Tejas Networks Limited, Bangalore V. Dy.DIT, Bangalore

ITA 715/BANG/2015

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 95289 (ITAT-BANGALORE)
• Duration Of Justice: 5 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-10-2015
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2009-2010
• Appeal Filed On: 13-05-2015
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: P K SRIHARI
• Assessee Lawyers: K R VASUDEVAN
• Keywords: Double taxation relief
• Section: 201(1); 90

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH B BEFORE SHRI VIJAYPAL RAO, JUDICIAL MEMBER AND SHRI G MANJUNATHA, ACCOUNTANT MEMBER ITA NO.71 5 - 717/BANG/2015 (ASST. YEAR 2009-10 2011-12) M/S TEJAS NETWORKS LTD., PLOT NO.25, JP SOFTWARE TECH., ELECTRONIC CITY, PHASE I, HOSUR ROAD, BANGALORE-560 100. PAN AABCT 1670M. . APPELLANT VS. THE DY. DIRECTOR OF INCOME-TAX, INTERNATIONAL TAXATION, CIRCLE-2(1), BANGALORE. . RESPONDENT APPELLANT BY : SHRI K.R VASUDEVAN, ADVOCATE RESPONDENT BY : SHRI PK SRIHARI, ADDL. CIT DATE OF HEARING : 08-10-2015 DATE OF PRONOUNCEMENT : 16-10-2015 O R D E R PER G MANJUNATHA, ACCOUNTANT MEMBER : THESE APPEALS FILED BY THE ASSESSEE ARE DIRECTED AG AINST THE COMMON ORDER OF COMMISSIONER OF INCOME TAX (A PPEALS)-IV, ITA NO.715-717/B /15 2 BANGALORE DATED 5/11/2014 FOR THE ASSESSMENT YEAR 2 009-10 TO 2011- 12. 2. DURING THE COURSE OF HEARING IN ITA NO.750 AUTHO RIZED REPRESENTATIVE OF THE ASSESSEE BROUGHT TO OUR NOTIC E THAT THE ASSESSEE HAS ALREADY FILED AN APPEAL IN ITA NO.31/BANG/2015 DATED 5/6/2015 FOR THE ASST. YEAR 2009-10 ON SIMILAR ISSUES WHICH WAS DISPOSED OFF BY THIS TRIBUNAL VIDE ORDER DATED 31/6/2015. HENCE, I N THIS APPEAL NOTHING TO ADJUDICATE, BECOMES INFRUC T UOUS AND DISMISSED ACCORDINGLY. NOW, WE PROCEED WITH ITA NO.716 AND 7 17. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE I S AN INDIAN COMPANY WHO IS ENGAGED IN DEVELOPING TELECOMMUNICAT ION EQUIPMENT. DURING THE RELEVANT ASST. YEAR, THE ASS ESSEE HAS PURCHASED SHRINK-WRAP SOFTWARE FROM CADENCE DESIGNS IRELAND AMOUNTING TO RS.5,946,245/- AND RS.4,015,887/- RESPECTIVELY. TH E AO NOTICED THAT THE ASSESSEE HAS REMITTED THE ABOVE AMOUNTS TO CADE NCE DESIGNS SYSTEMS IRELAND WITHOUT DEDUCTING TAX AT SOURCE U/ S 195 OF THE INCOME-TAX ACT 1961. THE AO INITIATED PROCEEDINGS U/S 201(1) AND ISSUED SHOW CAUSE NOTICE DATED 25/12/2011 WHY THE A SSESSEE SHOULD NOT BE CONSIDERED ASSESSEE IN DEFAULT FOR NOT DED UCTING TAX AT SOURCE U/S 195 IN RESPECT OF PAYMENT IN QUESTION. IN RESP ONSE TO NOTICE, THE ITA NO.715-717/B /15 3 ASSESSEES AUTHORIZED REPRESENTATIVE SHRI PUNEETH, C.A APPEARED AND SUBMITTED THAT THE PAYMENT MADE TO THE NON-RESIDENT INDIAN WAS MADE FOR THE USE OF SOFTWARE UNDER NON EXCLUSIVE AND NON TRANSFERABLE AND LICENSED TO USE THE SOFTWARE. ACCORDINGLY, THE PAY MENTS IN QUESTION ARE NOT CHARGEABLE TO TAX IN INDIA AND, THEREFORE, NO LIABILITY TO DEDUCT TAX AT SOURCE IN RESPECT OF SUCH PAYMENT. THE AO H OWEVER DID NOT CONVINCED WITH THE EXPLANATION FURNISHED BY THE ASS ESSEE AND WAS OF THE VIEW THAT AS PER THE PROVISION OF SEC. 192 OF T HE INCOME-TAX ACT 1961, THE ASSESSEE WAS LIABLE TO DEDUCT TAX AT SOUR CE ON THE PAYMENT MADE TO CADENCE DESIGNS SYSTEMS IRELAND . DURING TH E PURCHASE OF SHRINK-WRAP SOFTWARE AS A PAYMENT MADE AMOUNTS