Black Duck Software Inc., Noida V. DCIT (International Taxation), New Delhi

ITA 624/DEL/2016

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 4673 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 7 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-09-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Next Hearing Date: 13-06-2017
• Assessment Year: 2012-2013
• Appeal Filed On: 05-02-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ANUJ ARORA
• Assessee Lawyers: ABHIMANYU JHAMBA
• Keywords: Business income; Double taxation relief; Retrospective amendment; Permanent establishment
• Section: 143(3); 6

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH E , NEW DELHI BEFORE SHRI. G. D. AGRAWAL, PRESIDENT AND SHRI AMIT SHUKLA, JUDICIAL MEMBER I.T .A. NO. 624/DEL/2016 ASSESSMENT YEAR: 2012 - 13 M/S. BLACK DUCK SOFTWARE INC. C/O SHIPLI AGARWAL & CO. B - 1 8, LGF, EXPRESS GREEN, SECTOR 44, NOIDA VS. D Y. C OMMISSIONER OF I NCOME T AX (INTERNATIONAL TAXATION) CIRCLE1(1)(2) NEW DELHI TAN/PAN: AAECB2775L (APP LIC ANT) (RESPONDENT) APP LIC ANT BY: SHRI ABHIMANYU J HAMBA, ADVOCATE RESPONDENT BY: SHRI ANUJ ARORA, CIT (DR) DATE OF HEARING: 13 06 201 7 DATE OF PRONOUNCEMENT: 11 09 201 7 O R D E R PER AMIT SHUKLA, J.M.: THE AFORESAID APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE FINAL ASSESSMENT ORDER DATED 26 . 11 . 2015, PASSED BY THE DCIT, CIRCLE 1(1)(2) (INTER NATIONAL TAXATION), NEW DELHI , (A0) FOR THE QUANTUM OF ASSESSMENT PASSED UNDER SECTION 143(3) READ WITH 144C(13) OF THE ACT FOR ASSESSMENT YEAR 2012 - 13 , IN PURSUANCE OF DIRECTION GIVEN BY THE DISPUTE RESOLUTION PANTEL - 1, NEW DELHI (DRP) , VIDE ORDER DATED 1 6/10/2015. 1. IN THE GROUNDS OF APPEAL, THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS: - 2 1. THAT THE LEARNED DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 1(1)(2), INTERNATIONAL TAXATION, NEW DELHI (HEREAFTER REFERRED TO AS LD: AO FOR SHORT) HAS ERRED ON FACTS AND IN LAW IN COMPUTING THE TOTAL INCOME OF THE APPELLANT FOR THE YEAR AT RS 3,80,43,400 AND RAISING A TAX DEMAND OF RS.38,04,340 (EXCLUDING SURCHARGE & EDUCATION CESS) AS AGAINST NIL AS COMPUTED BY THE APPELLANT. 2. THE LD. AO HAS ERRED; IN LAW IN CONSIDERIN G REVENUES FROM NON - EXCLUSIVE AND NON - TRANSFERABLE LICENSE AGREEMENT AS ROYALTY INCOME TAXABLE UNDER SECTION 9(1)(VI); AND 3. THE LD. AO HAS ERRED IN LAW IN CONSIDERING REVENUES FROM NON - EXCLUSIVE AND NON - TRANSFERABLE LICENSE AGREEMENT UNDER ARTICLE 12(3) OF INDIA USA DOUBLE TAXATION AVOIDANCE AGREEMENT ('DTAA') AS FEE FOR TECHNICAL SERVICES/FEE FOR INCLUDED SERVICES. 4. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO HAS ERRED IN PROPOSING TO INITIATE' PENALTY PROCEEDINGS' UNDER SEC TION 271 (1)( C) OF THE ACT WITHOUT APPRECIATING THE FACT THAT THERE HAS BEEN NO CONCEALMENT OF INCOME/REVENUES BY THE ASSESSEE. 5. THE ABOVE GROUNDS ARE MUTUALLY EXCLUSIVE' AND WITHOUT PREJUDICE TO EACH OTHER. 2. THE SOLE ISSUE RAISED BY THE ASSESSEE IS THE TAXABILITY OF RECEIPTS ON SUPPLY OF SOFTWARE WHICH HAS BEEN TREATED AS ROYALTY AND HELD TO BE TAXABLE BOTH UNDER SECTION 9(1)(VI) AND ALSO IN TERMS OF ARTICLE 12(3) OF INDIA USA DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA) BY THE AO; AND PART OF RECEIPTS AS FEE FOR TECHNICAL SERVICES/FEE FOR INCLUDED SERVICES. 3. THE BRIEF FACTS QUA THE ISSUE INVOLVED ARE THAT , THE ASSESSEE - COMPANY IS INCORPORATED UNDER THE LAWS OF STATE OF 3 DELAWARE, USA AND IS PROVIDER OF PRODUCTS AND SERVICES FOR AUTOMATING THE MANAGEMENT, COM PLIANCE AND SECURE USE OF OPEN SOURCE SOFTWARE IN MULTI SOURCE DEVELOPMENT AT ENTERPRISE SCALE. IT PROVIDES ITS CUSTOMERS A NON - EXCLUSIVE; NON - TRANSFERABLE LICENSE FOR THE PROGRAMS IN WHICH THE COMPANY NORMALLY DEALS. THE CUSTOMERS SUBSCRIBE FOR THESE LI CENSES FOR A SPECIFIED PERIOD AS PER THE AGREEMENT ENTERED INTO WITH THE ASSESSEE - COMPANY. 4. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD SOLD SOFTWARE UNDER A MASTER LICENSE AND SUBSCRIPTION AGREEMENT WITH TWO ENTITIES IN INDIA, NAMELY , (A) INFOS YS LIMITED; AND (B) ROBERT BOSCH ENGINEERING AND BUSINESS SOLUTIONS LIMITED. THE ASSESSING OFFICER IN THE IMPUGNED ASSESSMENT ORDER HAS REPRODUCED THE RELEVANT CLAUSE OF THE MASTER LICENSE AND SUBSCRIPTION AGREEMENT , WHICH IS VERY CRUCIAL FOR THE PURPOSE OF OUR ADJUDICATION, HENCE IS REPRODUCED HEREUNDER: - 2.3 LICENSE: SUBJECT TO TERMS AND CONDITIONS OF THIS AGREEMENT AND THE APPLICABLE SUP PLEMENT, BLACK DUCK HEREBY GRANTS TO CUSTOMER THE FOLLOWING NON EXCLUSIVE, NON TRANSFERABLE LICENSE, DURING THE APPL ICABLE SUBSCRIPTION PERIOD: (A) TO INSTALL THE PROGRAM ON THE NUMBER OF SERVERS AND AT THE LOCATIONS DESIGNATED IN THE APPLICABLE SUPPLEMENT; AND (B) FOR THE NUMBER OF USERS DESIGNATED IN THE APPLICABLE SUPPLEMENT TO USE THE PROGRAM INTERNALLY, SOLELY IN ACCORDANCE WITH ITS DOCUMENTATION AND IN CONNECTION WITH A MANAGED CODE BASE OF A SIXE NO GREATER THAN THE 4 MEGABYTE LIMIT SET FORTH IN THE APPLICABLE SUPPLEMENT. 2.4 LICENSE RESTRICTIONS : THIS IS NOT A PERPETUAL LICENSE, AND CUSTOMER HAS NO RIGHT TO RE TAIN OR TO USE THE PROGRAM AFTER TERMINATION OF THE APPLICABLE SUBSCRIPTION PERIOD FOR ANY REASON. CUSTOMERS MAY NOT PERMIT ACCESS OR USE OF THE PROGRAMS FOR ANY USERS OTHER THAN THE USERS LICENSED AND PAID FOR BY THE CUSTOMER. CUSTOMER MAY MAKE A REASONAB LE NUMBER OF COPIES OF THE PROGRAM EXCLUSIVELY FOR INACTIVE BACK UP, DISASTER RECOVERY, FAILOVER OR ARCHIVAL PURPOSES. CUSTOMER HAS NO RIGHT TO RENT, LEASE, ASSIGN, TRANSFER, SUB LICENSE, DISPLAY OR OTHERWISE DISTRIBUTE OR MAKE THE PROGRAM AVAILABLE TO ANY THIRD PARTY. UNLESS OTHERWISE EXPRESSLY STATED IN THIS AGREEMENT OR THE APPLICABLE SUPPLEMENT, THE PROGRAM MAY NOT BE USED (A) IN THE PERFORMANCE OF SERVICES FOR OR ON BEHALF OF ANY THIRD PARTY OR AS A SERVICE BUREAU OR (B) IN CONNECTION WITH THE ANALYSIS OF ANY CODE OTHER THAN THE MANAGED CODE BASE. EXCEPT TO THE EXTENT BLACK DUCK MAY, IN CERTAIN JURISDICTIONS BE REQUIRED BY LAW TO PERMIT REVERSE ENGINEERING. CUSTOMER MAY NOT MODIFY, DISASSEMBLE, DECOMPILE OR OTHERWISE REVERSE ENGINEER THE PROGRAM NOR PER MIT ANY THIRD PARTY TO DO SO. BLACK DUCK RESERVES ALL RIGHTS NOT EXPRESSLY GRANTED TO THE CUSTOMER UNDER THIS AGREEMENT. THE USE OF BLACK DUCK'S INTELLECTUAL PROPERTY BEYOND THE SCOPE OF THE LICENSE EXPRESSLY GRANTED IS ACKNOWLEDGED AND AGREED TO BE OUTSID E THE SUBJECT MATTER OF THIS AGREEMENT. 