A CT DEALING WITH 'WHEN COPYRIGHT INFRINGED' STATES THAT COPYRIGHT IN A WORK SHALL BE DEEMED TO BE INFRINGED - WHEN ANY PERSON, WITHOUT A LICENCE GRANTED BY THE OWNER OF THE COPYRIGHT OR THE REGISTRAR OF COPYRIGH TS UNDER THE ACT OR IN CONTRAVENTION OF THE CONDITIONS OF A LICENCE SO GRANTED OR OF ANY CONDITION IMPOSED BY A COMPETENT AUTHORITY UNDER THE ACT: DOES ANYTHING, T HE EXCLUSIVE RIGHT TO DO WHICH IS BY THE ACT CONFERRED UPON THE OWNER OF THE COPYRIGHT. SECTION 52 OF THE ACT D EALING WITH CERTAIN ACTS NOT TO BE INFRINGEMENT OF COPYRIG HT STATES THAT THE FOLLOWING ACTS SHALL NOT CONSTITUTE AN INFRINGEMENT OF COPYRIGHT, NAMELY- XXXX (AA) THE MAKING OF COPIES OR ADAPTATION OF A COMPUT ER PROGRAMME BY THE LAWFUL POSSESSOR OF A COPY OF SUCH COMPUTER PROGRAMME, FROM SUCH COPY. (I) IN ORDER TO UTILISE THE COMPUTER PROGRAMME FO R THE PURPOSE FOR WHICH IT WAS SUPPLIED; OR ITA NO.543/BANG/11 PAGE 11 OF 15 (II) TO MAKE BACK-UP COPIES PURELY AS A TEMPORARY P ROTECTION AGAINST LOSS, DESTRUCTION OR DAMAGE IN ORDER ONLY T O 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 WOUL D ALSO CONSTITUTE EXCLUSIVE RIGHT OF THE COPYRIGHT HO LDER AND 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 LAWFU L 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 CONTAIN ED IN SHRINK-WRAPPED/OFF-THE-SHELF SOFTWARE INTO THE H ARD DISK OF THE DESIGNATED COMPUTER AND TO TAKE, A COPY FOR 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, LICEN CE IS GRANTED FOR TAKING COPY OF THE SOFTWARE AND TO STOR E IT IN THE HARD DISK AND TO TAKE A BACK UP COPY AND RIGHT TO MAKE A COPY ITSELF IS A PART OF THE COPYRIGHT. THER EFORE, WHEN LICENCE TO MAKE USE OF THE SOFTWARE BY MAKING COPY OF THE SAME AND TO STORE IT IN THE HARD DISK O F 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 AN D WHAT IS TRANSFERRED IS ONLY RIGHT TO USE COPY OF TH E SOFTWARE FOR THE INTERNAL BUSINESS AS PER THE TERMS AND CONDITIONS OF THE AGREEMENT. THE DECISION OF THE DE LHI HIGH COURT IN DYNAMIC VERTICAL SOFTWARE INDIA (P.) LTD.'S CASE (SUPRA) RELIED UPON BY SRI ARAVIND DATT AR, LEARNED SENIOR COUNSEL APPEARING FOR THE RESPONDENT S 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 SUPPLIERS CAN BE TR EATED AS 'ROYALTY' IS NOT HELPFUL TO THE RESPONDENTS IN T HE PRESENT CASES AS IN THE SAID CASE, DELHI HIGH COURT WAS CONSIDERING THE PROVISIONS OF SECTION 40(A)(I) OF T HE ACT AND THE ORDER OF THE HIGH COURT READS AS FOLLOWS :- 'WHAT IS FOUND, AS A MATTER OF FACT, IS THAT THE AS SESSEE HAS BEEN PURCHASING THE SOFTWARE FROM MICROSOFT AND SOL D IT FURTHER IN INDIAN MARKET BY NO STRETCH OF IMAGINATI ON, IT WOULD BE TERMED AS ROYALTY.' ITA NO.543/BANG/11 PAGE 12 OF 15 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. ACCORDIN GLY, WE HOLD THAT RIGHT TO MAKE A COPY OF THE SOFTWARE A ND USE IT FOR INTERNAL BUSINESS BY MAKING COPY OF THE SAME 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 AN D LICENCE IS GRANTED TO USE THE SOFTWARE BY MAKING CO PIES, WHICH WORK, BUT FOR THE LICENCE GRANTED WOULD HAVE CONSTITUTED