TO R OYALTY UNDER THE INCOME-TAX ACT AS WELL AS THE INDO-IRELAND DTAA. T HE AO ACCORDINGLY HELD THAT THE ASSESSEE IS DEFAULT U/S 2 01 AND 201(1A) AND PASSED ORDER U/S 201 AND 201(1A) DATED 14/3/2013 AS UNDER:- FROM THE ABOVE DISCUSSION, IT IS PROVED THAT THE PAYMENTS MADE BY THE ASSESSEE TO CADENCE, IRELAND DURING THE FY 2008-09 & 2010-11 IN TERMS OF A LICEN SE, CONSTITUTE ROYALTY, BOTH U/S 9(1)(VI) OF THE INCOME -TAX ACT, 1961, AND UNDER THE DTAA BETWEEN INDIA AND IRELAND, AND IS CHARGEABLE TO TAX IN INDIA. AS PER SEC. 195 OF THE INCOME-TAX ACT, THE ASSESSEE WAS LIABLE TO DEDUCT T AX AT SOURCE ON THE ROYALTY PAYMENTS TO CADENCE, IRELAND. ITA NO.715-717/B /15 4 BUT NO TAX HAD BEEN DEDUCTED BY THE ASSESSEE THEREON EITHER AT THE TIME OF CREDITING OR SUBSEQUE NTLY. AS THE ASSESSEE HAS FAILED TO DISCHARGE ITS OBLIGAT ION TO DEDUCT TAX AT SOURCE AS STIPULATED U/S 195 OF THE I NCOME- TAX ACT, OBLIGATION TO DEDUCT TAX AT SOURCE AS STIP ULATED U/S 195 OF THE INCOME-TAX ACT, 1961, AS PER THE PROVISIONS OF SEC.201(1) OF THE INCOME-TAX ACT, 196 1, FOR THE FY 2007-08 THE ASSESSEE IS HELD TO BE AN ASSESS EE IN DEFAULT IN RESPECT OF TAX NOT DEDUCTED AT SOURCE ON ROYALTY PAYMENTS TO CADENCE, IRELAND. IT IS LIABLE TO PAY TAX DEDUCTIBLE IN THIS REGARD ALONG WITH THE INTEREST U /S 201(1A). TAX LIABILITY OF THE ASSESSEE: THE TAX LIABILITY OF THE ASSESSEE, TEJAS NETWORKS L TD., U/S 201(1) & 201(1A) FOR THE ASST. YEAR 2009-10 (FY 2008-09) IS DETERMINED AS UNDER: MONTH AMOUNT IN RS TAX DEDUCTIBLE U/S 201(1) RS. INTEREST U/S 201(1A) RS. 08-07-2008 537,500 53,750 30,638 14.-10-2008 593,750 59,375 32,063 11-12-2008 617,500 61,750 32,110 26-03-2009 637,500 63,750 31,238 TOTAL 2,386,250 238,625 126,049 ITA NO.715-717/B /15 5 THE TAX LIABILITY FOR THE ASST. YEAR 2010-11 (FY 2 009-10) IS DETERMINED AS UNDER: MONTH AMOUNT IN RS. TAX DEDUCTIBLE U/S 201(1) RS INTEREST U/S 201(1A) RS. 12-06-2009 587,500 58,750 27,025 08-07-2009 2,136,813 213,681 96,157 08-09-2009 611,125 61,113 26,279 14-12-2009 573,125 57,313 22,925 01-02-2010 2,037,682 203,768 77,432 TOTAL 5,946,245 594,625 249,818 THE TAX LIABILITY FOR THE ASST. YEAR 2011-12 (FY 2 010-11) IS DETERMINED AS UNDER: MONTH AMOUNT IN RS. TAX DEDUCTIBLE U/S 201(1) RS INTEREST U/S 201(1A) RS. 13.08.2010 2,046,494 204,649 65,488 31.01.2011 1,969,393 196,939 5 3,174 TOTAL 4,015,887 401,588 118,662 ITA NO.715-717/B /15 6 4. AGGRIEVED BY THE ORDER U/S 201 AND 201(1A) OF TH E ACT, THE ASSESSEE PREFERRED ON APPEAL BEFORE THE LE ARNED CIT(A) BY DECLARING THE ASSESSMENT AND CONTENDED BE FORE THE LEARNED CIT(A) THAT THE PAYMENT MADE IN QUESTIO N WERE NOT ROYALTY WITH THE MEANING OF SEC. 9(1) OF INDO- IRELAND DTAA. THE LEARNED CIT(A) DISMISSED THE ASSESSEES APPEAL VIDE ORDER DATED 5/11/20114 BY FOLLOWING THE DECISION OF THE HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF CIT VS. SAMSUNG ELECTRONIC S CO. LTD., . 