5. THE ASSESSING OFFICER REQUIRED THE ASSESSEE TO SHOW CAUSE AS TO WHY RECEIPTS FROM PROVIDING SOFTWARE LICENSE TO ITS CUSTOMERS ALONG WITH CERTAIN SERVICES, SHOULD NOT BE TAXED AS ROYALTY . IN RESPONSE THE ASSESSEE FI LED ITS DETAILED SUBMISSION VIDE LETTER DATED 3/2/2015. THE SUM AND SUBSTANCE OF ASSESSEE S 5 SUBMISSIONS BEFORE THE ASSESSING OFFICER CAN BE SUMMARISED AS UNDER: - DESPITE THE AMENDMENT IN THE INCOME TAX ACT 1961 BY INSERTION OF EXPLANATION 4, 5 AND 6 TO SEC TION 9(1)(VI), THE LAW AS ENUMERATED BY THE HON'BLE SUPREME COURT IN THE CASE OF TATA CONSULTANCY SERVICES VS. STATE OF ANDHRA PRADESH [2004] (271 ITR 401) STILL HOLDS THE FIELD , WHEREIN IT HAS BEEN HELD THAT THE SALE OF COMPUTER SOFTWARE IS 'GOOD' AND SUC H A SALE CANNOT BE TRE ATED AS ROYALTY. THIS JUDGMENT, HAS BEEN UPHELD BY THE HON'BLE JURISDICTIONAL DELHI HIGH COURT IN THE FOLLOWING CASES: DIT VS . INFRASOFT LTD, REPORTED IN [2014] (220 TAXMAN 273) DIT VS . NOKIA NETWORKS OY, REPORTED IN [2013] 358 TR 25 9(DEL) DIT VS . ERICSSON AB, REPORTED IN [2012] (343 ITR 470 )(DEL) THE ASSESSEE ALSO SOUGHT SHELTER OF THE INDIA US TAX TREATY BY REFERRING TO ARTICLE 12(3) OF THE SAID TREATY AND SUBMITTED THAT, W HAT IS SOUGHT TO BE TAXED AS 'ROYALTY' UNDER THE TREATY W AS A 'COPYRIGHT' OF A LITERARY WORK. A DISTINCTION WAS MADE BETWEEN 'A COPYRIGHT' AND 'COPYRIGHTED ARTICLE' AND TREATY, TILL DATE, RECOGNIZES THE SUBTLE DISTINCTION BETWEEN 'COPYRIGHT' AND 'COPYRIGHTED ARTICLE'. ALTHOUGH THERE HAS BEEN AN AMENDMENT TO SECT ION 9(1)(VI) BY THE FINANCE ACT, 2012 BY INSERTION OF EXPLANATION 4 WHICH ENLARGES THE CONCEPT OF ROYALTY, BUT NO SUCH AMENDMENT HAS BEEN MADE OR CAN BE READ INTO THE TREATY. 6 THE ASSESSEE ALSO REFERRED AND RELIED UPON DEFINITION OF COPYRIGHT AS DEFINED IN SECTION 14 OF THE COPYRIGHT ACT, 1957 AND ALSO SECTION 52 OF THE COPY RIGHT ACT, 1957 AND CONTENDED THAT SALE OF COMPUTER SOFTWARE UNDER A LICENSE CAN ONLY BE TREATED AS SALE OF COPYRIGHTED ARTICLE, WHICH CANNOT BE TAXED AS ROYALTY, HENCE THERE IS NO IN FRINGEMENT OF COPYRIGHT IN TERMS OF SECTION 52 OF COPY RIGHT ACT, 1957. HEAVY RELIANCE WAS PLACED ON THE JUDGMENT OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF DIT VS. INFRASOFT LTD [2014] 220 TAXMAN, 273 (DEL). THUS, IT WAS SUBMITTED THAT CONSIDERATION FOR SALE OF SOFTWARE WAS NOT TAXABLE UNDER ARTICLE 12 OF INDIA USA DTAA ; AND SINCE ASSESSEE DID NOT HAD A NY PERMANENT ESTABLISHMENT IN INDIA, THEREFORE, CONSIDERATION FOR SALE O F SOFTWARE WOULD NOT BE TAXED AS BUSINESS PROFITS ALSO UNDER ARTICLE 7 OF THE T AX TREATY . 6 . THE ASSESSING OFFICER FIRST OF ALL DEALT WITH THE DEFINITIONS OF TERM ROYALTY AS GIVEN IN EXPLANATION 2 TO SECTION 9(1)(VI) AND ALSO EXPLANATIONS 4 AND 5 , WHICH WAS ADDED BY THE FINANCE ACT, 2012 WITH RETROSPECTIVE EFFECT FROM 1/6/1976 . THUS, HE HELD THAT IN TERMS OF SUCH AMENDMENT IN SECTION 9(1)(VI), THE LEGISLATURE MADE IT AMPLY CLEAR THAT TRANSFER OF ANY RIGHT , INCLUDING GRANTING OF A LICENSE IN RESPECT OF COPYRIGHT , SHALL BE TAXED AS ROYALTY. NOT ONLY THAT, HE ALSO HELD THAT DEFINI TION OF ROYALTY AS CONTAINED IN EXPLANATION 2 T O SECTION 9(1)(VI) AND ALSO DEFINITION GIVEN IN ARTICLE 12(3) OF INDIA USA DTAA , BOTH TAKE INTO ACCOUNT THE INDUSTRIAL AS WELL AS COPYRIGHT ROYALTY. AO ALSO REFERRED TO VARIOUS CBDT CIRCULARS AND CAME TO THE C ONCLUSION THAT RECEIPTS OF ASS ESSEE PERTAINING TO LICENSING OF SOFTWARE ARE TAXABLE AS ROYALTY 7 UNDER SECTION 9(1)(VI). THEREAFTER, HE PROCEEDED TO HOLD THAT EVEN UNDER THE TREATY, THE PAYMENT RECEIVED BY THE ASSESSEE WAS IN THE NATURE OF ROYALTY WITHIN TH E TERMS OF ARTICL E 12(3) OF INDIA USA DTAA ALSO. IN HIS ORDER, HE HAS REFERRED TO VARIOUS LITERATURES AND REPORT ON HIGH LEVEL COMMITTEE ON TAXATION AND E - COMMERCE AND OTHER COMMENTARIES TO JUSTIFY THE INTENTION OF THE GOVERNMENT OF INDIA AND CODE OF ROYAL TY AS DEFINED IN THE TREATY. HE ALSO REFERRED TO THE DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF DIT VS. ERICSSON A.B. (2012) 343 ITR 470 AND THE CASE OF DIT VS. INFRASOFT LTD. (SUPRA). THOUGH HE ACK NOWLEDGED THAT THESE JUDGMENTS WE RE SQUARELY IN FA VOUR OF THE ASSESSEE, BUT HE NOTED THAT HON'BLE KARNATAKA HIGH COURT IN THE CASE OF CIT VS. SAMSUNG ELECTRONICS CO. LTD. [2012] 345 ITR 494 WAS IN FAVOUR OF THE REVENUE WHICH HAS TO BE FOLLOWED . IN HIS ASSESSMENT ORDER, HE HAS TABULATED TO MAKE A CO MPARISON OF THE DECISIONS OF VARIOUS COURTS ON THIS ISSUE, WHICH IS REPRODUCED AS UNDER: - T AXABILITY OF COMPUTER SOFTWARE PARTICULARS KARNATAK A HC IN SAMSUNG /DELHI ITAT IN MICROSOFT AAR IN MILLENNIU M IT SOFTWARE DELHI HC IN ERICSSON/I TAT (SB) IN MOTOROLA MUMBAI ITAT IN TII TEAM TELECOM DELHI HC IN INFRASOFT LTD. 1. TAXABLE AS ROYALTY UNDER SECTION 9(1)(VI)? YES YES DOES NOT AMOUNT TO ROYALTY NOT DISCUSSED NOT DISCUSSED 2. TAXABLE AS ROYALTY UNDER DTAA? YES YES DOES NOT AMOUNT TO ROYALTY DOES NOT AMOUNT TO ROYALTY DOES NOT AMOUNT TO ROYALTY 8 3. COPYRIGHT OR COPYRIGHTED ARTICLE? COPYRIGHT COPYRIGHT COPYRIGHT COPYRIGHTED ARTICLE COPYRIGHT COPYRIGHTED ARTICLE COPYRIGHT COPYRIGHTED ARTICLE 4.PROVIDING SOFTWARE AMOUNTS TO USE OF PROCESS YES NO T DISCUSSED NOT DISCUSSED HYPER TECHNICAL INTERPRETATI ON NOT DISCUSSED 5. WHETHER SOFTWARE IS A LITERARY WORK? SEPARATE FROM OTHER LITERARY WORKS YES YES NOT DISCUSSED NOT DISCUSSED 6. RELIANCE ON SC S RULING IN TCS ON SALES TAX TCS CANNOT BE RELIED TCS CANNOT BE RELIED TCS RELIED ON NOT DISCUSSED TCS RELIED ON 7. RELINACE ON OECD C OMMENTAR Y OECD CANNOT BE RELIED ON OECD CANNOT BE RELIED ON OECD RELIED ON NOT DISCUSSED OECD RELIED ON BASED ON THE AFORESAID COMPARISON OF VARIOUS DECISIONS AND ALSO HI S OWN ANALYSIS, HE HELD THAT THE AMOUNT RECEIVED FROM SUPPLY OF SOFTWARE WOULD BE TAXABLE IN INDIA AS ROYALTY INCOME UNDER ARTICLE 12(3) OF THE INDIA USA DTAA ALSO. HE FURTHER HELD THAT SERVICE PORTION THOUGH DO NOT SPECIF Y INTO CONTRACT OR INVOICES SHALL BE SUBJECTED TO TAX AS FEE FOR TECHNICAL SERVICES/FEE FOR INCLUDED SERVICES. 7. THE DRP REITERATED THE ENTIRE FINDING OF THE ASSESSING OFFICER AND REFUSED TO FOLLOW THE JUDGMENT OF HON'BLE DELHI HIGH COURT IN THE CASE OF DIT VS. INFRASOFT LTD (SUPRA) BY HOLDI NG THAT THE HON'BLE DELHI HIGH COURT HAS NOT EXAMINED THE DECISION OF 9 THE HON'BLE KARNATAKA HIGH COURT IN THE CASE OF CIT VS. SAMSUNG ELECTRONICS CO. LTD. (SUPRA). 8. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE, SHRI ABHIMANYU JHAMB A, SUBMITTED THAT THE ASSES SEE BEING A NON - RESIDENT COMPANY AND IS TAX RESIDENT OF USA, HAS SHORT SHELTER OF TREATY UNDER INDIA - USA DTAA. HE SUBMITTED THAT IT IS SETTLED PROPOSITION OF LAW AT LEAST IN THE JURISDICTION OF HON'BLE DELHI HIGH C OURT , THAT AMENDMENT IN THE DOMESTIC LEGIS LATION I.E. IN THE INCOME TAX ACT BY FINANCE ACT, 2012 BY WAY OF INSERTION OF EXPLANATION 4, 5 AND 6 TO SECTION 9(1)(VI) WHEREBY SCOPE AND DEFINITION OF ROYALTY HAS BEEN EXPANDED RETROSPECTIVELY , CANNOT BE IMP O RTED INTO THE TREATY. IN SUPPORT, HE STRONGLY RELIED UPON THE JUDGMENT OF HON'BLE DELHI HIGH COURT IN THE CASE OF DIT VS. NOKIA NETWORKS [2013] 358 ITR 259 (DEL). HE FURTHER SUBMITTED THAT SO FAR AS ISSUE OF PERMANENT ESTABLISHMENT IN INDIA IS CONCERNED , THE ASSESSING OFFICER AND THE DRP HAVE NOT MENT IONED ANYTHING DESPITE ASSESSEE S CATEGORICAL SUBMISSION BEFORE BOTH THE AUTHORITIES, THIS INTER - ALIA, CAN BE INFERRED THAT QUESTION OF TAXABILITY UNDER ARTICLE 7 DOES NOT ARISE AT ALL, IN CASE IF IT IS TO BE HELD A S BUSINESS INCOME. 