Nagravision SA, Gurgaon V. ACIT Circle-2(2)(2), International Taxation, New Delhi

ITA 9130/DEL/2019

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 8181 (ITAT-DELHI)
• Duration Of Justice: 7 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-07-2020
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: 2016-2017
• Appeal Filed On: 26-11-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SATPAL GULATI
• Keywords: Business income; Double taxation relief; Retrospective amendment; Wholly owned subsidiary; FORM 26AS
• Section: 143(3); 234B; 264; 64; 9(1); 9(1); 9(1); 72; 13; 22; 20

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH D, NEW DELHI , ! ' $%&'()*+,-+! BEFORE MS. SUSHMA CHOWLA, VP & SHRI PRASHANT MAHARI SHI, AM . / ITA NO.9130/DEL/2019 / ) ) / ASSESSMENT YEAR 2016-17 NAGRAVISION S.A. C/O-ERNST & YOUNG LLP, GOLF VIEW, CORPORATE TOWER, TOWER-B, SECTOR-42, GURUGRAM, HARYANA-122002. PAN-AADCN6048B .......... 01 /APPELLANT VS THE ACIT(INTERNATIONAL TAXATION), CIRCLE-2(2)(2), NEW DELHI. . $201 / RESPONDENT 0134+ / APPELLANT BY : SH. DEEPAK CHOPRA, ADV. $20134+ / RESPONDENT BY : SH. SATPAL GULATI, CIT DR 3&, / DATE OF HEARING : 16.03.2020 56 3&, / DATE OF PRONOUNCEMENT: 06.07.2020 +% / ORDER PER SUSHMA CHOWLA,VP THE PRESENT APPEAL FILED BY ASSESSEE IS AGAINST ORD ER OF ACIT, CIRCLE INT. TAX.-2(2)(2), NEW DELHI DATED 23.10.2019 RELATING TO ASSESSMENT YEAR 2016-17 AGAINST THE ORDER PASSED UNDER SECTION 143(3) R.W.S 144C(13) OF THE INCOME-TAX ACT, 1961 (IN SHORT THE ACT). 2 ITA NO.9130/DEL/2019 ASSESSMENT YEAR 2016-17 2. THE ASSESSEE HAS RAISED FOLLOWING GROUNDS OF AP PEAL:- 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE IMPUGNED ORDER PASSED BY THE LEARNED ASSISTANT COMM ISSIONER OF INCOME TAX, CIRCLE 2(2)(2), INTERNATIONAL TAXATION, DELHI (HEREINAFTER REFERRED TO AS 'THE LD. AO') UNDER SECTION 143(3) READ WITH SECTIO N 144C(13) OF THE INCOME-TAX ACT, 1961 ('THE ACT'), PURSUANT TO THE D IRECTIONS OF THE LEARNED DISPUTE RESOLUTION PANEL -2, DELHI ('THE LD. DRP'), IS A VITIATED ORDER, HAVING BEEN PASSED IN VIOLATION OF PRINCIPLES OF NA TURAL JUSTICE AND IS OTHERWISE ARBITRARY AND IS THUS BAD IN LAW. 2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO HAS ERRED IN PASSING THE IMPUGNED ORDER WHICH IS BASED ON SURMISES AND CONJECTURES, AND IS THEREFORE, BAD IN LAW AND V OID-AB-INITIO. NON-TAXABILITY OF REVENUES FROM SALE OF HARDWARE EQ UIPMENT 3. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO HAS ERRED IN ALLEGING THAT THE REVENUE EARNED BY THE APPELLANT FROM SALE OF HARDWARE EQUIPMENT IS IN THE NATURE OF ROY ALTY AS PER PROVISIONS OF BOTH, SECTION 9(1)( VI) OF THE ACT AND ARTICLE 1 2(3) OF THE INDIA-SWITZERLAND DOUBLE TAXATION AVOIDANCE AGREEMENT (INDIA-SWISS TA X TREATY'). 4. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO HAS ERRED IN DISREGARDING THAT THE REVENUE EARNE D BY THE APPELLANT FROM SALE OF HARDWARE EQUIPMENT REPRESENTS BUSINESS INCOME, WHICH IS NOT TAXABLE IN INDIA IN THE ABSENCE OF ANY PERMANENT ES TABLISHMENT (PE') OF THE APPELLANT IN INDIA, IN ACCORDANCE WITH THE PROV ISIONS OF THE ACT AS WELL AS ARTICLE 5 READ WITH ARTICLE 7 OF THE INDIA-SWISS TAX TREATY. NON-TAXABILITY OF REVENUES FROM SUPPLY OF CONDITION AL ACCESS SYSTEMS ('CAS') AND MIDDLEWARE PRODUCTS (I.E., SOFT WARE PRODUCTS) 5. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO HAS ERRED IN ALLEGING THAT THE CONSIDERATION EARNED BY THE APPELLANT FROM SUPPLY OF CAS AND MIDDLEWARE PRODUCTS TO THE INDIAN CUSTOMERS FALLS WITHIN THE AMBIT OF 'ROYALTIES' AS DEFINED UNDER SE CTION 9(1)(VI) OF THE ACT AND ARTICLE 12(3) OF THE INDIA-SWISS TAX TREATY. 6. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO HAS ERRED IN DISREGARDING THAT THE REVENUE EARNE D BY THE APPELLANT FROM SUPPLY OF CAS AND MIDDLEWARE PRODUCTS REPRESEN TS BUSINESS INCOME, WHICH IS NOT TAXABLE IN INDIA IN THE ABSENCE OF ANY PE OF THE APPELLANT IN 3 ITA NO.9130/DEL/2019 ASSESSMENT YEAR 2016-17 INDIA, IN ACCORDANCE WITH THE PROVISIONS OF THE ACT AS WELL AS ARTICLE 5 READ WITH ARTICLE 7 OF THE INDIA-SWISS TAX TREATY. ADDITION TO INCOME ON ACCOUNT OF ALLEGED DIFFERENCE S BETWEEN DATA AS PER FORM 15CA FILINGS AND REVENUE AS PER FORM 26 AS 7. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO HAS ERRED IN MAKING AN ADDITION (AMOUNTING TO IN R 10,61,66,731) TO THE APPELLANT'S TAXABLE INCOME ON ACCOUNT OF ALLEGE D MISMATCH/ DIFFERENCE IN THE AMOUNT OF REMITTANCES (TO THE APPELLANT) REF LECTED IN THE FORM ISCAS FILED BY THREE (3) INDIAN RESIDENT CUSTOMERS (AS PE R DATA AVAILABLE AND SOURCED BY THE LD. AO) VIS-A-VIS REVENUES REPORTED IN FORM 26AS OF THE APPELLANT. 