245 ITR 181 THEREAFTER, IT IS VERY CLEAR FROM THE EXPRESS TERM S OF THE AGREEMENT THAT THE RIGHT TO USE COPY RIGHTED SOFTWARE HAS BEEN TRANSFERRED TO THE ASSESSEE. KEEPING IN V IEW THE FACT THAT THE JUDGMENT OF THE HONBLE HIGH COURT OF KARN ATAKA TAKES THE NATURE OF BINDING PRECEDENT THE AMOUNTS I N QUESTION PAID AS CONSIDERATION FOR THE RIGHT TO USE COPY-RIG HTED- SOFTWARE AMOUNTS TO ROYALTY WITHIN THE MEANING OF T HE ACT READ WITH RESPECTIVE DTAA, THE CONTENTIONS OF THE A SSESSEES REPRESENTATIVE ARE REJECTED. ITA NO.715-717/B /15 7 5. AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSES SEE IS IN APPEAL BEFORE US. 6. THE AUTHORIZED REPRESENTATIVE OF THE ASSESSEE DU RING THE COURSE OF HEARING BROUGHT TO OUR NOTICE THAT THE APPEALS A RE ALREADY DECIDED AGAINST THE ASSESSEE IN ASSESSEES OWN CASE IN ITA NO.31/BANG/2015 DATED 5/6/2015. WE FURTHER SUBMIT THAT THE HONBLE HIGH COURT OF KARNATAKA HAS ALSO HAVE JUDGMENT AGAINST THE ASSESS EE IN THE CASE OF SAMSUNG ELECTRONICS CO. LTD., (SUPRA), WHEREIN THE ASSESSEE IS ALSO ONE OF THE PARTY. 7. ON THE OTHER HAND, THE LEARNED DR SUPPORTED THE ORDER OF THE CIT(A). 8. WE HAVE HEARD BOTH THE PARTIES, PERUSED THE MATE RIAL AVAILABLE ON RECORD AND ALSO CONSIDERED THE ORDERS OF THE AUT HORITIES BELOW. DURING THE COURSE OF HEARING BOTH THE COUNSELS BROU GHT TO OUR NOTICE THAT THE ISSUE INVOLVED IN THESE APPEALS ARE DECIDE D AGAINST THE ASSESSEE IN ITA NO.31/BANG/2015 DATED 5/6/2015. W E FIND THAT THE ISSUE BEFORE US IS WHETHER THE PAYMENTS MADE FOR AC QUIRING THE SHRINK-WRAP SOFTWARE AMOUNTS TO ROYALTY U/S 9(1)(V I) OF THE INCOME- ITA NO.715-717/B /15 8 TAX ACT AND ALSO INDO- IRELAND DTAA AND, THEREFORE, TAX AT SOURCE REQUIRED TO BE DEDUCTED AS PER THE PROVISION OF SEC . 195 OF THE INCOME-TAX ACT. AS POINTED OUT BY THE AR, THE ISSU E IS ALREADY DECIDED IN FAVOUR OF THE ASSESSEE IN ASSESSEES OWN CASE BY THIS TRIBUNAL IN ITA NO.31/BANG/2015 DATED 5/6/2015 CON SIDERING THE RATIO OF HONBLE KARNATAKA HIGH COURT IN THE CASE O F SAMSUNG ELECTRONICS CO. LTD., (SUPRA). 9. THE HONBLE HIGH COURT IN ITS DECISION IN THE CA SE OF SAMSUNG ELECTRONICS CO. LTD., (SUPRA) WHILE DECIDING THE I SSUE OBSERVED AS UNDER: 4.3.2 THE HON'BLE HIGH COURT IN ITS DECISION IN SAMSUNG ELECTRONICS CO. LTD. (SUPRA) WHILE EXAMINING THE TE RM ROYALTY VIS-A-VIS COMPUTER SOFTWARE HAS OBSERVED AS UNDER:- IN VIEW OF THE ABOVESAID DEFINITION OF 'ROYALTY', IT IS CLEAR THAT THE NECESSARY INGREDIENT TO BE SATISFIED TO F IND OUT AS TO WHETHER THE PAYMENT WOULD AMOUNT TO 'ROYALTY' I S AS FOLLOWS - PAYMENT OF ANY KIND RECEIVED AS A CONSIDERATION FOR THE USE OF, OR THE RIGHT TO USE, ANY COPYRIGHT OF LITERARY, ARTISTIC OR SCIENTIFIC WORK. IT HAS BEEN UNIVERSALLY ACCEPTED THAT A LITERARY WO RK IS ENTITLED TO COPYRIGHT AND WHEREFORE, A LITERARY WO RK IS ITA NO.715-717/B /15 9 ENTITLED TO BE REGISTERED AS COPYRIGHT. IN INDIA, THE PROVISIONS OF SECTION 2(O) OF THE COPYRIGHT ACT, 19 57, DEFINES 'LITERARY WORK' AS UNDER : ''LITERARY WORK' INCLUDES COMPUTER PROGRAMMES, TABL ES AND COMPILATIONS INCLUDING COMPUTER DATABASES ;' THEREFORE, 'COMPUTER SOFTWARE' HAS BEEN RECOGNIZED AS COPYRIGHT WORK IN INDIA ALSO. HAVING REGARD TO THE ABOVE SAID DEFINITION OF 'ROYA LTY', WE HAVE TO CONSIDER THE CONTENTS OF SOFTWARE LICENCE AGREEMENT ENTERED INTO BY THE NONRESIDENT WITH SAMS UNG ELECTRONICS AND ALSO THE RESPONDENTS IN THE CASE REPRESENTED BY SRI GANESH, LEARNED SENIOR COUNSEL A ND SRI ARAVIND DATTAR, WHEREIN IT IS A CASE OF PURCHASE, SALE OR DISTRIBUTION OR OTHERWISE OF THE OFF-THE-SHELF SOF TWARE. IT IS DESCRIBED AS A 'SOFTWARE LICENCE AGREEMENT', WHERE IN IT IS AVERRED THAT CUSTOMER ACCEPTS AN INDIVIDUAL, NON- TRANSFERABLE AND