9. COMING TO THE ISSUE WH ETHER IT IS A ROYALTY WITH IN THE TERMS OF ARTICLE 12(3), HE SUBMITTED THAT RECITAL OF THE AGREEMENT CLEARLY SHOWS THAT THERE IS NO INFRINGEMENT OF COPYRIGHT IN ANY MANNER. SINCE THE COPYRIGHT HAS NOT BEEN DEFINED IN THE INCOME TAX ACT, THEREFORE, THE MEANI NG GIVEN IN SECTION 14 AND 52 OF THE COPYRIGHT ACT, 1957 HAS TO BE CONSIDERED. HE POINTED OUT THAT AS PER THE TERMS OF AGREEMENT , THE ASSESSEE ONLY GIVES NON - EXCLUSIVE AND NON - TRANSFERABLE LICENSE TO THE CUSTOMERS FOR A SPECIFIED 10 PERIOD ONLY. THE CUSTOME RS HAVE NO RIGHT TO USE THE SOFTWARE AFTER THE SUBSCRIPTION PERIOD OR CAN MAKE COPIES OF THE SOFTWARE. UNDER THE AGREEMENT T HE CUSTOMERS HAVE NO RIGHT TO RENT, LEASE, ASSIGN, TRANSFER, SUB - LICENSE, DISPLAY OR OTHERWISE DISTRIBUTE OR MAKE THE PROGRAM AVAIL ABLE TO ANY THIRD PARTY. THIS ONLY GOES TO SHOW THAT , WHAT ASSESSEE IS SELLING TO ITS CUSTOMERS IS COPYRIGHTED ARTICLE AND NOT COPYRIGHT IN THE ARTICLE. IT IS A KIND OF PROVIDING A STANDARD SHRINK WRAPPED SOFTWARE TO ITS CUSTOMERS, WHICH IS PROVIDED AT AN ENTERPRISE LEVEL TO PROVIDE SECURE ACCESS OF OPEN SOURCE SO FTWARE. THE ASSESSEE S CUSTOMERS LIKE INFOSYS U SE A LOT OF OPEN SOURCE SOFTWARE FOR CARRYING OUT THEIR BUSINESS ACTIVITIES. SINCE SUCH OPEN SOURCE SOFTWARE ARE SUSCEPTIBLE TO A LOT OF ONLINE VIRUSE S AND CYBER FRAUDS ETC., THE REFORE, THE SOFTWARE SOLD BY THE ASSESSEE TO SUCH CUSTOMERS WORKS IN THE NATURE OF AN ANTI VIRUS S OFTWARE AND PROTECTS THE CUSTOMER'S OPEN SOURCE SOFTWARE SO USED BY THEM. THE ACCESS IS GIVEN AT AN ENTERPRISE LEVEL SO AS TO PRO TECT THE ENTIRE ORGANIZATION FROM ANY UNWANTED VIRUSES ETC. SUCH SOFTWARE IS COMPARABLE TO SOFTWARE LICENSES LIKE MC AFEE, KASPERSKY WHICH ARE COMMONLY SOLD IN THE MARKET. THE CUSTOMERS OF THE APPELLANT USE THE S OFTWARE FOR THEIR OWN USE ONLY. THEY ARE NOT PERMITTED TO MAKE COPIES OF THE SOFTWARE AND COMMERCIALLY EXPLOIT THE SOFTWARE. THE SOFTWARE LICENSE SOLD BY THE ASSESSEE IS ONLY USED BY THE ENTERPRISES FOR THEIR OWN PROTECTION AGAINST ANY KIND OF CYBER ISSUES. THIS CAN AT BEST BE VIEWED AS A SALE OF C OPYRIGHTED ARTICLE AND NOT AS A N INFRINGEMENT OF COPYRIGHT. 10. RELYING UPON THE JUDGMENT OF HON'BLE DELHI HIGH COURT IN THE CASE OF DIT VS. INFRASOFT LTD (SUPRA) AND DRAWING OUR ATTENTION TO PARAGRAPHS 84 TO 89 O F THE SAID JUDGMENT, HE 11 SUBMITTED THAT HERE IN THIS CASE ALSO SIMILAR KIND OF SOFTWARE LICENSE WAS GIVEN AND EVEN THE TERMS OF AGREEMENT WAS BY AND LARGE SAME. IN THAT CONTEXT, THE HON'BLE DELHI HIGH COURT HELD THAT INDIA - USA TREATY STILL RECOGNIZES THE DIFFERENCE BETWEEN A COPYRIGHT AND A COPYRIGHTED ARTICLE. THE HON'BLE HIGH COURT AFTER REFERRING TO ANOTHER DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF DIT VS. NOKIA NETWORKS (SUPRA), HELD THAT , FIRSTLY , AMENDMENT IN SECTION 9(1)(VI) CANNOT BE READ INTO TREATY ; AND SECONDLY , GRANTING LICENSE TO USE COPYRIGHTED SOFTWARE FOR LICENSEES OWN BUSINESS PURPOSE, CANNOT B E BROUGHT TO TAX U NDER ARTICLE 12(3) OF INDIA USA DTAA . THE HON'BLE HIGH COURT HAS ALSO DISSENTED FROM THE JUDGMENT OF HON'BLE KARANATAKA HIGH COURT IN THE CASE OF CIT VS. SAMSUNG ELE CTRONICS CO. LTD. (SUPRA) WHICH HAS BEEN STRONGLY REFERRED AND RELIED UPON BY THE REVENUE AUTHORITIES . HE FURTHER RELIED UPON THE DECISION OF ITAT MUMBAI BENCH IN THE CASE OF ADIT VS. BAAN GLOBAL, 29 ITR (TRIB.) 73 , WHEREIN THE TRIBUNAL, AFTER DETAILED DISC USSION ON VARIOUS PROVISIONS OF COPYRIGHT AND THE JUDGMENTS OF VARIOUS HIGH COURTS ON SIMILAR SET OF FACTS AND SOFTWARE LICENSE AGREEMENT, HELD THAT PAYMENT RECEIVED FOR SOFTWARE LICENSE IN SUCH A SITUATION CANNOT BE TAXED UNDER ROYALTY AND THERE IS A DIST INCTION BETWEEN COP YRIGHT AND COPYRIGHTED ARTICLE. LASTLY , HE REFERRED AND RELIED UPON THE DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. ALCATEL LUCENT CANADA, 372 ITR 476 , WHEREIN AGAIN THE HON'BLE HIGH COURT HELD THAT SALE OF A SOFTWARE PRO GRAMME CANNOT BE TAXED AS ROYALTY. AGAIN THE HON'BLE HIGH COURT HAS REITERATED ITS EARLIER JUDGMENTS. THUS, IN WAKE OF SEVERAL JURISDICTIONAL HIGH COURT JUDGMENT, THE VIEW TAKEN BY THE DEPARTMENT TO TAX THE RECEIPTS AS ROYALTY HAS TO BE REJECTED. 12 11. THE LD. C IT (DR), SHRI ANUJ ARORA, THOUGH FAIRLY AGREED THAT SO FAR AS MASTER LICENSE AND SUBSCRIPTION AGREEMENT IS CONCERNED, CLAUSES THEREOF FOR GRANT OF LICENSE ARE CLEARLY COVERED BY THE RATIO LAID DOWN IN THE JUDGMENT OF THE J URISDICTIONAL HIGH COURT IN THE CASE OF DIT VS. INFRASOFT LTD (SUPRA) AND CONSIDERATION FOR SALE OF SOFTWARE WOULD NOT BE TREATED AS ROYALTY IF THE JUDGMENT OF HON'BLE DELHI HIGH COURT IS TO BE FOLLOWED. HOWEVER, HE TRIED TO CANVASS BEFORE US THAT THERE WAS ANOTHER SUPPLEMENT AGREEMENT W HICH WAS ANNEXED TO THE MASTER LICENSE AND SUBSCRIPTION AGREEMENT WHICH PROVIDES FOR WIDER USE OF SOFTWARE BY VARIOUS HANDS IN THE GROUP. HE FIRST REFERRED TO THE CLAUSE 1.5; 1.11; 2.1 ; AND 10.12 OF THE MASTER LICENSE AGREEMENT WHICH, FOR THE SAKE OF REA DY REFERENCE, ARE REPRODUCED HEREUNDER: - 1.5 MANAGED CODE BASE: MEANS A CODE BASE OWNED OR CONTROLLED BY CUSTOMER THAT IS INPUT INTO A PROGRAM BY CUSTOMER AND MANAGED USING THAT PROGRAM OVER THE COURSE OF THE APPLICABLE SUBSCRIPTION PERIOD. IF APPLICABLE, THE SIZE OF THE MANAGED CODE BASE EQUALS THE SIZE OF THE CODE ADDED TO THE MANAGED CODE BASE, WHETHER OR NOT ANY OF THAT CODE IS EVENTUALLY DELETED BY THE CUSTOMER, PROVIDED THAT THE SIZE OF THE MANAGED CODE BASE DOES NOT INCLUDE CODE USED BY CUSTOMER FOR TRAINING PURPOSES OR THAT IS INADVERTENTLY ADDED BY CUSTOMER AND DELETED UPON DISCOVERY. 1.11 'SUPPLEMENT' MEANS AN ORDER FORM, IN THE FORM AND FORMAT FURNISHED BY BLACK DUCK, INDICATING CUSTOMER'S DESIRE TO LICENSE A PROGRAM OR ACQUIRE SERVICES, PURSUAN T TO THE TERMS OF THIS AGREEMENT. 2.10 ORDERING: EACH ORDER OF A PROGRAM OR SERVICE WILL BE SET FORTH IN A MUTUALLY AGREED SUPPLEMENT, WHICH WILL BE BINDING ON BOTH PARTIES UPON ACCEPTANCE AND EXECUTION BY AUTHORIZED 13 REPRESENTATIVE OF THE PARTIES. EACH SU PPLEMENT WILL BE GOVERNED BY THIS AGREEMENT AND UPON EXECUTION BY BOTH PARTIES, WILL AUTOMATICALLY BECOME A PART OF THIS AGREEMENT. ADDITIONAL OR DIFFERENT TERMS IN ANY PURCHASE ORDER OR SIMILAR DOCUMENT PROVIDED BY CUSTOMER WILL NOT MODIFY OR ADD TO THE T ERMS OF THIS AGREEMENT OR ANY SUPPLEMENT. 10.12 ASSIGNMENT: THIS AGREEMENT AND THE RIGHTS GRANTED UNDER IT MAY NOT BE ASSIGNED OR TRANSFERRED BY WITHER PARTY WITHOUT THE WRITTEN CONSENT OF THE OTHER PARTY, EXCEPT TO A SUCCESSOR IN INTEREST IN THE EVENT OR MERGER OR ACQUISITION OF SUCH PARTY. IF CUSTOMER ASSIGNS THIS AGREEMENT AS DESCRIBED IN THIS SECTION, ADDITIONAL BUSINESS TERMS MAY APPLY TO THE ACQUIRING COMPANY (E . G . LIMITATION IN THE SIZE OF THE MANAGED CODE BASE) AS FURTHER DESCRIBED IN THE APPLICABL E SUPPLEMENT. 