8. WITHOUT PREJUDICE, ON THE FACTS AND CIRCUMSTANCE S OF THE CASE AND IN LAW, THE LD. AO HAS ERRED IN MAKING ADDITION TO INC OME AMOUNTING TO INR 2,81,29,442 WHICH REPRESENTS INCOME THAT HAS BEEN D OUBLY TAXED IN THE HANDS OF THE APPELLANT AS PER THE IMPUGNED ASSESSME NT ORDER FOR THE SUBJECT AY. 9. WITHOUT PREJUDICE, ON THE FACTS AND CIRCUMSTANCE S OF THE CASE AND IN LAW, THE LD. AO HAS ERRED IN DISREGARDING THE APPEL LANT'S SUBMISSION THAT THE ABOVE PROPOSED ADDITION TO INCOME COMPRISES INC OME THAT IS IN THE NATURE OF REVENUES FROM SUPPLY OF HARDWARE, CAS AND MIDDLEWARE PRODUCTS THAT ARE EVEN OTHERWISE NOT TAXABLE IN IND IA UNDER THE ACT AND THE INDIA-SWISS TAX TREATY (AS PER GROUNDS 4 AND 6 ABOVE). LEVY OF INTEREST AND INITIATION OF PENALTY PROCEEDI NGS 10. THAT THE LD. AO HAS ERRED IN LEVYING INTEREST U NDER SECTIONS 234A AND 234B OF THE ACT. 11. THAT THE LD. AO HAS ERRED IN INITIATING PENALTY PROCEEDINGS UNDER SECTION 271 (1)( C) OF THE ACT. THE APPELLANT SUBMITS THAT EACH OF THE ABOVE GROUND S ARE INDEPENDENT AND WITHOUT PREJUDICE TO ONE OTHER. THAT THE APPELLANT RESERVES ITS RIGHT TO ADD, ALTER , AMEND, SUBSTITUTE OR WITHDRAW ANY GROUND OF APPEAL EITHER BEFORE OR AT T HE TIME OF HEARING OF THIS APPEAL. 4 ITA NO.9130/DEL/2019 ASSESSMENT YEAR 2016-17 THE APPELLANT PRAYS THAT APPROPRIATE RELIEF BE GRA NTED ON THE SAID GROUNDS OF APPEAL AND THE FACTS AND CIRCUMSTANCES O F THE APPELLANTS CASE. 3. THE FIRST ISSUE RAISED BY THE ASSESSEE VIDE GROUND OF APPEAL NOS. 3 & 4 IS AGAINST THE REVENUE EARNED BY THE ASSESSEE FROM SAL E OF HARDWARE EQUIPMENT IN THE NATURE OF ROYALTY AS PER PROVISIONS OF BOTH, SECTION 9(1)(VI) OF THE ACT AND ARTICLE 12(3) OF THE INDIA-SWITZERLAND TAXATION AVO IDANCE AGREEMENT (INDIA- SWISS TAX TREATY). THE CASE OF THE ASSESSEE IS THAT THE REVENUE EARNED BY THE ASSESSEE FROM SALE OF HARDWARE EQUIPMENT REPRESENTS BUSINESS INCOME, WHICH IS NOT TAXABLE IN INDIA IN THE ABSENCE OF ANY PERMA NENT ESTABLISHMENT (IN SHORT PE) OF THE ASSESSEE IN INDIA, IN ACCORDANCE WITH THE PROVISIONS OF THE ACT AS WELL AS ARTICLE 5 READ WITH ARTICLE 7OF THE INDIA-S WISS TAX TREATY. 4. FURTHER, THE ASSESSEE HAS RAISED GROUND OF APPEA L NOS.5 & 6 AGAINST THE ORDERS OF THE ASSESSING OFFICER IN ALLEGING THAT T HE CONSIDERATION EARNED BY THE ASSESSEE FROM SUPPLY OF CAS AND MIDDLEWARE PRODUCTS TO THE INDIAN CUSTOMERS FALLS WITHIN THE AMBIT OF ROYALTIES AS DEFINED UN DER SECTION 9(1)(VI) OF THE ACT AND ARTICLE 12(3) OF THE INDIA-SWISS TAX TREATY. TH E CASE OF THE ASSESSEE IS THAT THE REVENUE EARNED BY THE ASSESSEE FROM SUPPL Y OF CAS AND MIDDLEWARE PRODUCTS REPRESENTS BUSINESS INCOME, WHICH IS NOT T AXABLE IN INDIA IN THE ABSENCE OF ANY PE OF THE ASSESSEE IN INDIA, IN ACCO RDANCE WITH THE PROVISIONS OF THE ACT AS WELL AS ARTICLE 5 R.W. ARTICLE 7 OF THE INDIA-SWISS TAX TREATY. 5. BRIEFLY IN THE FACTS OF THE CASE THE ASSESSEE CO MPANY IS A FOREIGN COMPANY AND HEAQUARTERED IN CHESEAUXSUR-LAUSANNE, S WITZERLAND. IT 5 ITA NO.9130/DEL/2019 ASSESSMENT YEAR 2016-17 OPERATES AS A WHOLLY OWNED SUBSIDIARY OF KUDELSKI S A-A SWISS ENTITY. IT SUPPLIES CONDITIONAL ACCESS SYSTEM (IN SHORT CAS) PRODUCTS, MIDDLEWARE PRODUCTS, DIGITAL RIGHTS MANAGEMENT, AND INTEGRATED ON-DEMAND SOLUTIONS FOR CONTENT PROVIDERS AND DIGITAL TELEVISION (TV) OPERA TORS OVER BROADCAST, BROADBAND, AND MOBILE PLATFORMS. THE COMPANY OFFER S SATELLITE, TERRESTRIAL, CABLE, AND IPTV SOLUTIONS INCLUDING CONTENT SECURIT Y SOLUTIONS TO MANAGE AND ENHANCE PAY-TV OVER BROADCAST AND BROADBAND NETWORK S; MIDDLEWARE AND APPLICATIONS; CONSUMER CONDITIONAL ACCESS MODULES; AND PCTV ADAPTER SOLUTIONS. IT ALSO OFFERS MOBILE TV SOLUTIONS, INC LUDING MOBILE TV MICRO-SD CARD AND OMA BCAST SMARTCARDS. IN ADDITION, THE CO MPANY OFFERS MAINTENANCE AND SUPPORT SERVICE, INCLUDING HOTLINE, SUPPORT LINE, SOFTWARE UPDATES, HARDWARE REPAIRS, REMOTE DIAGNOSIS, ONSITE INTERVENTION, AND HEALTH CHECK SERVICES; AND PROFESSIONAL SERVICES, INCLUDIN G TECHNICAL TRAINING, SYSTEM AUDIT, OPERATIONAL MENTORING, MIGRATION AND DEPLOYM ENT, SYSTEM INTEGRATION, CONSULTING, AND SET-TOP BOX VALIDATION SERVICES. I TS TECHNOLOGIES ARE USED BY PAY-TELEVISION OPERATORS IN THE UNITED STATES AND I NTERNATIONALLY. 6. THE ASSESSING OFFICER CONSIDERED THE TAXABILITY OF THE CAS AND MIDDLEWARE PRODUCTS IN THE HANDS OF THE ASSESSEE. AFTER CONSIDERING VARIOUS ASPECTS OF CAS AND MIDDLEWARE PRODUCTS, THE ASSESSI NG OFFICER WAS OF THE VIEW THAT THE CAS AND MIDDLEWARE SOFTWARE PRODUCTS SUPPL IED BY THE ASSESSEE TO ITS CUSTOMERS WERE LIMITED, NON-EXCLUSIVE, NON-TRANSFER ABLE AND NON SUB LICENSABLE LICENSE FOR THE TERRITORY TO USE THE PRO DUCT FOR THE CONTRACTUAL PERIOD. THEREFORE, THE ASSESSING OFFICER WAS OF THE VIEW T HAT THESE SOFTWARE MAKE 6 ITA NO.9130/DEL/2019 ASSESSMENT YEAR 2016-17 AVAILABLE A PROCESS TO THE CUSTOMERS WHO USE TH E PROCESS, WHILE CARRYING OUT THEIR BUSINESS. IT IS, THEREFORE, CLEAR THAT IN AD DITION TO SOFTWARE INVOLVING A COPYRIGHT, THESE SPECIALIZED SOFTWARE ALSO REPRESEN T A PROCESS WHICH CAN BE USED IN A PARTICULAR INDUSTRY SPECIFIC CORE ACTIVIT Y. AFTER PERUSING THE CONTRACT OF THE ASSESSEE WITH ITS CLIENTS, IT WAS OBSERVED B Y THE ASSESSING OFFICER THAT THE CAS CONSISTS OF A SET UP OF HARDWARE AND SOFTWA RE. THE ASSESSING OFFICER THUS OBSERVED THAT BOTH THE HARDWARE AND SOFTWARE A RE INTEGRAL PART OF THE CAS. A SHOW CAUSE NOTICE DATED 13.12.2018 WAS ISSU ED