NON-EXCLUSIVE LICENCE TO USE THE LICENSED SOFTWARE PROGRAM(S) ON THE TERMS AND CONDITIONS ENUMERATED IN THE AGREEMENT. IT IS FURTHER AVERRED THAT THE CUSTOMER-SAMSUNG ELECTRONICS-SHALL PROTECT CONFIDEN TIAL INFORMATION AND SHALL NOT REMOVE ANY COPYRIGHT, CONFIDENTIALITY OR OTHER PROPRIETARY RIGHTS PROVIDE D BY THE NON-RESIDENT. HOWEVER, WHAT IS GRANTED UNDER THE SAID LICENCE IS ONLY A LICENCE TO USE THE SOFTWARE FOR I NTERNAL BUSINESS WITHOUT HAVING ANY RIGHT FOR MAKING ANY ITA NO.715-717/B /15 10 ALTERATION OR REVERSE ENGINEERING OR CREATING SUB- LICENCES. WHAT IS TRANSFERRED UNDER THE SAID LICEN CE IS THE LICENCE TO USE THE SOFTWARE AND THE COPYRIGHT CONTI NUE TO BE WITH THE NON-RESIDENT AS PER THE AGREEMENT. EVEN AS PER THE AGREEMENT ENTERED INTO WITH THE OTHER DIST RIBUTORS AS ALSO THE END-USER LICENCE AGREEMENT, IT IS CLEAR THAT THE DISTRIBUTOR WOULD GET EXCLUSIVE NON-TRANSFERABLE L ICENCE WITHIN THE TERRITORY FOR WHICH HE IS APPOINTED AND HE HAS GOT RIGHT TO DISTRIBUTE VIA RESELLERS THE SOFTWARE , UPON PAYMENT OF THE LICENCES SET FORTH IN EXHIBIT A TO THE AGREEMENT ONLY TO END USERS PURSUANT TO A VALID AC TUATE SHRINKWRAP OR OTHER ACTUATE LICENCE AGREEMENT AND E XCEPT AS EXPRESSLY SET FORTH IN THE SAID AGREEMENT, DIST RIBUTOR MAY NOT RENT, LEASE, LOAN, SELL OR OTHERWISE DISTR IBUTE THE SOFTWARE THE DOCUMENTATION OR ANY DERIVATIVE WORKS BASED UPON THE SOFTWARE OR DOCUMENTATION IN WHOLE OR IN PART. DISTRIBUTOR SHALL NOT REVERSE ENGINEER, DECOMPILE, OR OTHERWISE ATTEMPT TO DERIVE OR MODIFY THE SOURCE C ODE FOR THE SOFTWARE. THE DISTRIBUTOR SHALL HAVE NO RIGHTS TO THE SOFTWARE OTHER THAN THE RIGHTS EXPRESSLY SET FORTH IN THE AGREEMENT. THE DISTRIBUTOR SHALL NOT MODIFY OR COPY ANY PART OF THE SOFTWARE OR DOCUMENTATION. THE DISTRIBU TOR MAY NOT USE SUBDISTRIBUTORS FOR FURTHER DISTRIBUTION OF THE SOFTWARE AND DOCUMENTATION WITHOUT THE PRIOR CONSEN T OF ACTUATE. WHAT IS CHARGED IS THE LICENCE FEE TO BE PAID BY THE DISTRIBUTOR OF THE SOFTWARE AS ENUMERATED IN EX HIBIT A TO THE AGREEMENT. FURTHER, CLAUSE 6.01 OF THE AGRE EMENT DEALING WITH TITLE STATES THAT THE DISTRIBUTOR ACKN OWLEDGES ITA NO.715-717/B /15 11 THAT ACTUATE AND ITS SUPPLIERS RETAIN ALL RIGHT, T ITLE AND INTEREST IN AND TO THE ORIGINAL, AND ANY COPIES (BY WHOMEVER PRODUCED), OF THE SOFTWARE OR DOCUMENTATIO N AND OWNERSHIP OF ALL PATENT COPYRIGHT, TRADE MARK, TRADE SECRET AND OTHER INTELLECTUAL PROPERTY RIGHTS PERTA INING THERETO, SHALL BE AND REMAIN THE SOLE PROPERTY OF ACTUATE . THE DISTRIBUTOR SHALL NOT BE AN OWNER OF ANY COPIES OF, OR ANY INTEREST IN, THE SOFTWARE, BUT RATHER IS LICEN CED PURSUANT TO THE AGREEMENT TO USE AND DISTRIBUTE SU CH COPIES. ACTUATE REPRESENTS THAT IT HAS THE RIGHT T O ENTER INTO THE AGREEMENT AND GRANT THE LICENCES PROVIDED THEREIN AND CONFIDENTIALITY IS PROTECTED. THEREFORE, ON READING THE CONTENTS OF THE RESPECTIVE AGREEMENT E NTERED INTO BY THE RESPONDENTS WITH THE NON-RESIDENT, IT I S CLEAR THAT UNDER THE AGREEMENT, WHAT IS TRANSFERRED IS ON LY A LICENCE TO USE THE COPYRIGHT BELONGING TO THE NON-R ESIDENT SUBJECT TO THE TERMS AND CONDITIONS OF THE AGREEME NT, AS REFERRED TO ABOVE, AND THE NONRESIDENT SUPPLIER CON TINUES TO BE THE OWNER OF THE COPYRIGHT AND ALL OTHER INT ELLECTUAL PROPERTY RIGHTS. IT IS WELL SETTLED THAT