12. THEN HE POINTED THAT SUPPLEMENT AGREEMENT INDICATES THAT THERE ARE UNLIMITED NUMBER OF USERS; UNLIMITED SIZE OF MANAGED CODE BASE; AND TERMS OF SUPPLEMENT AGREEMENT SHALL PREVAIL IN THE EVENT OF ANY CONFLICT BETWEEN THE TERMS OF SUPPLEMENT A GREEMENT AND MASTER LICENSE AND SUBSCRIPTION AGREEMENT . L ASTLY , FROM THE SAMPLE COPY OF SUPPLEMENT AGREEMENT HE POINTED OUT THAT ACCESS IS GRANTED TO ALL THE COMPANIES WITHIN THE ROBERT BOSCH GROUP, HELD UNDER THE ROBERT BO SCH GMBH HOLDING IN STUTTGART. TH US, HE SUBMITTED THAT THE AGREEMENTS ENTERED INTO BY THE ASSESSEE MAINLY SUPPLEMENT AGREEMENT CLEARLY VIOLATES THE PRINCIPLES LAID DOWN BY THE JUDGMENT OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF DIT VS. INFRASOFT LTD (SUPRA) AND, THEREFORE, THE SAID JU DGMENT CANNOT BE HELD TO BE APPLICABLE, ESPECIALLY IF THE SUPPLEMENT AGREEMENT IS TO BE LOOKED INTO. 14 13. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED THE RELEVANT FINDING GIVEN IN THE IMPUGNED ORDER OF THE DRP AS WELL AS THE MATERIAL REFERRED TO BEFORE US AND THE JUDGMENTS RELIED UPON . THE SOLE I SSUE INVOLVED IN THIS APPEAL IS , WHETHER THE PAYMENT RECEIVED BY THE AS SESSEE FROM SUPPLY OF SOFTWARE, IS TAXABLE IN INDIA AS ROYALTY IN INDIA OR NOT ; EITHER UNDER SECTION 9(1)(VI) ; OR UNDER ARTICLE 12(3) OF INDIA USA D TAA ; OR BOTH. BEFORE WE PROCEED TO DECIDE THE ISSUE, AT THE OUTSET IT IS QUITE CLEAR THAT THE REVENUE HAS NOT TAKEN ANY STAND THAT IF IT IS NOT TAXED AS ROYALTY, THEN CAN IT BE TAXE D AS BUSINESS INCOME IN INDIA AND IF IT IS BUSINESS INCOME THEN WHETHER THE RE IS ANY PE OF ASSESSEE IN INDIA. THIS IS INFERRED FROM THE FACT THAT THERE IS NO REBUTTAL OF ASSESSEE S CONTENTION THAT IT DOES NOT HAVE ANY PERMANENT ESTABLISHMENT IN INDIA, THEREFORE, RECEIPTS FROM SALE OF SOFTWARE WILL NOT BE TAXED AS BUSINESS INCOME IN TERMS OF ARTICLE 7 OF INDIA USA DTAA. AT THE OUTSET, IT IS AN ADMITTED FACT THAT THE ASSESSEE - COMPANY IS TAX RESIDENT OF USA AND HAS SOUGHT SHELTER UNDER INDIA - USA DTAA, THEREFORE, RECEIPTS IN QUESTION HAS TO BE SEEN FROM THE ANGLE, WHETHER SUCH RECEIPT S CAN BE HELD TO BE TAXABLE, ESPECIALLY AS ROYALTY IN TERMS AND SCOPE OF PARA ( 3 ) OF ARTICLE 12. THE ASSESSEE HAD SOLD SOFTWARE UNDER MASTER LICENSE AND SUBSCRIPTION AGREEMENT TO TWO CUSTOMERS IN INDIA NAMELY , INFOSYS LIMITED AND ROBERT BOSCH ENGINEERING AND BUSINESS SOLUTIONS LIMITED. THE MASTER LICENSE AND SUBSCRIPTION AGREEMENT DEFINES THE LICENSE AND LICENSE RESTRICTIONS IN THE FOLLOWING MANNER: - 2.3 LICENSE: SUBJECT TO TERMS AND CONDITIONS OF THIS AGREEMENT AND THE A PPLICABLE SUPPLEMENT, BLACK DU CK HEREBY GRANTS TO CUSTOMER THE FOLLOWING NON EXCLUSIVE, NON 15 TRANSFERABLE LICENSE, DURING THE APPLICABLE SUBSCRIPTION PERIOD: (A) TO INSTALL THE PROGRAM ON THE NUMBER OF SERVERS AND AT THE LOCATIONS DESIGNATED IN THE APPLICABLE SUPPLEMENT; AND (B) FOR THE NUMBER OF USERS DESIGNATED IN THE APPLICABLE SUPPLEMENT TO USE THE PROGRAM INTERNALLY, SOLELY IN ACCORDANCE WITH ITS DOCUMENTATION AND IN CONNECTION WITH A MANAGED CODE BASE OF A SIXE NO GREATER THAN THE MEGABYTE LIMIT SET FORTH IN THE APPLICABLE SUPP LEMENT. 2.4 LICENSE RESTRICTIONS: THIS IS NOT A PERPETUAL LICENSE, AND CUSTOMER HAS NO RIGHT TO RETAIN OR TO USE THE PROGRAM AFTER TERMINATION OF THE APPLICABLE SUBSCRIPTION PERIOD FOR ANY REASON. CUSTOMERS MAY NOT PERMIT ACCESS OR USE OF THE PROGRAMS FOR ANY USERS OTHER THAN THE USERS LICENSED AND PAID FOR BY THE CUSTOMER. CUSTOMER MAY MAKE A REASONABLE NUMBER OF COPIES OF THE PROGRAM EXCLUSIVELY FOR INACTIVE BACK UP, DISASTER RECOVERY, FAILOVER OR ARCHIVAL PURPOSES. CUSTOMER HAS NO RIGHT TO RENT, LEASE, ASSIGN, TRANSFER, SUB LICENSE, DISPLAY OR OTHERWISE DISTRIBUTE OR MAKE THE PROGRAM AVAILABLE TO ANY THIRD PARTY. UNLESS OTHERWISE EXPRESSLY STATED IN THIS AGREEMENT OR THE APPLICABLE SUPPLEMENT, THE PROGRAM MAY NOT BE USED (A) IN THE PERFORMANCE OF SERVICE S FOR OR ON BEHALF OF ANY THIRD PARTY OR AS A SERVICE BUREAU OR (B) IN CONNECTION WITH THE ANALYSIS OF ANY CODE OTHER THAN THE MANAGED CODE BASE. EXCEPT TO THE EXTENT BLACK DUCK MAY, IN CERTAIN JURISDICTIONS BE REQUIRED BY LAW TO PERMIT REVERSE ENGINEERING . CUSTOMER MAY NOT MODIFY, DISASSEMBLE, DECOMPILE OR OTHERWISE REVERSE ENGINEER THE PROGRAM NOR PERMIT ANY THIRD PARTY TO DO SO. BLACK DUCK RESERVES ALL RIGHTS NOT EXPRESSLY GRANTED TO THE CUSTOMER UNDER THIS AGREEMENT. THE USE OF BLACK DUCK'S INTELLECTUAL PROPERTY BEYOND THE SCOPE OF THE LICENSE EXPRESSLY GRANTED IS 16 ACKNOWLEDGED AND AGREED TO BE OUTSIDE THE SUBJECT MATTER OF THIS AGREEMENT. 14. FROM A PERUSAL OF THE AFORESAID SCOPE OF LICENSE, IT IS QUITE APPARENT THAT THE ASSESSEE PROVIDE TO ITS CUSTOMERS A NON - EXCLUSIVE; NON - TRANSFERABLE LICENSE WITHIN THE APPLICABLE SUBSCRIPTION PERIOD. THE CLAUSE DEALING WITH LICENSE RESTRICTION CLEARLY ENVISAGES THAT IT IS NOT A PERPETUAL LICENSE AND CUSTOMER HAS NO RIGHT TO RETAIN OR USE THE PROGRAMME AFTER TERMINATION OF APPLICABLE SUBSCRIPTION PERIOD FOR ANY REASON. THE CUSTOMERS ARE NOT PERMITTED ANY ACCESS OR USE OF THE PROGRAMMES FOR ANY USERS OTHER THAN THE USER S LICENSE PAID FOR BY THE CUSTOMER. THOUGH THE CUSTOMER IS ENTITLED TO MAKE REASONABLE NUMBER OF COPIES OF THE PROGRAMME FOR INACTIVE BACK UP; DISASTER RECOVERY; FAILOVER OR ARCHIVAL PURPOSES, HOWEVER, IT HAS NO RIGHT TO RENT; LEASE; ASSIGN; TRANSFER; SUB - LICENSE; DISPLAY OR OTHERWISE DISTRIBUTE OR MAKE THE PROGRAM AVAILABLE TO ANY THIRD PARTY. THE CUSTOMER IS FURTHER PROHIBITED NOT TO MODIFY; DISASSEMBLE; DECOMPILE OR OTHERWISE REVERSE ENGINEER THE PROGRAM NOR CAN PERMIT ANY THIRD PARTY TO DO SO. IN OTHER WORDS, THE ASSESSEE HAS ALL THE RIGHTS NOT ONLY ON THE COPYRIGHT IN THE SOFTWARE, BUT ALSO DEBARS ITS C USTOMERS IN SEVERAL WAYS AS HIGHLIGHTED ABOVE. THUS, THE PAYMENT, WHICH HAS BEEN RECEIVED BY THE ASSESSEE, IS PURELY FOR COPYRIGHTED SOFTWARE PRODUCT AS AGAINST PAYMENT FOR GIVING ANY RIGHT TO USE ANY COPYRIGHT IN THE SOFTWARE. THE CUSTOMERS HAVE A VERY LI MITED RIGHT TO ACCESS COPYRIGHT SOFTWARE FOR ITS OWN BUSINESS PURPOSE AND DOES NOT ACQUIRE ANY KIND OF RIGHT TO EXPLOIT THE COPYRIGHT IN THE SOFTWARE. THESE FACTS ARE UNCONTROVERTED IN THE IMPUGNED ORDER. NOW ON THESE FACTS, W HETHER SUCH ACTION OF GRANTIN G OF LICENSE TO CUSTOMERS CAN BE RECKONED AS ROYALTY WITHIN THE SCOPE OF ARTICLE 17 12(3) OF THE INDIA USA DTAA ? THE RELEVANT PARAGRAPH 3(A) DEALING WITH THE ROYALTY READS AS UNDER: - (A) PAYMENTS OF ANY KIND RECEIVED AS A CONSIDERATION FOR THE USE OF, OR THE R IGHT TO USE, ANY COPYRIGHT OF A LITERARY, ARTISTIC, OR SCIENTIFIC WORK, INCLUDING CINEMATOGRAPH FILMS OR WORK ON FILM, TAPE OR OTHER MEANS OF REPRODUCTION FOR USE IN CONNECTION WITH RADIO OR TELEVISION BROADCASTING, ANY PATENT, TRADE MARK, DESIGN OR MODEL, PLAN, SECRET FORMULA OR