INFRINGEMENT OF COPYRIGHT AND LICENCEE IS IN POSSESSION OF THE LEGAL COPY OF THE SOFTWARE UNDER THE 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 COPYR IGHT SOFTWARE CANNOT BE ACCEPTED. IT IS ALSO TO BE NOTED THAT WHAT IS SUPPLIED IS THE COPY OF THE SOFTWARE OF WHI CH THE RESPONDENT-SUPPLIER CONTINUES TO BE THE OWNER OF TH E COPYRIGHT AND WHAT IS GRANTED UNDER THE LICENCE IS ONLY RIGHT TO COPY THE SOFTWARE AS PER THE TERMS OF THE AGREEMENT, WHICH, BUT FOR THE LICENCE WOULD AMOUNT TO INFRINGEMENT OF COPYRIGHT AND IN VIEW OF THE LICENC E GRANTED, THE SAME WOULD NOT AMOUNT TO INFRINGEMENT UNDER SECTION 52 OF THE COPYRIGHT ACT AS REFERRED T O ABOVE. THEREFORE, THE AMOUNT PAID TO THE NON-RESIDE NT SUPPLIER TOWARDS SUPPLY OF SHRINK-WRAPPED SOFTWARE, OR OFF-THE-SHELF SOFTWARE IS NOT THE PRICE OF THE C.D. ALONE NOR SOFTWARE ALONE NOR THE PRICE OF LICENCE GRANTED . THIS IS A COMBINATION OF ALL AND IN SUBSTANCE, UNLESS LI CENCE IS GRANTED PERMITTING THE END USER TO COPY AND DOWN LOAD THE SOFTWARE, THE DUMB C.D. CONTAINING THE SOFTWARE WOULD NOT IN ANY WAY BE HELPFUL TO THE END USER AS SOFTWARE WOULD BECOME OPERATIVE ONLY IF IT IS DOWNLOADED TO THE HARDWARE OF THE DESIGNATED COMPUT ER AS PER THE TERMS AND CONDITIONS OF THE AGREEMENT AN D THAT MAKES THE DIFFERENCE BETWEEN THE COMPUTER SOFT WARE AND COPYRIGHT IN RESPECT OF BOOKS OR PRERECORDED MU SIC SOFTWARE AS BOOK AND PRERECORDED MUSIC C.D. CAN BE USED ONCE THEY ARE PURCHASED, BUT SO FAR AS SOFTWAR E STORED IN DUMB C.D. IS CONCERNED, THE TRANSFER OF D UMB C.D. BY ITSELF WOULD NOT CONFER ANY RIGHT UPON THE END USER AND THE PURPOSE OF THE C.D. IS ONLY TO ENABLE THE END USER TO TAKE A COPY OF THE SOFTWARE AND TO STOR E IT IN THE HARD DISK OF THE DESIGNATED COMPUTER IF LICENCE IS ITA NO.543/BANG/11 PAGE 13 OF 15 GRANTED IN THAT BEHALF AND IN THE ABSENCE OF LICENC E, THE SAME WOULD AMOUNT TO INFRINGEMENT OF COPYRIGHT, WHI CH IS EXCLUSIVELY OWNED BY NON-RESIDENT SUPPLIERS, WHO WOULD CONTINUE TO BE THE PROPRIETOR OF COPYRIGHT. THEREFORE, THERE IS NO SIMILARITY BETWEEN THE TRANS ACTION OF PURCHASE OF THE BOOK OR PRERECORDED MUSIC C.D. O R THE C.D. CONTAINING SOFTWARE AND IN VIEW OF THE SAM E, THE LEGISLATURE IN ITS WISDOM, HAS TREATED THE LITE RARY WORK LIKE BOOKS AND OTHER ARTICLES SEPARATELY FROM 'COMPUTER' SOFTWARE WITHIN THE MEANING OF THE 'COPYRIGHT' AS REFERRED TO ABOVE UNDER SECTION 14 O F THE COPYRIGHT ACT. 25. IT IS ALSO CLEAR FROM THE ABOVE SAID ANALYSIS OF T HE DTAA INCOME TAX ACT, COPYRIGHT ACT THAT THE PAYMENT WOULD CONSTITUTE 'ROYALTY' WITHIN THE MEANING OF AR TICLE 12(3) OF THE DTAA AND EVEN AS PER THE PROVISIONS OF 9(1)(VI) OF THE ACT AS THE DEFINITION OF 'ROYALTY' UNDER CLAUSE 9(1)(VI) OF THE ACT IS BROADER THAN THE DEFI NITION OF 'ROYALTY' UNDER THE DTAA AS THE RIGHT THAT IS TRANSFERRED IN THE PRESENT CASE IS THE TRANSFER OF COPYRIGHT INCLUDING THE RIGHT TO MAKE COPY OF SOFTW ARE FOR INTERNAL BUSINESS, AND PAYMENT MADE IN THAT REG ARD WOULD CONSTITUTE 'ROYALTY' FOR IMPARTING OF ANY INFORMATION CONCERNING TECHNICAL, INDUSTRIAL, COMMERCIAL