COPYRIGHT IS A NEGATIVE RIGHT. IT IS AN UMBRELLA OF MANY RIGHTS A ND LICENCE IS GRANTED FOR MAKING USE OF THE COPYRIGHT IN RESPECT OF SHRINK WRAPPED SOFTWARE/OFF-THE-SHELF S OFTWARE UNDER THE RESPECTIVE AGREEMENT, WHICH AUTHORIZES TH E END USER, I.E., THE CUSTOMER TO MAKE USE OF THE COPYRI GHT SOFTWARE CONTAINED IN THE SAID SOFTWARE, WHICH IS PURCHASED OFF THE SHELF OR IMPORTED AS SHRINK WRAP PED SOFTWARE AND THE SAME WOULD AMOUNT TO TRANSFER OF P ART OF ITA NO.715-717/B /15 12 THE COPYRIGHT AND TRANSFER OF RIGHT TO USE THE COP YRIGHT FOR INTERNAL BUSINESS AS PER THE TERMS AND CONDITIONS OF THE AGREEMENT. THEREFORE, THE CONTENTION OF THE LEARNE D SENIOR COUNSEL APPEARING FOR THE RESPONDENTS THAT THERE IS NO TRANSFER OF COPYRIGHT OR ANY PART THEREOF UNDER THE AGREEMENTS ENTERED INTO BY THE RESPONDENT WITH THE NON- RESIDENT SUPPLIER OF SOFTWARE CANNOT BE ACCEPTED. .. IT IS WELL SETTLED THAT IN THE ABSENCE OF ANY DEFINITION OF 'COPYRIGHT' IN THE INCOME-TAX ACT OR THE DTAA WITH THE RESPECTIVE COUNTRIES, IN VIEW OF ARTI CLE 3 OF THE DTAA, REFERENCE IS TO BE MADE TO THE RESPECT IVE LAW REGARDING THE DEFINITION OF 'COPYRIGHT', NAMEL Y, COPYRIGHT ACT, 1957, IN INDIA, WHEREIN IT IS CLEAR LY STATED THAT 'LITERARY WORK' INCLUDES COMPUTER PROGRAMMES, TABLES AND COMPILATIONS INCLUDING COMPUTER (DATABA SES). SECTION 16 OF THE COPYRIGHT ACT, 1957, STATES THAT NO PERSON SHALL BE ENTITLED TO COPYRIGHT OR ANY SIMILA R RIGHT IN ANY WORK, WHETHER PUBLISHED OR UNPUBLISHED, OTHERWISE THAN UNDER AND IN ACCORDANCE WITH THE PROVISIONS OF THE SAID ACT OR OF ANY OTHER LAW FOR THE TIME BEING IN FORCE, BUT NOTHING IN THIS SECTION SHALL B E CONSTRUED AS ABROGATING ANY RIGHT OR JURISDICTION TO RESTRAIN A BREACH OF TRUST OR CONFIDENCE. SECTION 14 OF THE SAID ACT DEALING WITH THE MEANING OF 'COPYRIGHT ' READS AS FOLLOWS : '14. MEANING OF COPYRIGHT.-FOR THE PURPOSES OF THIS ACT, ITA NO.715-717/B /15 13 'COPYRIGHT' MEANS THE EXCLUSIVE RIGHT SUBJECT TO TH E PROVISIONS OF THIS ACT, TO DO OR AUTHORISE THE DOI NG OF ANY OF THE FOLLOWING ACTS IN RESPECT OF A WORK OR ANY SUBSTANTIAL PART THEREOF, NAMELY : (A) IN THE CASE OF A LITERARY, DRAMATIC OR MUSICAL WORK, NOT BEING A CO MPUTER PROGRAMME, (I) TO REPRODUCE THE WORK IN ANY MATERIA L FORM INCLUDING THE STORING OF IT IN ANY MEDIUM BY ELECT RONIC 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 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 ADA PTATION 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) ; ITA NO.715-717/B /15 14 (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 CASE OF AN ARTISTIC WORK, (I) TO REPRODU CE THE WORK IN ANY MATERIAL FORM INCLUDING DEPICTION IN TH REE 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 ; (VI) TO DO IN RELATION TO AN ADAPTATION OF THE WORK ANY OF THE ACTS SPECIFIED IN RELATION TO THE WORK IN SUB- CLAUSES (I) TO (IV) ; (D) IN THE CASE OF A CINEMATOGRAPH FILM, (I) TO MAK E A COPY OF THE FILM, INCLUDING A PHOTOGRAPH OF ANY IMAGE F ORMING ITA NO.715-717/B /15 15 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 BEEN 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 A NY OTHER SOUND RECORDING EMBODYING IT ; (II) TO SELL OR GIVE ON HIRE, OR OFFER FOR SALE OR HIRE, ANY COPY OF THE SOUND RECORDING REGARDLESS OF WHETHER SUCH COPY HAS BEEN SOLD OR GIVEN ON HIRE ON EARLIER OCC ASIONS ; (III) TO COMMUNICATE THE SOUND RECORDING TO THE PUBLIC. EXPLANATION.