PROCESS, OR FOR INFORMATION CONCERNING INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EXPERIENCE, INCLUDING GAINS DERIVED FROM THE ALIENATION OF ANY SUCH RIGHT OR PROPERTY WHICH ARE CONTINGENT ON THE PRODUCTIVITY, USE, OR DISPOSITION THEREOF ; 15. THE MAIN EMPHASIS IS ON USE OF OR THE RIGHT TO USE OF ANY COPYRIGHT OF A LITERARY; ARTISTIC; OR SCIENTIFIC WORK, WHICH INDICATES THAT AN EXCLUSIVE RIGHT TO USE ANY COPYRIGHT IN AN ARTICLE (WHICH IS IN THE NATURE OF LITERARY; ARTISTIC; OR SCIENTIFIC WORK ) HAS TO BE GIVEN. SINCE THE COPYRIGHT HAS NOT BEEN DEFINED OR EXPLAINED IN THE TREATY, THEREFORE, MEANING ASSIGNED OF THE COPYRIGHT UNDER THE DOMESTIC LAW , I.E. COPYRIGHT ACT, 1957 CAN BE REFERRED FOR UNDERSTANDING THE TRUE PURPORT AND MEANING OF COPYRIGH T . SECTION 14 OF COPYRIGHT ACT, 1957 DEF INES THE COPYRIGHT IN THE FOLLOWING MANNER: - 4.MEANING OF COPYRIGHT: - (1) FOR THE PURPOSES OF THIS ACT, 'COPYRIGHT' MEANS THE EXCLUSIVE RIGHT, BY VIRTUE OF AND SUBJECT TO THE PROVISIONS OF, THIS ACT, (A) IN THE CASE OF A LITERARY, DRAMATIC OR MUSICAL WORK, NOT BEING A COMPUTER PROGRAMME, - 18 (I) TO REPRODUCE THE WORK IN ANY MATERIAL FORM INCLUDING THE STORING OF IT IN ANY MEDIUM BY ELECTRONIC MEANS; (II) TO ISSUE COPIES OF THE WORK TO THE PUBLIC NOT BEING COPIES ALR EADY IN CIRCULATION; (III) TO PERFORM THE WORK IN PUBLIC, OR COMMUNICATE IT TO THE PUBLIC; (IV) TO MAKE ANY CINEMATOGRAPH FILM OR SOUND RECORDING IN RESPECT OF THE WORK; (V) TO MAKE ANY TRANSLATION OF THE WORK; (VI) TO MAKE ANY ADAPTATION OF THE WORK; (VII) TO DO, IN RELATION TO A TRANSLATION OR AN ADAPTATION 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); (I I) T O 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. THUS, THE DEFINITION OF COPYRIGHT IN SECTION 14 IS AN EXHAUSTIVE DEFINITION AND IT REFERS TO BUNDLE OF RIGH TS. IN RESPECT OF COMPUTER PROGRAMMING, WHICH IS RELEVANT FOR THE ISSUE UNDER CONSIDERATION BEFORE US, T HE COPYRIGHT MAINLY CONSIS TS OF RIGHTS AS GIVEN IN CLAUSE (B), THAT IS, TO DO ANY OF THE ACT SPECIFIED IN CLAUSE ( A) FROM (I) TO (VII) AS REPRODUCED ABOVE. THUS, TO FALL WITHIN THE REALM AND 19 AMBIT OF RIGHT TO USE COPYRIGHT THE COMPUTER SOFTWARE PROGRAMME, THE AFORESAID RIGHTS MUST BE GIVEN AND IF THE SAID RIGHTS ARE NOT GIVEN THEN, THERE IS NO COPYRIGHT IN THE COMPUTER PROGRAMME OR SOFTWARE . HERE IN THIS CASE NONE OF THESE CONDITIONS OR SUCH RIGHTS ARE FLOWING FROM THE MASTER LICENSE AND SUBSCRIPTION AGREEMENT TO THE CUSTOMERS, ALBE IT THE AGREEMENT AS INCORPORATED ABOVE ILLUSTRATES LOT OF RESTRICTIVE COVENANTS AND GIVES VERY LIMITED RIGHT TO THE CUSTOMERS FOR SELF - USE AT ENTERPRISE LEVEL. 16. FURTHER SECTION 52 OF COPYRIGHT ACT, 1957 TREATS CERTAIN ACTS AS NOT INFRINGING COPYRIGHT, WHICH IS AS UNDER: - SECTION 52 TREATS CERTAIN ACTS AS NOT INFRINGING COPYRIGHT: - 52. CERTAIN ACTS NOT TO BE INFRINGEMENT OF COPYRIGHT. - (1) THE FOLLOWING ACTS SHALL NOT CONSTITUTE AN INFRINGEMENT OF COPYRIGHT, NAMELY: (A) A FAIR DEALING WITH A LITERARY, DRAM ATIC, MUSICAL OR ARTISTIC WORK NOT BEING A COMPUTER PROGRAMME FOR THE PURPOSES OF - (I) PRIVATE USE, INCLUDING RESEARCH; (II) CRITICISM OR REVIEW, WHETHER OF THAT WORK OR OF ANY OTHER WORK; (AA) THE MAKING OF COPIES OR ADAPTATION OF A COMPUTER PROGRAMME BY THE LAWFUL POSSESSOR OF A COPY OF SUCH COMPUTER PROGRAMME, FROM SUCH COPY - (I ) IN ORDER TO UTILISE THE COMPUTER PROGRAMME FOR THE PURPOSES FOR WHICH IT WAS SUPPLIED; OR (II) TO MAKE BACK - UP COPIES PURELY AS A TEMPORARY PROTECTION AGAINST LOSS, DESTRUC TION OR DAMAGE IN ORDER ONLY TO UTILISE THE COMPUTER PROGRAMME FOR THE PURPOSE FOR WHICH IT WAS SUPPLIED;' 20 17. THE AFORESAID SECTION ALSO MAKES IT AMPLY CLEAR THAT PRIVATE USE INCLUDING RESEARCH OR TO UTILIZE A COMPUTER PROGRAMME FOR THE PURPOSES FOR WHICH IT WAS SUPPLIED OR MAKE BACK - UP COPIES IS PURELY FOR THE TEMPORARY PROTECTION AGAINST LOSS; DESTRUCTION OR DAMAGE IN ORDER TO UTILIZE THE COMPUTER PROGRAMME FOR THE PURPOSE FOR WHICH IT WAS SUPPLIED. THIS DOESN T ENLARGES THE SCOPE SO AS TO RECKON IT AS GIVIN G ANY COPYRIGHT. HENCE UNDER THE COPYRIGHT ACT, NO USE OR RIGHT TO USE OF COPYRIGHT HAS BEEN GIVEN BY THE ASSESSEE TO ITS CUSTOMERS IN TERMS OF ITS LICENSING AGREEMENT. 18. THE ISSUE WHETHER CONSIDERATION RECEIVED FOR GRANTING OF LICENSE TO USE COPYRIGHTED SOF TWARE FOR LICENSEE S OWN BUSINESS AND WHETHER CAN IT BE BROUGHT TO TAX AS ROYALTY UNDER ARTICLE 12(3) OF INDIA USA DTAA, IS NO LONGER RES - INTRA AT LEAST IN THE JURISDICTION OF HON'BLE DELHI HIGH COURT IN THE WAKE OF CATENA OF DECISIONS, LIKE DIT VS. NOKI A NETWORKS (SUPRA); DIT VS. ERICSSON A.B. (SUPRA); DIT VS. INFRASOFT LTD. (SUPRA); AND CIT VS. ALCATEL LUCENT CANADA (SUPRA). 19. IN THE CASE OF DIT VS. INFRASOFT LTD (SUPRA), IN FACT THE LICENSE AGREEMENT WAS BY AND LARGE QUITE AKIN TO THE LICENSE AGREEMENT I N THE PRESENT CASE. THE HON'BLE DELHI HIGH COURT IN ITS DETAILED JUDGMENT HAVE ANALYZED THIS ISSUE THREADBARE AND HAVE COME TO THE CONCLUSION THAT MERE TRANSFER OF RIGHT TO USE COPYRIGHTED MATERIAL , I.E. , SOFTWARE PROGRAMME CANNOT BE TAXED AS ROYALTY IN TE RMS OF ARTICLE 12(3) OF INDIA USA DTAA. THE HON BLE COURT ALSO HELD THAT THE AMENDMENT IN THE DOMESTIC LAW, THAT IS, IN THE INCOME TAX ACT CANNOT BE READ INTO THE TREATY. 21 THE RELEVANT OBSERVATION S AND THE RATIO LAID DOWN BY THE HON'BLE HIGH COURT IN SUM AND SUBSTANCE ARE DISCUSSED HEREUNDER: - TO BE TAXABLE AS ROYALTY INCOME COVERED BY ARTICLE 12 OF THE DTAA THE INCOME OF THE ASSESSEE SHOULD HAVE BEEN GENERATED BY THE 'USE OF OR THE RIGHT TO USE OF 'ANY COPYRIGHT. [PARA 64] THE LICENSING AGREEMENT SHOWS T HAT THE LICENSE IS NON - EXCLUSIVE, NON - TRANSFERABLE AND THE SOFTWARE HAS TO BE USED IN ACCORDANCE WITH THE AGREEMENT. ONLY ONE COPY OF THE SOFTWARE IS BEING SUPPLIED FOR EACH SITE. THE LICENSEE IS PERMITTED TO MAKE ONLY ONE COPY OF THE SOFTWARE AND ASSOCIAT ED SUPPORT INFORMATION AND THAT ALSO FOR BACKUP PURPOSES. IT IS ALSO STIPULATED THAT THE COPY SO MADE SHALL INCLUDE I NFRASOFT'S COPYRIGHT AND OTHER PROPRIETARY NOTICES. ALL COPIES OF THE SOFTWARE ARE THE EXCLUSIVE PROPER TY OF INFRASOFT. THE SOFTWARE INCLUD ES A LICENCE AUTHORISATION DEVICE, WHICH RESTRICTS THE USE OF THE SOFTWARE. THE SOFTWARE IS TO BE USED ONLY FOR LICENSEES OWN BUSINESS AS DEFINED WITHIN THE INFRASOFT LICENCE SCHEDULE. WITHOUT THE CONSENT OF THE ASSESSEE THE SOFTWARE CANNOT BE LOANED, RENT ED, SOLD, SUB - LICENSED OR TRANSFERRED TO ANY THIRD PARTY OR USED BY ANY PARENT, SUBSIDIARY OR AFFILIATED ENTITY OF LICENSEE OR USED FOR THE OPERATION OF A SERVICE BUREAU OR FOR DATA PROCESSING. THE LICENSEE IS FURTHER RESTRICTED FROM MAKING COPIES, DECOMP ILE, DISASSEMBLE OR REVERSE - ENGINEER THE SOFTWARE WITHOUT I NFRASOFTS WRITTEN CONSENT. THE SOFTWARE CONTAINS A MECHANISM WHICH INFRASOFT MAY ACTIVATE TO DENY THE LICENSEE USE OF THE SOFTWARE IN THE EVENT THAT