TO THE ASSESSEE CITING THE REASONS WHY REVENUE EARNED FROM SUPPLY OF CAS A ND MIDDLEWARE PRODUCTS SHOULD NOT BE TREATED AS ROYALTY INCOME AND TAXED ACCORDINGLY. THE ASSESSEE EXPLAINED ITS CASE IN DETAIL AND POINTED OUT THAT I T WAS NOT A CASE OF ROYALTY, AS THE PURCHASER OF SOFTWARE DOES NOT BECOME THE OW NER OF THE COPYRIGHT IN THE SOFTWARE. RELIANCE WAS PLACED ON SEVERAL DECISIONS IN THIS REGARD. IT WAS ALSO EXPLAINED WHAT IS COPYRIGHT? THE ASSESSEE STRESSED RELYING ON THE DECISIONS OF THE JURISDICTIONAL HIGH COURT THAT THE TRANSACTION OF LICENSING OF SOFTWARE HAS BEEN HELD TO BE SALE OF COPYRIGHTED ARTICLES INSTEA D OF CONSIDERATION FOR THE USE OF OR THE RIGHT TO USE ANY COPYRIGHT OF A LITERARY, ARTISTIC OR SCIENTIFIC WORK. THE ASSESSING OFFICER WAS OF THE VIEW THAT AMENDED PROV ISIONS OF SECTION 9(1)(VI) OF THE ACT HELD THAT THE CAS CONSISTS OF SOFTWARE AND HARDWARE WHICH AR E DESIGNED TO BE CAPABLE OF HANDLING CAS RELATED ACTI VITIES. THE TAXABILITY OF HARDWARE EQUIPMENTS IS DEALT IN THE EXPLANATION 2(I VA) OF SECTION 9(1)(VI) OF THE ACT AND IS ALSO COVERED IN THE DEFINITION OF ROYALT IES AS PER THE DTAA. THE TAXABILITY OF THE CAS AND MIDDLEWARE SOFTWARE HAS B EEN DEALT IN DETAILING 7 ITA NO.9130/DEL/2019 ASSESSMENT YEAR 2016-17 PRECEDING PARAGRAPHS AND WHICH IS COVERED IN BOTH T HE PROVISIONS OF THE INCOME TAX ACT AS WELL AS TREATY. IN VIEW OF THE ABOVE, I T IS CATEGORICALLY HELD THAT THE CONSIDERATION FOR CAS AND MIDDLEWARE PRODUCTS SUPPL IED BY THE ASSESSEE IS IN THE NATURE OF ROYALTY INCOME TAXABLE IN INDIA. THE SAID OBSERVATION WERE MADE BY THE ASSESSING OFFICER. THE DRP HAS DISMISSED TH E OBJECTIONS FILED BY THE ASSESSEE ON THE GROUND THAT SLP WAS PENDING AGAINST THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF INFRASOFT LTD. IN I TA NO.1034/2009. 7. THE LD.AR FOR THE ASSESSEE REFERRED TO THE TERM S OF LICENSE AGREEMENT PLACED AT PAGES 40 ONWARDS OF THE PAPERBOOK. SPECI AL REFERENCE WAS MADE TO CLAUSE 8, 8.1 TO 8.7 OF THE AGREEMENT. THE LD.AR F OR THE ASSESSEE POINTED OUT THAT THE ISSUE STANDS SQUARELY COVERED BY THE DECIS ION OF HONBLE DELHI HIGH COURT IN DIT VS INFRASOFT LTD. 264 CTR 329 (DEL.) A ND DIT & ORS. VS NEW SKIES SATELLITE BV & ORS. [2016] 382 ITR 0114 (DEL.). HE ALSO POINTED OUT THAT RELIANCE PLACED UPON BY THE AUTHORITIES BELOW ON TH E DECISION OF HONBLE KARNATAKA HIGH COURT IN DIT VS SAMSUNG ELECTRONICS COMPANY LTD. [2012] 345 ITR 494 (KAR.) IS MISPLACED. IT WAS ALSO BROUG HT TO OUR KNOWLEDGE THAT THE HONBLE DELHI HIGH COURT IN DIT VS INFRASOFT LTD. ( SUPRA) HAD REFERRED TO THE SAID DECISION AND HELD THAT WHERE LIMITED RIGHT TO USE COPYRIGHTED MATERIAL HAS BEEN TRANSFERRED, THE SAME DOES NOT GIVE RISE TO AN Y ROYALTY INCOME. COMING TO THE SALE OF HARDWARE, LD.AR FOR THE ASSESSEE POI NTED OUT THAT THE SAME HAS BEEN TREATED TO BE INTEGRAL PART OF CAS AND ASSESSE D AS ROYALTY. 8 ITA NO.9130/DEL/2019 ASSESSMENT YEAR 2016-17 8. THE LD.DR FOR THE REVENUE ON THE HAND POINTED OU T THAT THE HONBLE DELHI HIGH COURT IN INFRASOFT LTD. (SUPRA) HAS DECI DED THE ISSUE OF COPYRIGHTED ARTICLE AND HELD THE SAME TO BE NOT ROYALTY. HO WEVER, IN CASE WE COME TO THE DEFINITION OF ROYALTY, IT TALKS OF PROCESS ALSO U/S 9(1)(VI) OF THE ACT. HE THEN PLACED RELIANCE OF THE OBSERVATIONS OF THE DRP IN P ARA 3.2 AND 3.3 AT PAGE 4 OF THE ORDER. THE LD. DR FOR THE REVENUE STRESSED THA T THE HONBLE DELHI HIGH COURT (SUPRA) HAS NOT GONE INTO THE ASPECT OF THE E ND USER, WHICH IN THE PRESENT CASE IS TECHNOLOGY DRIVEN SOLUTION, WHICH C HANGES TOTAL USE FEE STRUCTURE. HE WAS OF THE VIEW THAT DIMENSION HAS T O BE SEEN VIS--VIS CUSTOMERS FOR WHOM IT IS DEVELOPED; ITS PRIMARY OBJ ECTIVE IS CAS. HE PLACED RELIANCE ON THE ORDER OF THE DRP IN THIS REGARD. 9. THE LD.AR FOR THE ASSESSEE POINTED OUT THAT THE ASSESSING OFFICER HAD HELD IT TO BE IN THE CASE OF ROYALTY; EVEN FOR SATE LLITE AND FOR MAKING SIGNALS VIEWABLE; FOR MOBILE TECHNOLOGY, WE USE TECHNOLOGY AND PROCESS, BUT WE DO NOT USE ANY SECRET FORMULA. 10. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE GROUND OF APPEAL NOS. 1 & 2 RAISED BY THE ASSESSEE ARE GENERAL AND DO NOT REQUIRE ANY ADJUDICATION. 11. THE ISSUE RAISED VIDE GROUND OF APPEAL NO.3 TO 6 IS INTERLINKED AND HENCE, THE SAME ARE BEING DECIDED TOGETHER. 12. THE ASSESSEE IS A NON-RESIDENT COMPANY INCORPOR ATED AS PER LAWS OF SWITZERLAND. THE ISSUE WHICH IS ARISING BEFORE US IS WHETHER CONSIDERATION 9 ITA NO.9130/DEL/2019 ASSESSMENT YEAR 2016-17 RECEIVED BY THE ASSESSEE FROM SUPPLY OF CAS & MIDDL EWARE SOFTWARE PRODUCTS ALONGWITH LIMITED SUPPLY OF HARDWARE EQUIPMENT IS T O BE TAXED AS ROYALTY IN THE HANDS OF THE ASSESSEE, IN VIEW OF THE AMENDED P ROVISIONS OF SECTION 9(1)(VI) OF THE ACT AND/OR ARTICLE 12(3) OF THE DTAA BETWEEN INDIA AND SWITZERLAND. 