-FOR THE PURPOSES OF THIS SECTION, A CO PY WHICH HAS BEEN SOLD ONCE SHALL BE DEEMED TO BE A C OPY ALREADY IN CIRCULATION.' IT MAY ALSO BE NOTED THAT UNDER SECTION 51 OF THE A CT DEALING WITH 'WHEN COPYRIGHT INFRINGED' STATES THA T COPYRIGHT IN A WORK SHALL BE DEEMED TO BE INFRINGE D-WHEN ANY PERSON, WITHOUT A LICENCE GRANTED BY THE OWNER OF THE COPYRIGHT OR THE REGISTRAR OF COPYRIGHTS UNDER THE ACT OR IN CONTRAVENTION OF THE CONDITIONS OF A LICENCE SO GRANTED OR OF ANY CONDITION IMPOSED BY A COMPETENT AUTHORI TY UNDER THE ACT DOES ANYTHING, THE EXCLUSIVE RIGHT TO DO WHICH IS BY THE ACT CONFERRED UPON THE OWNER OF THE ITA NO.715-717/B /15 16 COPYRIGHT. SECTION 52 OF THE ACT DEALING WITH CERT AIN ACTS NOT TO BE INFRINGEMENT OF COPYRIGHT STATES THAT THE FOLLOWING ACTS SHALL NOT CONSTITUTE AN INFRINGEMENT OF COPYRIGHT, NAMELY : '52.(1)(AA) THE MAKING OF COPIES OR ADAPTATION OF A COMPUTER PROGRAMME BY THE LAWFUL POSSESSOR OF A CO PY OF SUCH COMPUTER PROGRAMME, FROM SUCH COPY (I) IN ORDE R TO UTILISE THE COMPUTER PROGRAMME FOR THE PURPOSE FOR WHICH IT WAS SUPPLIED ; OR (II) TO MAKE BACK-UP COPIES PURELY AS A TEMPORARY PROTECTION AGAINST LOSS, DESTRUCTION OR DAMAGE IN ORDER ONLY TO UTILISE THE COMPUTER PROGRAMME FOR THE PURP OSE FOR WHICH IT WAS SUPPLIED.' IT IS CLEAR FROM THE ABOVESAID PROVISIONS OF THE CO PYRIGHT ACT THAT THE RIGHT TO COPYRIGHT WORK WOULD ALSO CO NSTITUTE EXCLUSIVE RIGHT OF THE COPYRIGHT HOLDER AND ANY VIO LATION OF THE SAID RIGHT WOULD AMOUNT TO INFRINGEMENT UNDER S ECTION 51 OF THE ACT. HOWEVER, IF SUCH COPYING OF COMPUTER PROGRAMME IS DONE BY A LAWFUL POSSESSOR OF A COPY O F SUCH COMPUTER PROGRAMME, THE SAME WOULD NOT CONSTITUTE INFRINGEMENT OF COPYRIGHT AND WHEREFORE, BUT FOR T HE LICENCE GRANTED IN THESE CASES TO THE RESPONDENT TO MAKE COPY OF THE SOFTWARE CONTAINED IN SHRINK-WRAPPED/OF F-THE- SHELF SOFTWARE INTO THE HARD DISK OF THE DESIGNATED COMPUTER AND TO TAKE A COPY FOR BACK-UP PURPOSES, THE END ITA NO.715-717/B /15 17 USER HAS NO OTHER RIGHT AND THE SAID TAKING BACK-U P WOULD HAVE CONSTITUTED AN INFRINGEMENT, BUT FOR THE LICEN CE. THEREFORE, LICENCE IS GRANTED FOR TAKING COPY OF TH E SOFTWARE AND TO STORE IT IN THE HARD DISK AND TO T AKE A BACK-UP COPY AND RIGHT TO MAKE A COPY ITSELF IS A PART OF THE COPYRIGHT. THEREFORE, WHEN LICENCE TO MAKE USE OF THE SOFTWARE BY MAKING COPY OF THE SAME AND TO STORE IT IN THE HARD DISK OF THE DESIGNATED COMPUTER AND TO TAKE B ACK-UP COPY OF THE SOFTWARE, IT IS CLEAR THAT WHAT IS TRA NSFERRED IS RIGHT TO USE THE SOFTWARE, AN EXCLUSIVE RIGHT, WHI CH THE OWNER OF THE COPYRIGHT, I.E., THE RESPONDENT-SUPPLI ER OWNS AND WHAT IS TRANSFERRED IS ONLY RIGHT TO USE COPY OF THE SOFTWARE FOR THE INTERNAL BUSINESS AS PER THE TERM S AND CONDITIONS OF THE AGREEMENT. THE DECISION OF THE DE LHI HIGH COURT IN CIT V. DYNAMIC VERTICAL SOFTWARE INDI A P. LTD. [2011] 332 ITR 222 (DELHI) RELIED UPON BY SRI ARAVIND DATTAR, LEARNED SENIOR COUNSEL APPEARING F OR THE RESPONDENTS IN SOME OF THE CASES IN SUPPORT OF HIS CONTENTION THAT BY NO STRETCH OF IMAGINATION, PAYME NT MADE BY THE RESPONDENTS TO THE NON-RESIDENT SUPPLI ERS CAN BE TREATED AS 'ROYALTY' IS NOT HELPFUL