THE LICENSEE IS IN BREACH OF PAYMENT TERMS OR AN Y OTHER PROVISIONS OF THIS AGREEMENT. ALL COPYRIGHTS AND INTELLECTUAL PROPERTY RIGHTS IN AND TO THE SOFTWARE, AND 22 COPIES MADE BY LICENSEE, WER E OWNED BY OR DULY LICENSED TO I NFRASOFT. [PARA 85] IN ORDER TO QUALIFY A S ROYALTY PAYMENT, IT IS NECESSARY TO EST ABLISH THAT THERE IS TRANSFER OF ALL OR ANY RIGHTS (INCLUDING THE GRANTING OF ANY LICENCE) IN RESPECT OF COPYRIGHT OF A LITERARY, ARTISTIC OR SCIENTIFIC WORK. IN ORDER TO TREAT THE CONSIDERATION PAID BY THE LICENSEE AS ROYALTY, IT IS TO BE ESTABLISHED THAT THE LICENSEE, BY MAKING SUCH PAYMENT, OBTAINS ALL OR ANY OF THE COPYRIGHT RIGHTS OF SUCH LITERARY WORK. DISTINCTION HAS TO BE MADE BETWEEN THE ACQUISITION OF A 'COPYRIGHT RIGHT' AND A 'COPYRIGHTED ARTICLE'. COPYR IGHT IS DISTINCT FROM THE MATERIAL OBJECT, COPYRIGHTED. COPYRIGHT IS AN INTANGIBLE INCORPOREAL RIGHT IN THE NATURE OF A PRIVILEGE, QUITE INDEPENDENT OF ANY MATERIAL SUBSTANCE, SUCH AS A MANUSCRIPT. JUST BECAUSE ONE HAS THE COPYRIGHTED ARTICLE, IT DOES NO T FOLLOW THAT ONE HAS ALSO THE COPYRIGHT W IT . IT DOES NOT AMOUNT TO TRANSFER OF ALL OR ANY RIGHT INCLUDING LICENCE IN RESPECT OF COPYRIGHT. COPYRIGHT OR EVEN RIGHT TO USE COPYRIGHT IS DISTINGUISHABLE FROM SALE CONSIDERATION PAID FOR 'COPYRIGHTED' ARTICLE. THIS SALE CONSIDERATION IS FOR PURCHASE OF G OODS AND IS NOT ROYALTY. [PARA 87] THE LICENSE GRANTED BY THE ASSESSEE IS LIMITED TO THOSE NECESSARY TO ENABLE THE LICENSEE TO OPERATE THE PROGRAM. THE RIGHTS TRANSFERRED ARE SPECIFIC TO THE NATURE OF COMPUTE R PROGRAMS. COPYING THE PROGRAM ONTO THE COMPUT ER'S HARD DRIVE OR RANDOM ACCESS MEMORY OR MAKING AN ARCHIVAL COPY IS AN ESSENTIAL STEP IN UTILIZING THE PROGRAM. THEREFORE, RIGHTS IN RELATION TO THESE ACTS OF COPYING, WHERE THEY DO NO MORE THAN ENABLE TH E EFFECTIVE OPERATION OF THE PROGRAM BY THE USER, SHOULD' BE DISREGARDED IN ANALYZING THE CHARACTER OF THE TRANSACTION 23 FOR TAX PURPOSES. PAYMENTS IN THESE TYPES OF TRANSACTIONS WOULD BE DEALT WITH AS BUSINESS INCOME IN ACCORDANCE WITH ARTICLE 7 OF DTAA. [PARA 88] THERE IS A CLEAR DISTINCTION BETWEEN ROYA LTY PAID ON TRANSFER OF COPYRIGHT RIGHTS AND CONSIDERATION FOR TRANSFER OF COPYRIGHTED ARTICLES. RIGHT TO USE A COPYRIGHTED ARTICLE OR PRODUCT WITH THE OWNER RETAINING HIS COPYRIGHT, IS NOT THE SAME THING AS TRANSFERRING OR ASSIGNING RIGHTS IN RELATION TO THE COPYRIGHT. THE ENJOYMENT OF SOME OR ALL THE RIGHTS WHICH THE COPYRIGHT OWNER HAS, IS NECESSARY TO INVOKE THE ROYALTY DEFINITION. VIEWED FROM THIS ANGLE, A NON - EXCLUSIVE AND NON - TRANSFERABLE LICENCE E NABLING THE USE OF A COPYRIGHTED PRODUCT CANNOT BE CO NSTRUED AS AN AUTHORITY TO ENJOY ANY OR ALL OF THE ENUMERATED RIGHTS INGRAINED IN ARTICLE 12 OF DTAA. WHERE THE PURPOSE OF THE LICENCE OR THE TRANSACTION IS ONLY TO RESTRICT USE OF THE COPYRIGHTED PRODUCT FOR INTERNAL BUSINESS PURPOSE, IT WOULD NOT BE LEGA LLY CORRECT TO STATE THAT THE COPYRIGHT ITSELF OR RIGHT TO USE COPYRIGHT HAS BEEN TRANSFERRED TO ANY EXTENT. THE PARTING OF INTELLECTUAL PROPERTY RIGHTS INHERENT IN AND ATTACHED TO THE SOFTWARE PRODUC T IN FAVOUR OF THE LICENSEE/CUSTOMER IS WHAT IS CONTEMP LATED BY THE TREATY. MERELY AUTHORIZING OR ENABLING A CUSTOMER TO HAVE THE BENEFIT OF DATA OR INSTRUCTIONS CONTAINED THEREIN WITHOUT ANY FURTHER RIGHT TO DEAL WITH THEM INDEPENDENTLY DOES NOT, AMOUNT TO TRANSFER OF RIGHTS IN RELATION TO COPYRIGHT OR CONFER MENT OF THE RIGHT OF USING THE COPYRIGHT. THE TRANSFER OF RIGHTS IN OR OVER COPYRIGHT OR THE CONFERMENT OF THE RIGHT OF USE OF COPYRIGHT IMPLIES THAT THE TRANSFEREE/LICENSEE SHOULD ACQUIRE RIGHTS EI THER IN ENTIRETY OR PARTIALLY CO - EXTENSIVE WITH THE OWNER - TRANSFEROR WHO DIVESTS HIMSELF OF THE RIGHTS HE POSSESSES PRO - TANTO. [PARA 89] 24 THE LICENSE GRANTED TO THE LICENSEE PERMITTING HIM TO DOWNLOAD THE COMPUTER PROGRAMME AND STORING IT IN THE COMPUTER FOR HIS OWN USE IS ONLY INCIDENTAL TO THE FACILITY EXTENDE D TO THE LICENSEE TO MAKE USE OF THE COPYRIGHTED PRODUCT FOR HIS INTERNAL BUSINESS PURPOSE. THE SAID PROCESS IS NECESSARY TO MAKE THE PROGRAMME FUNCTIONAL AND TO HAVE ACCESS TO IT AND IS QUALITATIVELY DIFFERENT FROM THE RIGHT CONTEMPLATED BY THE SAID PARAG RAPH BECAUSE IT IS ONLY INTEGRAL TO THE USE OF COPYRIGHTED PRODUCT. APART FROM SUCH INCIDENTAL FACILITY, THE LICENSEE HAS NO RIGHT TO DEAL WITH THE PRODUCT JUST AS THE OWNER WOULD BE IN A POSITION TO DO. [PARA 90] THERE IS NO TRANSFER OF ANY RIGHT IN RESPE CT OF COPYRIGHT BY THE ASSESSEE AND IT IS A CASE OF MERE TRANSFER OF A COPYRIGHTED ARTICLE. THE PAYMENT IS FOR A COPYRIGHTED ARTICLE AND REPRESENTS THE PURCHASE PRICE OF AN ARTICLE AND CANNOT BE CONSIDERED AS ROYALTY EITHER UNDER THE ACT OR UNDER THE DTAA. [PARA 91] THE LICENSEES ARE NOT ALLOWED TO EXPLOIT THE COMPUTER SOFTWA R E COMMERCIALLY, THEY HAVE ACQUIRED UNDER LICENCE AGREEMENT, ONLY THE COPYRIGHTED SOFTWARE WHICH' BY ITSELF IS AN ARTICLE AND THEY HAVE NOT ACQUIRED ANY COPYRIGHT IN THE SOFTWARE. IN TH E CASE OF THE ASSESSEE COMPANY, THE LICENSEE TO WHOM THE ASSESSEE COMPANY HAS SOLD/LICENSED THE SOFTWARE WERE ALLOWED TO MAKE ONLY ONE COPY OF THE SOFTWARE AND ASSOCIATED SUPPORT INFORMATION FOR BACKUP PURPOSES WITH A CONDITION THAT SUCH COPYRIGHT WOULD IN CLUDE INFRASOFT COPYRIGHT AND ALL COPIES OF THE SOFTWARE WOULD BE EXCLUSIVE PROPERTIES OF IN FRASOFT. LICENSEE WAS ALLOWED TO USE THE SOFTWARE ONLY FOR ITS OWN BUSINESS AS SPECIFICALLY IDEN TIFIED AND WAS NOT PERMITTED TO LOAN/RENT/SALE/SUB - LICENCE OR TRANS FER THE COPY OF 25 SOFTWARE TO ANY THIRD PARTY WITHOUT THE CONSENT OF INFRASOFT. [PARA 92] THE LICENSEE HAS BEEN PROHIBITED FROM COPYING, DECOMPILING, DE - ASSEMBLING, OR REVERSE ENGINEERING THE SOFTWARE WITHOUT THE WRITTEN CONSENT OF INFRASOFT. THE LICENCE AG REEMENT BETWEEN THE ASSESSEE COMPANY AND ITS CUSTOMERS STIPULATES THAT ALL COPYRIGHTS AND INTELLECTUAL PROPERTY RIGHTS IN THE SOFTWARE AND COPIES MADE BY THE LICENSEE WERE OWNED BY I NFRASOFT AND ONLY I NFRASOFT HAS THE POWER TO GRANT LI CENCE RIGHTS FOR USE OF THE SOFTWARE. THE LICENCE AGREEMENT STIPULATES THAT UPON TERMINATION OF THE AGREEMENT FOR ANY REASON, THE LICENCEE SHALL RETURN THE SOFTWARE INCLUDING SUPPORTING INFORMATION AND LICE NCE AUTHORIZATION DEVICE TO INFRASOFT. [PARA 93] THE INCORPOREAL RIGHT TO THE SOFTWARE, I.E., COPYRIGHT REMAINS WITH THE OWNER AND THE SAME WAS NOT TRANSFERRED BY THE ASSESSEE. THE RIGHT TO USE A COPYRIGHT IN A PROGRAMME IS TOTALLY DIFFERENT FROM THE RIG HT TO USE A PROGRAMME EMBEDDED IN A CASSETTE OR A CD WHICH MAY BE A SOFTW ARE AND THE PAYMENT MADE FOR THE SAME CANNOT BE SAID TO BE RECEIVED AS CONSIDERATION FOR THE USE OF OR RIGHT TO USE OF ANY COPYRIGHT TO BRING IT WITHIN THE DEFINITION OF ROYALTY AS GIVEN IN THE DTAA. WHAT THE LICENSEE HAS ACQUIRED IS ONLY A COPY OF THE COP YRIGHT ARTICLE WHEREAS THE COPYRIGHT REMAINS WITH THE OWNER AND