13. THE CASE OF THE ASSESSEE IS THAT IT WAS LICENSI NG ITS SOFTWARE TO ITS CUSTOMERS, DOES NOT MAKE AVAILABLE ANY PROCESS TO THE CUSTOMERS, WHO IN TURN USE THE PROCESS WHILE CARRYING OUT THEIR BUSINESS. FURTHER, NO EXCLUSIVE RIGHT IN THE SOFTWARE ARE TRANSFERRED TO THE CUSTOMERS; I T IS ONLY A COPYRIGHTED ARTICLE WHICH IS BEING LICENSED, AND NO RIGHT TO USE COPYRI GHT SUBSISTING IN SUCH SOFTWARE IS TRANSFERRED. THEREFORE, THE SAME DOES NOT FALL WITHIN THE DEFINITION OF ROYALTY AS PER AMENDED PROVISIONS OF SECTION 9(1 )(VI) OF THE ACT. THE ASSESSEE ALSO CLAIMED THAT THE CONSIDERATION RECEIP T CANNOT BE FOR USE OF PROCESS, SINCE THERE WAS NO CONTROL OF THE CUSTOMER OVER THE SOFTWARE SYSTEM AND ALL RIGHTS THEREIN ARE RETAINED WITH THE ASSESS EE. FURTHER, THE TRANSACTION MERELY INVOLVES SUPPLY OF THE PRODUCTS ON A LICENSE BASIS AND NOT THE GRANT OF RIGHTS (INCLUDING ANY RIGHTS TOWARDS THE COPYRIGHT) IN THE SOFTWARE/COMPUTER PROGRAMME EMBEDDED WITH THE PRODUCT. 14. THE ALTERNATE PLEA RAISED BY THE ASSESSEE IS TH AT WITHOUT PREJUDICE AND IN ADDITION TO ABOVE, THE PAYMENTS FOR SUPPLY OF CAS A ND MIDDLEWARE PRODUCTS DO NOT FALL WITHIN THE DEFINITION OF ROYALTY AS PER ARTICLE 12(3) OF THE INDIA-SWISS TAX TREATY, WHERE SUCH DEFINITION IS NARROWER IN AM BIT AS COMPARED TO THE ACT. 10 ITA NO.9130/DEL/2019 ASSESSMENT YEAR 2016-17 15. ON THE OTHER HAND, THE CASE OF THE AUTHORITIES BELOW IS THAT THE SOFTWARE WHICH IS BEING LICENSED BY THE ASSESSEE COMPANY IS SPECIALIZED CUSTOMIZED SOFTWARE THAT IS PROVIDED TO ITS CUSTOMER IN THE MA NNER AND USING THE METHODS THAT BEST SUIT THEIR PARTICULAR REQUIREMENTS. THE PRESENT SOFTWARE WHICH IS BEING LICENSED BY THE ASSESSEE EMBODIES THE PROCESS WHICH IS REQUIRED TO CONTROL AND MANAGE THE SPECIFIC SET OF ACTIVITIES I NVOLVED IN THE BUSINESS OF THE CUSTOMER. THE PROCESS EMBODIED IN THE SOFTWARE IS PART OF THE CORE ACTIVITY OF THE BUSINESS BEING RUN BY THE RESPECTIVE CUSTOMERS OF THE ASSESSEE. THEREFORE, THESE SOFTWARE MAKE AVAILABLE A PROCESS TO THE CU STOMERS WHO USE THE PROCESS WHILE CARRYING OUT THEIR BUSINESS. IT IS, THEREFORE, CLEAR THAT IN ADDITION TO SOFTWARE INVOLVING A COPYRIGHT, THESE SPECIALIZE D SOFTWARE ALSO REPRESENT A PROCESS WHICH CAN BE USED IN A PARTICULAR INDUSTR Y SPECIFIC CORE ACTIVITY. 16. THE DRP VIDE PARAS 3.4 & 3.5 OBSERVED AS UNDER :- 3.4. IT IS FURTHER DISCUSSED BY THE AO THAT THE SO FTWARE PROGRAMS BASICALLY ACT AS A SECRET PROCESS WHICH PROCESSES T HE INPUT COMMANDS OF THE USER TO DESIRED OUTPUT BY MAKING USE OF THE HAR DWARE. THE PAYMENT MADE FOR RIGHT TO USE OF SUCH SECRET PROCESS WOULD DEFINITELY TAKE FORM OF ROYALTY AS THE DEFINITION OF ROYALTY IN DTAA AS W ELL AS THE INCOME TAX ACT ENCOMPASSES THE RIGHT TO USE OF A SECRET PROCESS. IN VIEW THE SAME, AO CONSIDERED THE RECEIPTS OF THE ASSESSEE ARE TAXABLE AS ROYALTY U/S 9(1)(VI) OF THE ACT. 3.5. FROM THE CONTRACT IT WAS OBSERVED BY THE AO TH AT THE CONDITIONAL ACCESS SYSTEM CONSISTS OF A SET UP OF HARDWARE AND SOFTWARE AND THEY ARE INTEGRAL PART OF THE CONDITIONAL ACCESS SYSTEM. ON HIS QUERY TO ASSESSEE THAT WHY REVENUE EARNED FROM SUPPLY OF CAS AND MIDD LEWARE PRODUCTS SHOULD NOT BE TREATED AS ROYALTY INCOME AND TAXED A CCORDINGLY, THE ASSESSEE PRIMARILY CITED THE DECISION OF DIRECTOR O F INCOME TAX VS INFRASOFT LIMITED (264 ITR 329). ASSESSEE HAS ALSO QUOTED TH E OECD MODEL, COMMENTARY ON SOFTWARE ROYALTY AND COPYRIGHT UND ER THE INDIAN COPYRIGHT ACT, 1957 IN HIS SUBMISSION. 11 ITA NO.9130/DEL/2019 ASSESSMENT YEAR 2016-17 17. THE DRP CONCLUDED BY HOLDING AS UNDER:- 3.9. ROYALTY DEFINITION IN INDIAN INCOME TAX ACT, 1961 WAS AMENDED IN SECTION TO INCLUDE SUCH TRANSACTIONS ALSO. THE AO V ALIDLY TREATED IT AS 'ROYALTY' IN VIEW OF THE' AMENDED DEFINITION OF ROY ALTY PER SECTION 9 (1) VI READ WITH EXPLANATIONS (EXPLANATION 2 IN PARTICULAR ) THE ASSESSE HAS CHALLENGED THIS CONTENTION BY REFERRING TO THE DEFI NITION OF ROYALTY IN THE RELEVANT DTAA. THE ASSESSE HAS ALSO SUBMITTED THE J UDGMENT BY HONBLE DELHI HIGH COURT IN DIRECTOR OF INCOME TAX VS. INFR ASOFT LIMITED (264 CTR 329) ON SIMILAR ISSUES WHERE RELIEF HAS BEEN GRANTE D TO THE ASSESSE BASIS THE DEFINITION OF ROYALTY IN THE DTAA. IT HAS BEEN REPORTED THAT THE DEPARTMENT IS IN APPEAL BEFORE HONBLE SUPREME COUR T (CC NO 19034/2014) AGAINST THE ABOVE REFERRED JUDGMENT OF HONBLE DELHI HIGH COURT. IT HAS TO BE BORNE IN MIND THAT THE PANEL IS AN EXTENSION OF THE ASSESSMENT PROCESS AND THE AO IS NOW BOUND BY THE D IRECTIONS OF DRP. ACCORDINGLY, THE MATTER NEEDS TO BE KEPT ALIVE IN V IEW OF ITS PENDENCY BEFORE THE APEX COURT. 18. THE ASSESSING OFFICER HELD THE AFORESAID CONSID ERATION RECEIVED BY THE ASSESSEE ON SALE OF SOFTWARE AND HARDWARE AS TAXABL E IN THE HANDS OF THE ASSESSEE. 