TO THE RESP ONDENTS IN THE PRESENT CASES AS IN THE SAID CASE, THE DELHI H IGH COURT WAS CONSIDERING THE PROVISIONS OF SECTION 40(A)(I) OF THE ACT AND THE ORDER OF THE HIGH COURT READS AS FOLLOW S (PAGE 223) : 'WHAT IS FOUND, AS A MATTER OF FACT, IS THAT THE AS SESSEE HAS BEEN PURCHASING THE SOFTWARE FROM MICROSOFT AND SO LD IT FURTHER IN INDIAN MARKET BY NO STRETCH OF IMAGINAT ION, IT ITA NO.715-717/B /15 18 WOULD BE TERMED AS ROYALTY.' THEREFORE, THE CONTENTION OF THE LEARNED SENIOR COU NSEL APPEARING FOR THE RESPONDENTS THAT THERE IS NO TRA NSFER OF ANY PART OF COPYRIGHT OR COPYRIGHT UNDER THE IMPUG NED AGREEMENTS OR LICENCES 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 AN D STORING THE SAME IN THE HARD DISK OF THE DESIGNATE D COMPUTER AND TAKING BACK UP COPY WOULD ITSELF AMOU NT TO COPYRIGHT WORK UNDER SECTION 14(1) OF THE ACT AND L ICENSE IS GRANTED TO USE THE SOFTWARE BY MAKING COPIES, W HICH WORK, BUT FOR THE LICENCE GRANTED WOULD HAVE CONST ITUTED INFRINGEMENT OF COPYRIGHT AND THE LICENSEE IS IN P OSSESSION OF THE LEGAL COPY OF THE SOFTWARE UNDER THE LICENCE . THEREFORE, THE CONTENTION OF THE LEARNED SENIOR COU NSEL APPEARING FOR THE RESPONDENTS THAT THERE IS NO TRA NSFER OF ANY PART OF COPYRIGHT OR COPYRIGHT AND TRANSACTION ONLY INVOLVES SALE OF COPY OF THE COPYRIGHT SOFTWARE CAN NOT BE ACCEPTED. IT IS ALSO TO BE NOTED THAT WHAT IS SUPPL IED IS THE COPY OF THE SOFTWARE OF WHICH THE RESPONDENT-SUPPL IER CONTINUES TO BE THE OWNER OF THE COPYRIGHT AND WHA T IS GRANTED UNDER THE LICENCE IS ONLY RIGHT TO COPY TH E SOFTWARE AS PER THE TERMS OF THE AGREEMENT, WHICH, BUT FOR THE LICENCE WOULD AMOUNT TO INFRINGEMENT OF COPYRI GHT AND IN VIEW OF THE LICENCE GRANTED, THE SAME WOULD NOT AMOUNT TO INFRINGEMENT UNDER SECTION 52 OF THE COPYRIGHT ACT AS REFERRED TO ABOVE. THEREFORE, THE AMOUNT PAID TO TH E NON- ITA NO.715-717/B /15 19 RESIDENT SUPPLIER TOWARDS SUPPLY OF SHRINK-WRAPPED SOFTWARE, OR OFFTHE-SHELF SOFTWARE IS NOT THE PRICE OF THE C. D. ALONE NOR SOFTWARE ALONE NOR THE PRICE OF LICEN CE GRANTED. THIS IS A COMBINATION OF ALL AND IN SUBSTA NCE, UNLESS LICENCE IS GRANTED PERMITTING THE END USER T O COPY AND DOWNLOAD THE SOFTWARE, THE DUMB C. D. CONTAINI NG THE SOFTWARE WOULD NOT IN ANY WAY BE HELPFUL TO THE EN D 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 AND THAT MAKES THE DIFFERENCE BETWEEN THE COMPUTER SOFTWARE AND COPYRIGHT IN RESPECT OF BOOKS OR PRERECORDED MUSIC SOFTWARE AS BOOK AND PRERECORDED MUSIC C. D. CAN BE USED ONCE THEY ARE PURCHASED, BUT SO FAR AS SOFTWARE ST ORED IN DUMB C. D. IS CONCERNED, THE TRANSFER OF DUMB C. D . BY ITSELF WOULD NOT CONFER ANY RIGHT UPON THE END USE R AND THE PURPOSE OF THE C. D. IS ONLY TO ENABLE THE END USER TO TAKE A COPY OF THE SOFTWARE AND TO STORE IT IN THE HARD DISK OF THE DESIGNATED COMPUTER IF LICENCE IS GRANTED IN THAT BEHALF AND IN THE ABSENCE OF LICENCE, THE SAME WOULD AMOU NT TO INFRINGEMENT OF COPYRIGHT, WHICH IS EXCLUSIVELY OW NED BY NON-RESIDENT SUPPLIERS, WHO WOULD CONTINUE TO BE TH E PROPRIETOR OF COPYRIGHT. THEREFORE, THERE IS NO SIM ILARITY BETWEEN THE TRANSACTION OF PURCHASE OF THE BOOK OR PRERECORDED MUSIC C. D. OR THE C. D. CONTAINING SO FTWARE AND IN VIEW OF THE SAME, THE LEGISLATURE IN ITS WIS DOM, HAS TREATED THE LITERARY WORK LIKE