THE LICENSEES HAVE ACQUIRED A COMPUTER PROGRAMME FOR BEING USED IN THEIR BUSINESS AND NO RIGHT IS GRANTED TO THEM TO UTILIZE THE COPYRIGHT OF A COMPUTER PROGRAMME AND, THUS, THE PAYMENT FOR TH E SAME IS NOT IN THE NATURE OF ROYALTY. [PARA 94] IT IS NOT NECESSARY TO EXAMINE THE EFFECT OF SUBSEQUENT AMENDMENT TO SECTION 9(1)(VI) AND ALSO WHETHER AMOUNT RECEIVED FOR USE OF SOFTWARE WOULD BE ROYALTY IN TERMS 26 THEREOF FOR THE REASON THAT THE ASSESSEE IS COVERED BY THE DTAA, THE PROVISIONS OF WHICH ARE MORE BENEFICIAL. [PARA 95] THE AMOUNT RECEIVED BY THE ASSESSEE UNDER THE LICENCE AGREEMENT FOR ALLOWING THE USE OF THE SOFTWA RE IS NOT ROYALTY UNDER THE DTAA. [PARA 96] WHAT IS TRANSFERRED IS NEITHER THE COPYRIGHT IN THE SOFTWARE NOR THE USE OF THE COPYRIGHT IN THE SOFTWARE, BUT WHAT IS TRANSFERRED IS THE RIGHT TO USE THE COPYRIGHTED MATERIAL OR ARTICLE WHICH IS CLEARLY DISTIN CT FROM THE RIGHTS IN A COPYRIGHT. THE RIGHT THAT IS TRANSFERRED IS NOT A RIGHT T O USE THE COPYRIGHT BUT IS ONLY LIMITED TO THE RIGHT TO USE THE COPYRIGHTED MATERIAL AND THE SAME DOES NOT GIVE RISE TO ANY ROYALTY INCOME AND WOULD BE BUSINESS INCOME. [PAR A 97] IN VIEW OF ABOVE, IT IS CONCLUDED THAT THE TRIBUNAL WAS RIGHT IN HOLDING THAT THE CONSIDERATION RECEIVED BY THE ASSESSEE ON GRANT OF LICENSES FOR USE OF SOFTWARE IS NOT ROYALTY WITHIN THE MEANING OF ARTICLE 12(3) OF THE DTAA BETWEEN INDIA AND USA [ PARA 100] 20. THE AFORESAID POINTS AS HIGHLIGHTED FROM THE JUDGMENT OF THE HON'BLE HIGH C OURT CLEARLY CLINCHES THE ISSUE IN FAVOUR OF THE ASSESSEE ON THE PRESENT FACTS. THIS RATIO HAS BEEN FURTHER REITERATED IN CIT VS. ALCATEL LUCENT CANADA (SUPRA) , THE RELEVANT OBSERVATION READS AS UNDER: - WE HAVE NOTICED, AT THE OUTSET, THAT THE ITAT HAD RE LIED UPON THE RULING OF THIS COURT IN DIT V. ERICSSON A.B. [2012] 343 ITR 470/204 T AX MAN 192/[2011] 16 TAXMANL1.COM 371 WHEREIN IDENTICAL ARGUMENT WITH RESPECT TO 'WHETHER CONSIDERATION PAID TOWARDS SUPPLY OF SOFTWARE ALONG WITH HARDWARE - RATHER SOFTWARE EMBEDDED IN THE HARDWARE 27 AMOUNTED TO ROYALTY. AFTER NOTICING SEVERAL CONTENTIONS OF THE REVENUE, THIS COURT HELD IN ERICSSON A.B. (SUPRA) AS FOLLOWS: - '54. IT IS DIFFICULT TO ACCEPT THE AFORESAID SUBMISSIONS IN THE FACTS OF THE PRESENT CASE. WE HAVE ALREA DY HELD ABOVE THAT THE ASSESSEE DID NOT HAVE ANY BUSINESS CONNECTION IN INDIA. WE HAVE ALSO HELD THAT THE SUPPLY OF EQUIPMENT IN QUESTION WAS IN THE NATURE OF SUPPLY OF GOODS. THEREFORE, THIS ISSUE IS TO BE EXAMINED KEEPING IN VIEW THESE FINDINGS. MOREOVER , ANOTHER FINDING OF FACT IS RECORDED BY THE TRIBUNAL THAT THE CELLULAR OPERATOR DID NOT ACQUIRE ANY OF THE COPYRIGHTS REFERRED TO IN SECTION 14 (B) OF THE COPYRIGHT ACT, 1957. 55. ONCE WE PROCEED ON THE BASIS OF AFORESAID FACTUAL FINDINGS, IT IS DIFFICUL T TO HOLD THAT PAYMENT MADE TO THE ASSESSEE WAS IN THE NATURE OF ROYALTY EITHER UNDER THE INCOME - TAX ACT OR UNDER THE DTAA. WE HAVE TO KEEP IN MIND WHAT WAS SOLD BY THE ASSESSEE TO THE INDIAN CUSTOMERS WAS A GSM WHICH CONSISTED BOTH OF THE HARDWARE AS WELL AS THE SOFTWARE, THEREFORE, THE TRIBUNAL IS RIGHT IN HOLDING THAT IT 11'AS NOT PERMISSIBLE FOR THE REVENUE TO ASSESS THE SAME UNDER TWO DIFFERENT ARTICLES. THE SOFTWARE THAT WAS LOADED ON THE HARDWARE DID NOT HAVE ANY INDEPENDENT EXISTENCE. THE SOFTWARE S UPPLY IS AN INTEGRAL PART OF THE GSM MOBILE TELEPHONE SYSTEM AND IS USED BY THE CELLULAR OPERATOR FOR PROVIDING THE CELLULAR SERVICES TO ITS CUSTOMERS. THERE COULD NOT BE ANY INDEPENDENT USE OF SUCH SOFTWARE. THE SOFTWARE IS EMBODIED IN THE SYSTEM AND THE REVENUE ACCEPTS THAT IT COULD NOT HE USED INDEPENDENTLY. THIS SOFTWARE MERELY FACILITATES THE FUNCTIONING OF THE EQUIPMENT AND IS AN INTEGRAL PART THEREOF . ON THESE FACTS , IT WOULD BE USEFUL TO REFER 10 THE JUDGMENT OF THE SUPREME COURT IN TATA CONSULTANC Y SERVICES V. STATE OF ANDHRA PRADESH [2004] 271 ITR 401 (SC), WHEREIN THE APEX COURT HELD THAT SOFTWARE WHICH IS INCORPORATED ON A MEDIA WOULD BE GOODS AND, THEREFORE, LIABLE TO SALES TAX. FOLLOWING DISCUSSION IN THIS BEHALF' IS REQUIRED TO BE NOTED: - 28 'IN OUR VIEW, THE TERM 'GOODS' AS USED IN ARTICLE 366(12) OF THE CONSTITUTION OF INDIA AND AS DEFINED UNDER THE SAID ACT ARE VERY WIDE AND INCLUDE ALL TYPES OF MOVABLE PROPERTIES WHETHER THOSE PROPERTIES BE TANGIBLE OR INTANGIBLE. WE ARE IN COMPLETE AGREEMENT 'WITH THE OBSERVATIONS MADE BY THIS COURT IN ASSOCIATED CEMENT COMPANIES LTD. (SUPRA). A SOFTWARE PROGRAMME MAY CONSIST OF VARIOUS COMMANDS WHICH ENABLE THE COMPUTER TO PERFORM A DESIGNATED TASK. THE COPYRIGHT IN THAT PROGRAMME MAY REMAIN 'WITH THE ORIGIN ATOR OF THE PROGRAMME. BUT THE MOMENT COPIES ARE MADE AND MARKETED. IT BECOMES GOODS, WHICH ARE SUSCEPTIBLE TO SALES TAX. EVEN INTELLECTUAL PROPERTY, ONCE IT IS PUT ON TO A MEDIA, WHETHER IT BE IN THE FORM OF BOOKS OR CANVAS (IN CASE OF PAINTING) OR COMPUT ER DISCS OR CASSETTES, AND MARKETED WOULD BECOME 'GOODS'. WE SEE NO DIFFERENCE BETWEEN A SALE OF A SOFTWARE PROGRAMME ON A CD/FLOPPY DISC FROM A SALE OF MUSIC ON A CASSETTE/CD OR A SALE OF A FILM ON A VIDEO CASSETTE/CD. IN ALL SUCH CASES, THE INTELLECTUAL PROPERTY HAS BEEN INCORPORATED ON A MEDIA FOR PURPOSES OF TRANSFER. SALE IS NOT JUST (IF THE MEDIA WHICH BY ITSELF HAS VERY LITTLE VALUE. THE SOFTWARE AND THE MEDIA CANNOT BE SPLIT LIP. WHAT THE BUYER PURCHASES AND PAYS JAR IS NOT THE DISC OR THE CD, AS I N THE CASE OF PAINTINGS OR BOOKS OR MUSIC OR FILMS THE BUYER IS PURCHASING THE INTELLECTUAL PROPERTY AND NOT THE MEDIA I.E. THE PAPER OR CASSETTE OR DISC OR CD. THUS A TRANSACTION SALE OF COMPUTER SOFTWARE IS CLEARLY A SALE OF 'GOODS' 'WITHIN THE MEANING O F THE TERM AS DEFINED IN THE SAID ACT. THE TERM 'ALL MATERIALS, ARTICLES AND COMMODITIES' INCLUDES BOTH TANGIBLE AND INTANGIBLE/INCORPOREAL PROPERTY WHICH IS CAPABLE OF ABSTRACTION, CONSUMPTION AND USE AND WHICH CAN BE TRANSMITTED, TRANSFERRED, DELIVERED, STORED, POSSESSED ETC. THE SOFTWARE PROGR AMMES HAVE ALL THESE ATTRIBUTES . IN ADVENT SYSTEMS LTD. V. UNISYS CORPN, (925 F. 2D 670 (3RD CIR. 1991)), RELIED ON BY MR. SORABJEE, THE COURT WAS CONCERNED WITH INTERPRETATION OF UNIFORM CIVIL CODE WHICH 'APPLIED TO TRANSACTIONS IN GOODS', THE GOODS THEREIN WERE DEFINED AS 'ALL THINGS (INCLUDING SPECIALLY MANUFACTURED 29 GOODS) WHICH ARE MOVEABLE AT THE TIME OF THE IDENTIFICATION FOR SALE', IT WAS HELD: 'COMPUTER PROGRAMS ARE THE PRODUCT OF AN INTELLECTUAL PROCESS, B UT ONCE IMPLANTED IN A MEDIUM ARE WIDELY DISTRIBUTED TO COMPUTER OWNERS. AN ANALOGY CAN BE DRAWN TO A COMPACT DISC RECORDING OF AN ORCHESTRAL RENDITION. THE MUSIC IS PRODUCED BY THE ARTISTRY OF MUSICIANS AND IN ITSELF IS NOT A 'GOOD,' BUT WHEN TRANSFERRED TO A LASER - READABLE DISC BECOMES A READILY MERCHANTABLE COMMODITY. SIMILARLY, WHEN A PROFESSOR DELIV ERS A LECTURE, IT IS NOT A GOOD, BU T , WHEN TRANSCRIBED AS A BOOK, IT BECOMES A GOOD. THAT A COMPUTER PROGRAM MAY BE COPYRIGHTABLE AS INTELLECTUAL PROPERTY DOES NOT ALTER THE FACT THAT ONCE IN THE FORM OF A FLOPPY DISC OR OTHER MEDIUM, THE PROGRAM IS TANGIBLE, MOVEABLE AND AVAILABLE IN THE MARKETPLACE. THE FACT THAT SOME PROGRAMS MAY BE TAILORED FOR SPECIFIC PURPOSES NEED NOT ALTER THEIR STATUS AS 'GOODS' BEC AUSE THE CODE DEFINITION INCLUDES 'SPECIALLY MANUFACTURED GOODS. 