19. THE QUESTION WHICH ARISES IS WHETHER SUCH LICEN SE OF SOFTWARE BY THE ASSESSEE IS COVERED UNDER THE TERM ROYALTY AS PRO VIDED IN SECTION 9(1)(VI) OF THE ACT AND/OR ARTICLE 12 OF THE DTAA. ARTICLE 12 OF THE DTAA BETWEEN INDIA AND SWEDEN STIPULATES AND DEFINES WHAT IS ROYALTY A ND FEES FOR TECHNICAL SERVICES. THE TERM ROYALTY AS PER CLAUSE 3 OF AR TICLE 12 MEANS PAYMENT OF ANY KIND RECEIVED AS CONSIDERATION FOR THE USE OF OR TH E RIGHT TO USE, ANY COPYRIGHT OF A LITERARY, ARTISTIC, OR SCIENTIFIC WORK, INCLUD ING GAINS DERIVED FROM THE ALIENATION OF ANY SUCH RIGHT OR PROPERTY WHICH ARE CONTINGENT ON THE PRODUCTIVITY, USE OF DEPOSITION THEREOF. THE TERM ROYALTY HAS BEEN DEFINED BY CLAUSE 3 OF ARTICLE 12 AS PAYMENT RECEIVED FOR THE USE OF, OR THE RIGHT TO USE ANY 12 ITA NO.9130/DEL/2019 ASSESSMENT YEAR 2016-17 COPYRIGHT. SECTION 9(1)(VI) OF THE ACT DEFINES RO YALTY. THE AUTHORITIES BELOW WERE OF THE VIEW THAT BECAUSE OF INSERTION OF EXPLA NATION 5 TO SECTION 9(1)(VI) OF THE ACT WITH RETROSPECTIVE EFFECT FROM 01.06.1976, WHERE THE MEANING OF TERM ROYALTY HAS BEEN EXTENDED TO INCLUDE USE OF COPYR IGHT OR COPYRIGHTED ARTICLE IS TO BE APPLIED AND ON SUCH APPLICATION, THE ASSESSEE WAS HELD TO BE TAXABLE. THE CASE OF THE ASSESSEE IS THAT IT HAD NOT TRANSFE RRED ANY COPYRIGHT BUT HAD ONLY PARTED WITH COPYRIGHTED ARTICLE, IN THE FORM O F SOFTWARE, THEN IT IS NOT ROYALTY AND WAS NOT COVERED UNDER THE PROVISIONS OF SECTION 9(1)(VI) OF THE ACT. IN THE ALTERNATE, IT IS SUBMITTED BY THE LEARNED AU THORIZED REPRESENTATIVE FOR THE ASSESSEE THAT SINCE THE DEFINITION OF ROYALTY HAS NOT BEEN AMENDED IN TAX TREATY AND THE SAID PROVISIONS BEING BENEFICIAL, TH EN PROVISIONS OF ARTICLE 12(3) OF DTAA WITH SWEDEN WOULD APPLY AND THE ASSESSEES CASE WOULD FALL WITHIN NON AMENDED PROVISIONS OF DEFINITION OF ROYALTY U NDER ARTICLE 12(3) OF DTAA. 20. THE HONBLE HIGH COURT OF DELHI IN DIT VS. INFR ASOFT LTD. (SUPRA) HAVE NOTED THAT UNDER THE LICENSE AGREEMENT, LICENSE WAS NON-EXCLUSIVE, NON- TRANSFERRABLE AND THE SOFTWARE HAD TO BE USED IN AC CORDANCE WITH AGREEMENT; THE LICENSEE WAS PERMITTED TO MAKE ONLY ONE COPY OF SOFTWARE AND ASSOCIATED SUPPORT INFORMATION AND THAT ALSO FOR BACKUP PURPOS E. ALL COPIES OF SOFTWARE WERE THE EXCLUSIVE PROPERTY OF INFRASOFT AND IT W AS STIPULATED THAT COPY SHALL INCLUDE INFRASOFT COPYRIGHT AND ALL COPIES OF SOF TWARE ALSO; AND WITHOUT CONSENT OF THE LICENSOR, THE SOFTWARE COULD NOT BE LOANED, RENTED, SOLD, SUB-LICENSED OR TRANSFERRED TO ANY THIRD PARTY. THE HONBLE HIGH C OURT FURTHER WENT ON TO HOLD 13 ITA NO.9130/DEL/2019 ASSESSMENT YEAR 2016-17 THAT DISTINCTION HAD TO BE MADE BETWEEN ACQUISITION OF COPYRIGHT AND COPYRIGHTED ARTICLE; COPYRIGHTING WAS DISTINCT FROM MATERIAL OBJECT. 21. THE HONBLE HIGH COURT IN DIT VS. INFRASOFT LTD . (SUPRA) VIDE ITS DECISION DATED 22.11.2013 WAS OF THE VIEW THAT WHERE THE ASS ESSEE WAS GOVERNED BY INDO-US DTAA, THE INCOME OF ASSESSEE WOULD BE CHARG EABLE TO TAX IN TERMS OF PROVISIONS OF INDO-US DTAA AND IF THE SAME WAS MORE ADVANTAGEOUS OR BENEFICIAL, THEN DEFINITION OF THE WORD ROYALTY A S DEFINED IN EXPLANATION 2 TO SECTION 9(1)(VI) OF THE ACT COULD NOT BE APPLIED. THE HONBLE HIGH COURT VIDE PARAS 64 AND 65 HELD AS UNDER:- 64. TO BE TAXABLE AS ROYALTY INCOME COVERED BY ART ICLE 12 OF THE DTAA THE INCOME OF THE ASSESSEE SHOULD HAVE BEEN GENERATED B Y THE 'USE OF OR THE RIGHT TO USE OF' ANY COPYRIGHT. 65. THE ISSUE WHETHER CONSIDERATION FOR SOFTWARE WA S ROYALTY CAME UP FOR CONSIDERATION BEFORE THE SPECIAL BENCH OF THE TRIBU NAL IN DELHI IN THE CASE OF MOTOROLA INC VS DEPUTY CIT (2005) 147 TAXMAN 39 (DELHI) . THE TRIBUNAL HAS HELD AS UNDER: 155. IT APPEARS TO US FROM A CLOSE EXAMINATION OF T HE MANNER IN WHICH THE CASE HAS PROCEEDED BEFORE THE INCOME-TAX AUTHORITIES AND THE ARGUMENTS ADDRESSED BEFORE US THAT THE CRUX OF THE ISSUE IS WHETHER THE PAYMENT IS FOR A COPYRIGHT OR FOR A COP YRIGHTED ARTICLE. IF IT IS FOR COPYRIGHT, IT SHOULD BE CLASSIFIED AS ROY ALTY BOTH UNDER THE INCOME-TAX ACT AND UNDER THE DTAA AND IT WOULD BE T AXABLE IN THE HANDS OF THE ASSESSEE ON THAT BASIS. IF THE PAYMENT IS REALLY FOR A COPYRIGHTED ARTICLE, THEN IT ONLY REPRESENTS THE PU RCHASE PRICE OF THE ARTICLE AND, THEREFORE, CANNOT BE CONSIDERED AS ROY ALTY EITHER UNDER THE ACT OR UNDER THE DTAA. THIS ISSUE REALLY IS THE KEY TO THE ENTIRE CONTROVERSY AND WE MAY NOW PROCEED TO ADDRESS THIS ISSUE. 156. WE MUST LOOK INTO THE MEANING OF THE WORD 'COP YRIGHT' AS GIVEN IN THE COPYRIGHT ACT, 1957. SECTION 14 OF THIS ACT DEFINES 'COPYRIGHT' AS 'THE EXCLUSIVE RIGHT SUBJECT TO THE PROVISIONS O F THIS ACT, TO DO OR AUTHORIZE THE DOING OF ANY OF THE FOLLOWING ACTS IN RESPECT OF A WORK OR ANY SUBSTANTIAL PART THEREOF, NAMELY: 14 ITA NO.9130/DEL/2019 ASSESSMENT YEAR 2016-17 --------- IT IS CLEAR FROM THE ABOVE DEFINITION THAT A COMPUT ER PROGRAMME MENTIONED IN CLAUSE (B) OF THE SECTION HAS ALL THE RIGHTS MENTIONED IN CLAUSE (A) AND IN ADDITION ALSO THE RIGHT TO SELL O R GIVE ON COMMERCIAL RENTAL OR OFFER FOR SALE OR FOR COMMERCIAL RENTAL A NY COPY OF THE COMPUTER PROGRAMME. THIS ADDITIONAL RIGHT WAS SUBST ITUTED W.E.F. 15.1.2000. THE DIFFERENCE BETWEEN THE EARLIER PROVI SION AND THE PRESENT ONE IS NOT OF ANY RELEVANCE. WHAT IS TO BE NOTED IS THAT THE RIGHT MENTIONED IN SUB -CLAUSE (II) OF CLAUSE (B) O F SECTION 14 IS AVAILABLE ONLY TO THE OWNER OF THE COMPUTER PROGRAM ME. IT FOLLOWS THAT IF ANY OF THE CELLULAR OPERATORS DOES NOT HAVE ANY OF THE RIGHTS MENTIONED IN CLAUSES (A) AND (B) OF SECTION 14, IT WOULD MEAN THAT IT DOES NOT HAVE ANY RIGHT IN A COPYRIGHT. IN THAT CAS E, THE PAYMENT MADE BY THE CELLULAR OPERATOR CANNOT BE CHARACTERIZ ED AS ROYALTY EITHER UNDER THE INCOME-TAX ACT OR UNDER THE DTAA. THE QUESTION, THEREFORE, TO BE ANSWERED IS WHETHER ANY OF THE OPE RATORS CAN EXERCISE ANY OF THE RIGHTS MENTIONED IN THE ABOVE P ROVISIONS WITH REFERENCE TO THE SOFTWARE SUPPLIED BY THE ASSESSEE. 