OR SCIENTIFIC KNOWLEDGE, EXPERIENCE OR S KILL AS PER CLAUSE (IV) OF EXPLANATION 2 TO SECTION 9(1) (VI) OF THE ACT. IN ANY VIEW OF THE MATTER, IN VIEW OF THE PROVISIONS OF SECTION 90 OF THE ACT, AGREEMENTS WIT H FOREIGN COUNTRIES DTAA WOULD OVERRIDE THE PROVISION S OF THE ACT. ONCE IT IS HELD THAT PAYMENT MADE BY TH E RESPONDENTS TO THE NON-RESIDENT COMPANIES WOULD AMOUNT TO 'ROYALTY' WITHIN THE MEANING OF ARTICLE 1 2 OF THE DTAA WITH THE RESPECTIVE COUNTRY, IT IS CLEAR T HAT THE PAYMENT MADE BY THE RESPONDENTS TO THE NON-RESIDENT SUPPLIER WOULD AMOUNT TO ROYALTY. IN VIEW OF THE SA ID FINDING, IT IS CLEAR THAT THERE IS OBLIGATION ON TH E PART OF THE RESPONDENTS TO DEDUCT TAX AT SOURCE UNDER SECTI ON 195 OF THE ACT AND CONSEQUENCES WOULD FOLLOW AS HEL D BY THE HON'BLE SUPREME COURT WHILE REMANDING THESE APPEALS TO THIS COURT. ACCORDINGLY, WE ANSWER THE SUBSTANTIAL QUESTION OF LAW IN FAVOUR OF THE REVENU E AND AGAINST THE ASSESSEE BY HOLDING THAT ON FACTS AND CIRCUMSTANCES OF THE CASE, THE ITAT WAS NOT JUSTIFI ED IN HOLDING THAT THE AMOUNT(S) PAID BY THE RESPONDENT(S ) TO THE FOREIGN SOFTWARE SUPPLIERS WAS NOT 'ROYALTY' AN D THAT ITA NO.543/BANG/11 PAGE 14 OF 15 THE SAME DID NOT GIVE RISE TO ANY 'INCOME' TAXABLE IN INDIA AND WHEREFORE, THE RESPONDENT(S) WERE NOT LIA BLE TO DEDUCT ANY TAX AT SOURCE AND PASS THE FOLLOWING ORDER:- ALL THE APPEALS ARE ALLOWED. THE ORDER PASSED BY TH E INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH 'A' IMPUGNED IN THESE APPEALS IS SET ASIDE AND THE ORDE R PASSED BY THE COMMISSIONER OF INCOME TAX (APPEALS) CONFIRMING THE ORDER PASSED BY THE ASSESSING OFFICE R (TDS)-I IS RESTORED . (EMPHASIS SUPPLIED). 8. FROM THE AFORESAID REFERRED TO JUDGMENT DATED 1 5.10.2011 IN ITA NO.2808/2005 & OTHERS, IT IS CRYSTAL CLEAR T HAT THE ISSUE UNDER CONSIDERATION HAS BEEN SETTLED BY THE HONBLE JURISDICTIONAL HIGH COURT IN ASSESSEES OWN CASE AN D IT HAS BEEN HELD THAT PAYMENT MADE BY THE ASSESSEE TO NON-RESID ENT COMPANIES WOULD AMOUNT TO ROYALTY WITHIN THE MEANIN G OF ARTICLE 12 OF THE DTAA WITH THE RESPECTIVE COUNTRIES AND TH ERE WAS OBLIGATION ON THE PART OF THE ASSESSEE TO DEDUCT TA X AT SOURCE U/S. 195 OF THE I.T. ACT. WE THEREFORE DO NOT SEE ANY INFIRMITY IN THE ORDER OF THE LD. CIT(A), AS SUCH WE DO NOT FIND ANY MERIT IN THIS APPEAL OF THE ASSESSEE. 11. SINCE THE FACTS OF THE PRESENT CASE ARE SIMILAR TO THE FACTS INVOLVED IN THE AFORESAID REFERRED TO CASE OF M/S SAMSUNG ELECTRONICS CO. LTD. V. DCIT (INTERNATIONAL TAXATION) IN ITA NO.299/BANG/2011 , THEREFORE RESPECTFULLY FOLLOWING THE SAID ORDER DATED 22.03.2012 PASSED BY THE ITAT A BENCH BANGALORE, WE DO NOT SEE ANY MERIT IN THIS APPEAL O F THE ASSESSEE. 12. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS DISMISSED. PRONOUNCED IN THE OPEN COURT ON 13TH APRIL, 2012. SD/- SD/- ( SMT. P. MADHAVI DEVI ) ( N.K. SAINI ) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE, DATED, THE 13TH APR , 2012. VMS ITA NO.543/BANG/11 PAGE 15 OF 15 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.