56. A FORTIORARI WHEN THE ASSESSEE SUPPLIES THE SOFTWARE 'WHICH IS INCORPORATED ON A CD, IT HAS SUPPLIED TANGIBLE PROPERTY AND THE PAYMENT MADE BY THE CELLULAR OPERATOR FOR ACQUIRING SUCH PR OPERTY CANNOT BE REGARDED AS A PAYMENT BY WAY OF ROYALTY. 6. THIS COURT ALSO NOTICED THAT THE ITAT HAD IN ADDITION RELIED UPON OTHER JUDGMENT OF THIS COURT I.E. DIT V. NOKIA NETWORKS, OR [2013] 358 ITR 259/212 TAXMAN 68/[2012] 25 TAXMAN.COM 225. 21. NOW B EFO RE US, THE LD. CIT D.R. HAD TRIED TO C ANVASS A POINT THAT IN THE S UPPLEMENT A GREEMENT THERE IS A STIPULATION OF UNLIMITED NUMBER OF USERS AND UNLIMITED SIZE OF MANAGED CODE BASE; AND ALSO ACCESS HAS BEEN GRANTED TO ALL COMPANIES WITHIN ROBERT BOSCH GROUP. HE HAS ALSO REFERRED TO CORRESPONDING 30 MANAGED CODE BAS E AS GIVEN IN POINT 1.5 OF THE MASTER LICENSE AND SUBSCRIPTION AGREEMENT. (AS REPRODUCED IN THE FOREGOING PARAGRAPHS) T HE MANAGED CODE BASE HAS BEEN DEFINED IN THE AGREEMENT AS CODE BASE OWNED OR CONTRO LLED BY THE CUSTOMER , I.E. , INPUT INTO A PROGRAM BY CUSTOMER AND MANAGED USING THAT PROGRAMME OVER THE COURSE OF THE APPLICABLE SUBSCRIPTION PERIOD. SINCE THE SOFTWARE IS TO BE RUN AT AN ENTERPRISE LEVEL, MANAGED CODE BASE SIZE HAS TO BE KEPT UNLIMITED BU T WITHIN THE ORGANIZATION AND IS NOT MEANT TO THE OUTSIDERS . IT HAS BEEN CLARIFIED BEFORE US BY THE LD. COUNSEL FOR THE ASSESSEE THAT SOFTWARE SOLD BY THE ASSESSEE IS USED AS ANTIVIRUS BY THE CUSTOMERS FOR ENTIRE ORGANIZATION AND ACCESS TO SUCH SOFTWARE IS IP BASED AND IS GIVEN TO THE SERVER INSTALLED AT THE CUSTOMER S PLACE , SO THAT IT CAN BE USED BY THE CUSTOMER AND ALL ITS EMPLOYEES. IT IS NOT THE CASE OF THE REVENUE ALSO THAT SOFTWARE IS BEING COMMERCIALLY EXPLOITED BY THE CUSTOMERS ALBEIT IT HAS TO BE USED ONLY FOR PRIVA TE USE WITHIN THE ORGANIZATION. THE OTHER REFERENCE OF THE MEANING OF S UPPLEMENT AS GIVEN IN CLAUSE 1.11 HIGHLIGHTED BY THE LD. D.R. (ALSO INCORPORATED ABOVE) , IT IS SEEN THAT SUPPLEMENT MEANS AN ORDER FOR M , IN THE FORM AND FORMAT FUR NISHED BY BLACK DUCK, INDICATING CUSTOMER S DESIRE TO LICENSE A PROGRAM OR ACQUIRE SERVICES, PURSUANT TO THE TERMS OF THIS AGREEMENT. THIS VERY CLAUSE ENUMERATES THAT SUPPLEMENT IS AN ORDER FORM IN A STANDARD FORMAT ISSUED TO ITS CUSTOMERS. IT IS A STANDAR D FORMAT WHICH IS USED BY THE ASSESSEE TO SERVE ITS CUSTOMERS. THE CUSTOMER MAY HAVE ENTERED INTO AN AGREEMENT WITH VARIOUS ROBERT BOSCH ENTITIES BUT THE SUPPLEMENT APPENDED AT PAGE 113 OF THE PAPER BOOK WHICH WAS REFERRED TO BY LD. CIT DR IS ONLY FOR TH E SOFTWARE SOLD TO ROBERT BOSCH ENGINEERING INDIA. THE CUSTOMER'S NAME IN THE SUPPLEMENT IS 31 SHOWN AS ROBERT BOSCH ENGINEERING INDIA AND T HE SOFTWARE SOLD IS BLACK DUCK PROTEX AND ACCESS IS GIVEN ON ONE SERVER OF ROBERT BOSCH INDIA ONLY. THIS ONLY MEANS T HAT AN IP ACCESS IS GIVEN TO THE ROBERT BOSH INDIA AT AN ENTERPRISE LEVEL. ALL THE EMPLOYEES IN INDIA CAN ONLY USE THE ANTIVIRUS SOFTWARE FROM THE SAID SERVER. IF SUCH AN ACCESS TO UNLIMITED USERS , I.E. , EMPLOYEES WITHIN THE ORIGINATION IS NOT PROVIDED, TH E N THE SECURE SOFTWARE PROGRAM WOULD BE REDUNDANT AND WOULD NOT SERVE THE PURPOSE. THE TABLE ON THE S UPPLEMENT FORM CLEARLY ENUNCIATES THAT THE S UPPLEMENT WOULD BE APPLICABLE FOR A LIMITED SUBSCRIPTION PERIOD. LOCATION OF SERVERS IS MENTIONED , LIKE INDIA , GERMANY , UNITED STATES , AND SINGAPORE. IT WAS CLARIFIED BY THE LD. COUNSEL THAT THE STANDARD FORMAT OF THE ORDER FORM IS USED BUT A DIFFERENT AGREEMENT IS ENTERED WITHIN SUCH ENTITIES IN VARIOUS LOCATIONS. BUT AS THE COLUMN 3 IN THE TABLE ENUNCIATES, THE S OFTWARE IS SOLD TO BE RUN ONLY ON ONE SERVER IN INDIA. HENCE , THE ARGUMENT OF THE LD. CIT DR THAT ACCESS IS GRANTED TO ALL SER VERS IS NOT CORRECT . SOFTWARE IS SOLD TO BE USED ONLY ON ONE SERVER IN INDIA AND NOT IN OTHER JURISDICTIONS. FURTHER, LD. COUNSEL CLARIFIED THAT CLAUSE 2.3 OF THE LICENSING AGREEMENT USES THE WORD APPLICABLE SUPPLEMENT WHICH SUGGESTS THAT SUPPLEMENT WOULD BE DIFFERENT FOR DIFFERENT CUSTOMERS DEPENDING UPON VARIOUS CUSTOMERS. THOUGH THE ORDER FORM IS STANDARD, BUT THEY MAY BE DIFFER ENT IN SUPPLEMENT AGREEMENT SO AS TO NUMBER OF USERS, MANAGE CODE, SIZE BASE FOR DIFFERENT CUSTOMERS. IT IS ONLY WITH A VIEW TO PROVIDE FLEXIBILITY TO CUSTOMERS, THE CLAUSE SUBSCRIPTION TO OVERNIGHT THE MASTER LICENSING AGREEMENT HAVE BEEN INSERTED. THUS , HE SUBMITTED THAT THE REFERENCE MADE BY THE LD. CIT D.R. TO THESE CLAUSES AND ALSO SUPPLEMENT WILL NOT CHANGE THE BASIC FACT THAT WHAT HAS BEEN SOLD BY THE ASSESSEE IS PURELY A COPYRIGHTED SOFTWARE GIVEN FOR 32 USE OF THE CUSTOMERS WITHOUT TRANSFERRING ANY KI ND OF RIGHT TO USE AND WITH LOT OF RESTRICTIONS AS GIVEN IN CLAUSE 2.4 OF THE AGREEMENT. WE COMPLETELY AGREE WITH THE CLARIFICATION AND SUBMISSION MADE BY THE LD. COUNSEL THAT SUPPLEMENTARY AGREEMENT DOES NOT ENLARGE THE SCOPE OF THE MAIN LICENSE AGREEMENT BUT ONLY ENVISAGES PROVIDING ACCESS TO ALL THE PERSONS WITHIN THE ENTERPRISE. 22. THUS, IN VIEW OF THE DISCUSSION MADE ABOVE AND RESPECTFULLY FOLLOWING THE JUDGMENT OF HON BLE DELHI HIGH COURT, IN THE CASES OF DIT VS. NOKIA NETWORKS (SUPRA); DIT VS. ERICSSON A.B. (SUPRA); DIT VS. INFRASOFT LTD. (SUPRA); AND CIT VS. ALCATEL LUCENT CANADA (SUPRA). , WE HOLD THAT THE PAYMENT RECEIVED BY THE ASSESSEE DOES NOT FALL WITHIN THE AMBIT OF ROYALTY UNDER ARTICLE 12(3) OF INDIA USA DTAA AND HENCE , THE SAME CANNOT BE TAX ED UNDER THE TERMS OF INDI A USA TREATY. IF THE RECEIPTS CANNOT BE TAXED UNDER THE TREATY AS ROYALTY , THEN IT CANNOT BE TAXED UNDER THE DOMESTIC LAW UNDER SECTION 9(1)(VI) INCOME TAX ACT AND THE AMENDED PROVISION CANNOT BE READ INTO TREATY AS HELD BY THE HO N'BLE DELHI HIGH COURT IN AFORESAID CASE S . ACCORDINGLY, THE APPEAL OF THE ASSESSEE IS ALLOWED. 23. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRO NOUNCED IN THE OPEN COURT ON 11 TH S EPTEMBER, 2017. SD/ - SD/ - [G.D. AGRAWAL ] [ AMIT SHUKLA ] PRESIDEN T JUDICIAL MEMBER DATED: 11 TH SEPTEMBER , 2017 33 JJ: COPY FORWARDED TO: 1. APP ELLA NT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR ASSISTANT REGISTRAR DATE 1. DRAFT DICTATED ON 2. DRAFT PLACED BEFORE AUTHOR 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. 5. APPROVED DRAFT COMES TO THE SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON 7. FILE COMES BACK TO PS/SR. PS 8. UPLOADED ON 9. FILE SENT TO THE BENCH CLERK 10. DATE ON WHICH FILE GOES TO THE AR 11. DATE ON W HICH FILE GOES TO THE HEAD CLERK. 12. DATE OF DISPATCH OF ORDER.