157. WE MAY FIRST LOOK AT THE SUPPLY CONTRACT ITSEL F TO FIND OUT WHAT JTM, ONE OF THE CELLULAR OPERATORS, CAN RIGHTFULLY DO WITH REFERENCE TO THE SOFTWARE. WE MAY REMIND OURSELVES THAT JTM IS T AKEN AS A REPRESENTATIVE OF ALL THE CELLULAR OPERATORS AND TH AT IT WAS COMMON GROUND BEFORE US THAT ALL THE CONTRACTS WITH THE CE LLULAR OPERATORS ARE SUBSTANTIALLY THE SAME. CLAUSE 20.1 OF THE AGREEMEN T, UNDER THE TITLE 'LICENSE', SAYS THAT JTM IS GRANTED A NON - E XCLUSIVE RESTRICTED LICENSE TO USE THE SOFTWARE AND DOCUMENTATION BUT O NLY FOR ITS OWN OPERATION AND MAINTENANCE OF THE SYSTEM AND NOT OTH ERWISE. THIS CLAUSE APPEARS TO MILITATE AGAINST THE POSITION, IF IT WERE A COPYRIGHT, THAT THE HOLDER OF THE COPYRIGHT CAN DO ANYTHING WI TH RESPECT TO THE SAME IN THE PUBLIC DOMAIN. WHAT JTM IS PERMITTED TO DO IS ONLY TO USE THE SOFTWARE FOR THE PURPOSE OF ITS OWN OPERATI ON AND MAINTENANCE OF THE SYSTEM. THERE IS A CLEAR BAR ON THE SOFTWARE BEING USED BY JTM IN THE PUBLIC DOMAIN OR FOR THE P URPOSE OF COMMERCIAL EXPLOITATION. 158. SECONDLY, UNDER THE DEFINITION OF 'COPYRIGHT' IN SECTION 14 OF THE COPYRIGHT ACT, THE EMPHASIS IS THAT IT IS AN EXCLUS IVE RIGHT GRANTED TO THE HOLDER THEREOF. THIS CONDITION IS NOT SATISFIED IN THE CASE OF JTM BECAUSE THE LICENSE GRANTED TO IT BY THE ASSESSEE I S EXPRESSLY STATED IN CLAUSE 20.1 AS A 'NON EXCLUSIVE RESTRICTED LICEN SE'. THIS MEANS THAT THE SUPPLIER OF THE SOFTWARE, NAMELY, THE ASSE SSEE, CAN SUPPLY SIMILAR SOFTWARE TO ANY NUMBER OF CELLULAR OPERATOR S TO WHICH JTM CAN HAVE NO OBJECTION AND FURTHER ALL THE CELLULAR OPERATORS CAN USE THE SOFTWARE ONLY FOR THE PURPOSE OF THEIR OWN OPER ATION AND MAINTENANCE OF THE SYSTEM AND NOT FOR ANY OTHER PUR POSE. THE USER 15 ITA NO.9130/DEL/2019 ASSESSMENT YEAR 2016-17 OF THE SOFTWARE BY THE CELLULAR OPERATORS IN THE PU BLIC DOMAIN IS TOTALLY PROHIBITED, WHICH IS EVIDENT FROM THE USE O F THE WORDS IN ARTICLE 20.1 OF THE AGREEMENT, 'RESTRICTED' AND 'NO T OTHERWISE'. THUS JTM HAS A VERY LIMITED RIGHT SO FAR AS THE USE OF S OFTWARE IS CONCERNED. IT NEEDS NO REPETITION TO CLARIFY THAT J TM HAS NOT BEEN GIVEN ANY OF THE SEVEN RIGHTS MENTIONED IN CLAUSE ( A) OF SECTION 14 OR THE ADDITIONAL RIGHT MENTIONED IN SUB-CLAUSE (II ) OF CLAUSE (B) OF THE SECTION WHICH RELATES TO A COMPUTER PROGRAMME A ND, THEREFORE, WHAT JTM OR ANY OTHER CELLULAR OPERATOR HAS ACQUIRE D UNDER THE AGREEMENT IS NOT A COPYRIGHT BUT IS ONLY A COPYRIGH TED ARTICLE. 159. CLAUSE 20.4 OF THE SUPPLY CONTRACT WITH JTM IS AS UNDER: 20.4 IN PURSUANCE OF THE FOREGOING JT MOBI LES SHAL L: (A) NOT PROVIDE OR MAKE THE SOFTWARE OR DOCUMENTATI ON OR ANY PORTIONS OR ASPECTS THEREOF (INCLUDING ANY METHODS OR CONCEPTS UTILIZED OR EXPRESSED THEREIN) AVAILABLE TO ANY PER SON EXCEPT TO ITS EMPLOYEES ON A 'NEED TO KNOW' BASIS; (B) NOT MAKE ANY COPIES OF SOFTWARE OR DOCUMENTATIO N OR PARTS THEREOF, EXCEPT FOR ARCHIVAL BACKUP PURPOSES; (C) WHEN MAKING PERMITTED COPIES AS AFORESAID TRANS FER TO THE COPY/COPIES ANY COPYRIGHT OR OTHER MARKING ON THE S OFTWARE OR DOCUMENTATION. (D) NOT USE THE SOFTWARE OR DOCUMENTATION FOR ANY O THER PURPOSE THAN PERMITTED IN THIS ARTICLE 20, LICENCE OR SELL OR IN ANY MANNER ALIENATE OR PART WITH ITS POSSESSION. (E) NOT USE OR TRANSFER THE SOFTWARE AND/OR THE DOC UMENTATION OUTSIDE INDIA WITHOUT THE WRITTEN CONSENT OF THE CO NTRACTOR AND AFTER HAVING RECEIVED NECESSARY EXPORT OR RE -E XPORT PERMITS FROM RELEVANT AUTHORITIES. THIS CLAUSE PLACES STRINGENT RESTRICTIONS ON THE CE LLULAR OPERATOR SO FAR AS THE USE OF SOFTWARE IS CONCERNED . IT FIRST SAYS THAT THE CELLULAR OPERATOR CANNOT MAKE THE SOF TWARE OR PORTIONS THEREOF AVAILABLE TO ANY PERSON EXCEPT TO ITS EMPLOYEES AND EVEN WITH REGARD TO EMPLOYEES IT HAS TO BE ONLY ON A 'NEED TO KNOW BASIS' WHICH MEANS THAT EVE N THE EMPLOYEES ARE NOT TO BE TOLD IN ALL ITS ASPECTS. WH AT THE ASSESSEE CAN DO IS ONLY TO TELL THE PARTICULAR EMPL OYEE WHAT HE HAS TO KNOW ABOUT THE SOFTWARE FOR OPERATIONAL P URPOSES. THE CELLULAR OPERATOR HAS BEEN DENIED THE RIGHT TO MAKE COPIES OF THE SOFTWARE OR PARTS THEREOF EXCEPT FOR ARCHIVA L BACKUP PURPOSES. THIS MEANS THAT THE CELLULAR OPERATOR CAN NOT MAKE COPIES OF THE SOFTWARE FOR COMMERCIAL PURPOSES. THI S CONDITION IS PLAINLY CONTRARY TO SECTION 14(A)(I) OF THE COPY RIGHT ACT 16 ITA NO.9130/DEL/2019 ASSESSMENT YEAR 2016-17 WHICH PERMITS THE COPYRIGHT HOLDER TO REPRODUCE THE WORK IN ANY MATERIAL FORM INCLUDING THE STORING OF IT IN AN Y MEDIUM BY ELECTRONIC MEANS. WE MAY ALSO NOTICE SECTION 52(1)( AA) OF THE COPYRIGHT ACT WHICH LISTS OUT CERTAIN ACTS WHICH CA NNOT BE CONSIDERED AS INFRINGEMENT OF COPYRIGHT. THE PARTIC ULAR CLAUSE PERMITS THE MAKING OF COPIES OR ADAPTATION OF A COM PUTER PROGRAMME BY THE LAWFUL POSSESSOR OF THE COPY AND T HE COMPUTER PROGRAMME IN ORDER TO UTILIZE THE PUBLIC P ROGRAMME FOR THE PURPOSE FOR WHICH IT WAS SUPPLIED OR TO MAK E BACKUP COPIES PURELY AS A TEMPORARY PROTECTION AGAINST LOS S, DESTRUCTION OR DAMAGE. THEREFORE, MERELY BECAUSE TH E CELLULAR OPERATOR HAS BEEN PERMITTED TO TAKE COPIES JUST FOR BACKUP PURPOSES, IT CANNOT BE SAID THAT IT HAS ACQUIRED A COPYRIGHT IN THE SOFTWARE. 