BOOKS AND OTHER ART ICLES SEPARATELY FROM 'COMPUTER' SOFTWARE WITHIN THE MEA NING ITA NO.715-717/B /15 20 OF THE 'COPYRIGHT' AS REFERRED TO ABOVE UNDER SECT ION 14 OF THE COPYRIGHT ACT. IT IS ALSO CLEAR FROM THE ABOVESAID ANALYSIS OF THE DTAA, THE INCOME-TAX ACT, THE COPYRIGHT ACT THAT THE PAY MENT WOULD CONSTITUTE 'ROYALTY' WITHIN THE MEANING OF A RTICLE 12(3) OF THE DTAA AND EVEN AS PER THE PROVISIONS OF SECTION 9(1)(VI) OF THE ACT AS THE DEFINITION OF 'R OYALTY' UNDER CLAUSE 9(1)(VI) OF THE ACT IS BROADER THAN T HE DEFINITION OF 'ROYALTY' UNDER THE DTAA AS THE RIGH T THAT IS TRANSFERRED IN THE PRESENT CASE IS THE TRANSFER OF COPYRIGHT INCLUDING THE RIGHT TO MAKE COPY OF SOFT WARE FOR INTERNAL BUSINESS, AND PAYMENT MADE IN THAT REG ARD WOULD CONSTITUTE 'ROYALTY' FOR IMPARTING OF ANY INFORMATION CONCERNING TECHNICAL, INDUSTRIAL, COMME RCIAL OR SCIENTIFIC KNOWLEDGE, EXPERIENCE OR SKILL AS PE R CLAUSE (IV) OF EXPLANATION 2 TO SECTION 9(1)(VI) OF THE A CT. IN ANY VIEW OF THE MATTER, IN VIEW OF THE PROVISIONS OF S ECTION 90 OF THE ACT, AGREEMENTS WITH FOREIGN COUNTRIES DTAA WOULD OVERRIDE THE PROVISIONS OF THE ACT. ONCE IT IS HELD THAT PAYMENT MADE BY THE RESPONDENTS TO THE NON- RESIDENT COMPANIES WOULD AMOUNT TO 'ROYALTY' WITHI N THE MEANING OF ARTICLE 12 OF THE DTAA WITH THE RESP ECTIVE COUNTRY, IT IS CLEAR THAT THE PAYMENT MADE BY THE RESPONDENTS TO THE NON-RESIDENT SUPPLIER WOULD AMO UNT TO ROYALTY. IN VIEW OF THE SAID FINDING, IT IS CLEA R THAT THERE IS OBLIGATION ON THE PART OF THE RESPONDENTS TO DEDUCT TAX AT SOURCE UNDER SECTION 195 OF THE ACT AND ITA NO.715-717/B /15 21 CONSEQUENCES WOULD FOLLOW AS HELD BY THE HON'BLE SUPREME COURT WHILE REMANDING THESE APPEALS TO THIS COURT. ACCORDINGLY, WE ANSWER THE SUBSTANTIAL QUESTION O F LAW IN FAVOUR OF THE REVENUE AND AGAINST THE ASSES SEE BY HOLDING THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE INCOME-TAX APPELLATE TRIBUNAL WAS NOT JUS TIFIED IN HOLDING THAT THE AMOUNT(S) PAID BY THE RESPONDEN T(S) TO THE FOREIGN SOFTWARE SUPPLIERS WAS NOT 'ROYALTY' A ND THAT THE SAME DID NOT GIVE RISE TO ANY 'INCOME' TAXABLE IN INDIA AND WHEREFORE, THE RESPONDENT(S) WERE NOT LIABLE T O DEDUCT ANY TAX AT SOURCE AND PASS THE FOLLOWING ORDER : 10. RESPECTFULLY FOLLOWING THE DECISION OF THE HON BLE KARNATAKA HIGH COURT IN THE CASE OF SAMSUNG ELECTRONICS CO. L TD., (SUPRA) AND ALSO DECISION OF THE CO-ORDINATE BENCH OF THIS TRIB UNAL IN THE ASSESSEES OWN CASE IN ITA NO.31/BANG/2015 DATED 5/ 6/2015, WE ARE OF THE OPINION THAT THE CONTENTIONS RAISED BY THE A SSESSEE ARE NOT ACCEPTABLE FOR THE REASON THAT THE PAYMENT IN QUEST ION WAS CONSIDERATION FOR THE RIGHT TO USE COPY RIGHT SHRIN K-WRAP SOFTWARE AMOUNTS TO ROYALTY WITHIN THE MEANING OF SEC. 9(1)( VI) OF THE ACT AND ALSO ART 12 OF THE INDO- IRELAND DTAA, THEREFORE, G ROUNDS RAISED BY THE ASSESSEE ARE DISMISSED. ITA NO.715-717/B /15 22 11. IN THE RESULT, THE ASSESSEES APPEAL FOR THE ASST. YEAR 2010-11 AND 2011-12 ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 16 TH OCT, 2015. SD/- SD/- (VIJAYPAL RAO) (G MANJUNATHA) JUDICIAL MEMBER ACCOUNTANT MEMBER VMS. BANGALORE DATED : 16/10/2015 COPY TO : 1. THE ASSESSEE 2. THE REVENUE 3.THE CIT CONCERNED. 4.THE CIT(A) CONCERNED. 5.DR 6.GF BY ORDER ASST. REGISTRAR, I TAT, BANGALORE.