160. CLAUSE 20.4(C) MAKES IT MANDATORY FOR THE CELL ULAR OPERATOR, WHILE MAKING COPIES OF THE SOFTWARE FOR BACKUP PURP OSES, TO ALSO MARK THE COPIED SOFTWARE WITH COPYRIGHT OR OTHER MA RKING TO SHOW THAT THE RIGHTS OF THE ASSESSEE ARE RESERVED. THIS IS ONE MORE INDICATION THAT WHAT THE CELLULAR OPERATOR ACQUIRED IS NOT A COPYRIGHT. 161. CLAUSE 20.4(D) SAYS THAT THE CELLULAR OPERATOR CANNOT USE THE SOFTWARE FOR ANY OTHER PURPOSE THAN WHAT IS PERMITT ED AND SHALL NOT ALSO LICENSE OR SELL OR IN ANY MANNER ALIENATE OR P ART WITH ITS POSSESSION. THIS HAS TO BE READ WITH CLAUSE 20.5 WH ICH SAYS THAT THE LICENSE CAN BE TRANSFERRED, BUT ONLY WHEN THE G SM SYSTEM ITSELF IS SOLD BY THE CELLULAR OPERATOR TO A THIRD PARTY. THIS IN A WAY SHOWS THAT THE SOFTWARE IS ACTUALLY PART OF THE HARDWARE AND IT HAS NO USE OR VALUE INDEPENDENT OF IT. THIS RESTRICTION PLACED ON THE CELLULAR OPERATOR (NOT TO LICENSE OR SELL THE SOFTWARE) RUNS COUNTER TO SECTION 14(B)(II) OF THE COPYRIGHT ACT WHICH PERMITS A COPY RIGHT HOLDER TO SELL OR LET OUT ON COMMERCIAL RENTAL THE COMPUTER PROGRA MME. FOR THIS REASON ALSO IT CANNOT BE SAID THAT JTM OR ANY CELLU LAR OPERATOR ACQUIRED A COPYRIGHT IN THE SOFTWARE. 162. A CONJOINT READING OF THE TERMS OF THE SUPPLY CONTRACT AND THE PROVISIONS OF THE COPYRIGHT ACT, 1957 CLEARLY SHOWS THAT THE CELLULAR OPERATOR CANNOT EXPLOIT THE COMPUTER SOFTWARE COMME RCIALLY WHICH IS THE VERY ESSENCE OF A COPYRIGHT. IN OTHER WORDS A H OLDER OF A COPYRIGHT IS PERMITTED TO EXPLOIT THE COPYRIGHT COM MERCIALLY AND IF HE IS NOT PERMITTED TO DO SO THEN WHAT HE HAS ACQUIRED CANNOT BE CONSIDERED AS A COPYRIGHT. IN THAT CASE, IT CAN ONL Y BE SAID THAT HE HAS ACQUIRED A COPYRIGHTED ARTICLE. A SMALL EXAMPLE MAY CLARIFY THE POSITION. THE PURCHASER OF A BOOK ON INCOME-TAX ACQ UIRES ONLY A COPYRIGHTED ARTICLE. ON THE OTHER HAND, A RECORDING COMPANY WHICH HAS RECORDED A VOCALIST HAS ACQUIRED THE COPYRIGHT IN THE MUSIC 17 ITA NO.9130/DEL/2019 ASSESSMENT YEAR 2016-17 RENDERED AND IS, THEREFORE, PERMITTED TO EXPLOIT TH E RECORDING COMMERCIALLY. IN THIS CASE THE MUSIC RECORDING COMP ANY HAS NOT MERELY ACQUIRED A COPYRIGHTED ARTICLE IN THE FORM O F A RECORDING, BUT HAS ACTUALLY ACQUIRED A COPYRIGHT TO REPRODUCE THE MUSIC AND EXPLOIT THE SAME COMMERCIALLY. IN THE PRESENT CASE WHAT JTM OR ANY OTHER CELLULAR OPERATOR HAS ACQUIRED UNDER THE SUPPLY CON TRACT IS ONLY THE COPYRIGHTED SOFTWARE, WHICH IS AN ARTICLE BY ITSELF AND NOT ANY COPYRIGHT THEREIN. 163. WE MAY NOW BRIEFLY DEAL WITH THE OBJECTIONS OF MR. G.C. SHARMA, THE LEARNED SENIOR COUNSEL FOR THE DEPARTME NT. HE CONTENDED THAT IF A PERSON OWNS A COPYRIGHTED ARTIC LE THEN HE AUTOMATICALLY HAS A RIGHT OVER THE COPYRIGHT ALSO. WITH RESPECT, THIS OBJECTION DOES NOT APPEAR TO US TO BE CORRECT. MR. DASTUR FILED AN EXTRACT FROM IYENGAR'S COPYRIGHT ACT (3RD EDITION) EDITED BY R.G. CHATURVEDI. THE FOLLOWING OBSERVATIONS OF THE AUTHO R ARE ON THE POINT: '(H) COPYRIGHT IS DISTINCT FROM THE MATERIAL OBJECT , COPYRIGHTED: IT IS AN INTANGIBLE INCORPOREAL RIGHT IN THE NATURE OF A PRIVILEGE, QUITE INDEPENDENT OF ANY MATERIAL SUBSTANCE, SUCH A S A MANUSCRIPT. THE COPYRIGHT OWNER MAY DISPOSE OF IT O N SUCH TERMS AS HE MAY SEE FIT. HE HAS AN INDIVIDUAL RIGHT OF EXCLUSIVE ENJOYMENT. THE TRANSFER OF THE MANUSCRIPT DOES NOT, OF ITSELF, SERVE TO TRANSFER THE COPYRIGHT THEREIN. THE TRANSFER OF THE OWNERSHIP OF A PHYSICAL THING IN WHICH COPYRIGH T EXISTS GIVES TO THE PURCHASER THE RIGHT TO DO WITH IT (THE PHYSICAL THING) WHATEVER HE PLEASES, EXCEPT THE RIGHT TO MAK E COPIES AND ISSUE THEM TO THE PUBLIC' (UNDERLINE IS OURS). THE ABOVE OBSERVATIONS OF THE AUTHOR SHOW THAT ONE CANNOT HAVE THE COPYRIGHT RIGHT WITHOUT THE COPYRIGHTED ARTICLE BUT AT THE SAME TIME JUST BECAUSE ONE HAS THE COPYRIGHTED ARTICLE, IT DO ES NOT FOLLOW THAT ONE HAS ALSO THE COPYRIGHT IN IT. MR. SHARMA'S OBJE CTION CANNOT BE ACCEPTED. 164. IT IS NOT NECESSARY, THEREFORE, TO CONSIDER TH E ALTERNATIVE ARGUMENT OF MR. DASTUR, NAMELY, THAT EVEN ASSUMING THAT THE DEPARTMENT IS RIGHT IN SAYING THAT IF YOU HAVE THE COPYRIGHTED ARTICLE, YOU ALSO HAVE THE COPYRIGHT RIGHT THEREIN, STILL IT WOULD MEAN THAT THE COPYRIGHT RIGHTS ARE TRANSFERRED (ACQUIRED BY JTM) AND IT WOULD NOT BE A CASE OF MERELY GIVING THE RIGHT TO U SE AND CONSEQUENTLY ARTICLE 13 OF THE DTAA WOULD NOT APPLY . MR. DASTUR, HOWEVER, WAS FAIR ENOUGH TO CONCEDE THAT IF THE DEP ARTMENT IS RIGHT 18 ITA NO.9130/DEL/2019 ASSESSMENT YEAR 2016-17 IN SAYING THAT IF YOU HAVE THE COPYRIGHTED ARTICLE, YOU ALSO HAVE THE COPYRIGHTED RIGHTS, THEN CLAUSE (V) OF EXPLANATION 2 BELOW SECTION 9(1) OF THE INCOME-TAX ACT WILL APPLY BECAUSE HIS C LAUSE ROPES IN 'TRANSFER OF ALL OR ANY RIGHTS' AND IS NOT RESTRICT ED TO 'USE' OR 'RIGHT TO USE', THE COPYRIGHT. HOWEVER, HE ADDED THAT SINCE T HE BASIC PROPOSITION OF THE DEPARTMENT HAS BEEN DEMONSTRATED TO BE WRONG, CLAUSE (V) OF EXPLANATION 2 BELOW SECTION 9(1) IS N OT AN IMPEDIMENT TO ACCEPTING THE ASSESSEE'S CONTENTION. 165. WE MAY ALSO USEFULLY REFER TO THE COMMENTARY O N THE OECD MODEL CONVENTION (DATED 28.1.2003) WHICH IS OF PERS UASIVE VALUE AND WHICH THROWS CONSIDERABLE LIGHT ON THE CHARACTE R OF THE TRANSACTION AND THE TREATMENT TO BE GIVEN TO THE PA YMENTS FOR TAX PURPOSES. PARAGRAPH 14 OF THE COMMENTARY, A COPY OF WHICH WAS FILED IN PAPER BOOK NO. V IS RELEVANT: COMMENTARY ON ARTICLE 12 - PAPER BOOK V '14. IN OTHER TYPES OF TRANSACTIONS, THE RIGHTS ACQ UIRED IN RELATION TO THE COPYRIGHT ARE LIMITED TO THOSE NECE SSARY TO ENABLE THE USER TO OPERATE THE PROGRAM, FOR EXAMPLE , WHERE THE TRANSFEREE IS GRANTED LIMITED RIGHTS TO REPRODU CE THE PROGRAM. THIS WOULD BE THE COMMON SITUATION IN TRAN SACTIONS FOR THE ACQUISITION OF A PROGRAM COPY. THE RIGHTS T RANSFERRED IN THESE CASES ARE SPECIFIC TO THE NATURE OF COMPUTER PROGRAMS. THEY ALLOW THE USER TO COPY THE PROGRAM, FOR EXAMPL E ONTO THE USER'S COMPUTER HARD DRIVE OR FOR ARCHIVAL PURPOSES . IN THIS CONTEXT, IT IS IMPORTANT TO NOTE THAT THE PROTECTIO N AFFORDED IN RELATION TO COMPUTER PROGRAMS UNDER COPYRIGHT LAW M AY DIFFER FROM COUNTRY TO COUNTRY. IN SOME COUNTRIES THE ACT OF COPYING THE PROGRAM ONTO THE HARD DRIVE OR RANDOM ACCESS ME MORY OF A COMPUTER WOULD, WITHOUT A LICENSE, CONSTITUTE A B REACH OF COPYRIGHT. HOWEVER, THE COPYRIGHT LAWS OF MANY COUN TRIES AUTOMATICALLY GRANT THIS RIGHT TO THE OWNER OF SOFT WARE WHICH INCORPORATES A COMPUTER PROGRAM. REGARDLESS OF WHET HER THIS RIGHT IS GRANTED UNDER LAW OR UNDER A LICENSE AGREE MENT WITH THE COPYRIGHT HOLDER, COPYING THE PROGRAM ONTO THE COMPUTER'S HARD DRIVE OR RANDOM ACCESS MEMORY OR MAKING AN ARC HIVAL 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 THE EFFECTIVE OPERATION OF THE PRO GRAM BY THE USER, SHOULD BE DISREGARDED IN ANALYZING THE CHARAC TER OF THE TRANSACTION FOR TAX PURPOSES. PAYMENTS IN THESE TYP ES OF TRANSACTIONS WOULD BE DEALT WITH AS COMMERCIAL INCO ME IN ACCORDANCE WITH ARTICLE 7.' 19 ITA NO.9130/DEL/2019 ASSESSMENT YEAR 2016-17 166. WE MAY ALSO USEFULLY REFER TO THE PROPOSED AME NDMENTS TO THE REGULATIONS OF THE INTERNAL REVENUE SERVICE (IRS) I N THE USA. AGAIN THESE REGULATIONS MAY NOT BE BINDING ON US BU T THEY HAVE A PERSUASIVE VALUE AND THROW LIGHT ON THE QUESTION BE FORE US, NAMELY THE DIFFERENCE BETWEEN A COPYRIGHT RIGHT AN D A COP YRIGHTED ARTICLE. THESE REGULATIONS HAVE BEEN PLACED AT PAGES 136 TO 157 OF PAPER BOOK NO. II. THE ACTUAL REGULATIONS AS WELL AS THE EXPLANATORY NOTE EXPLAINING THE OBJECT AND THE PURPOSE OF THE PROPOS ED REGULATIONS HAVE ALSO BEEN GIVEN. IN PARAGRAPH 1 OF THE NOTE TI TLED 'BACKGROUND', IT HAS BEEN STATED THAT THE PROPOSED REGULATIONS REQUIRE THAT A TRANSACTION INVOLVING A COMPUTER PRO GRAMME MAY BE TREATED AS BEING ONE OF THE FOUR POSSIBLE CATEGORIE S. TWO SUCH CATEGORIES ARE THE TRANSFER OF COPYRIGHT RIGHTS AND THE TRANSFER OF A COPYRIGHTED ARTICLE. THE U.S. REGULATIONS DISTINGUI SHED BETWEEN TRANSFER OF COPYRIGHT RIGHTS AND TRANSFER OF COPYRI GHTED ARTICLES BASED ON THE TYPE OF RIGHTS TRANSFERRED TO THE TRAN SFEREE. BRIEFLY STATED, IF THE TRANSFEREE ACQUIRES A COPY OF A COMP UTER PROGRAMME BUT DOES NOT ACQUIRE ANY OF THE RIGHTS IDENTIFIED I N CERTAIN SECTIONS (OF THE U.S. REGULATIONS), THE REGULATION CLASSIFIE D THE TRANSACTION AS THE TRANSFER OF A COPYRIGHTED ARTICLE. PARAGRAPH 3 OF THE EXPLANATORY NOTE SAYS THAT IF A TRANSFER OF A COMPUTER PROGRAMM E RESULTS IN THE TRANSFEREE ACQUIRING ANY ONE OR MORE OF THE LISTED RIGHTS, IT IS A TRANSFER OF A COPYRIGHT RIGHT. 167. PARAGRAPH 4 SAYS THAT IF A PERSON ACQUIRES A C OPY OF A COMPUTER PROGRAMME BUT DOES NOT ACQUIRE ANY OF THE FOUR LISTED COPYRIGHT RIGHTS, HE GETS ONLY A COPYRIGHTED ARTICL E BUT NO COPYRIGHT. 168. THE ACTUAL REGULATIONS BRING OUT THE DISTINCTI ON VERY CLEARLY BETWEEN THE COPYRIGHT RIGHT AND A COPYRIGHTED ARTIC LE. THEY ALSO SPECIFY THE FOUR RIGHTS WHICH, IF ACQUIRED BY THE T RANSFEREE, CONSTITUTE HIM THE OWNER OF A COPYRIGHT RIGHT. THEY ARE: (A) THE RIGHT TO MAKE COPIES OF THE COMPUTER PROGRA MME FOR PURPOSES OF DISTRIBUTION TO THE PUBLIC BY SALE OR O THER TRANSFER OF OWNERSHIP, OR BY RENTAL, LEASE, OR LENDING. (II) THE RIGHT TO PREPARE DERIVATIVE COMPUTER PROGR AMMES BASED UPON THE COPYRIGHTED COMPUTER PROGRAMME (III) THE RIGHT TO MAKE A PUBLIC PERFORMANCE OF THE COMPUTER PROGRAMME. (IV) THE RIGHT TO PUBLICALLY DISPLAY THE COMPUTER P ROGRAMME. 169. A COPYRIGHTED ARTICLE HAS BEEN DEFINED IN THE REGULATION (PAGE 147 OF THE PAPER BOOK) AS INCLUDING A COPY OF A COM PUTER PROGRAMME 20 ITA NO.9130/DEL/2019 ASSESSMENT YEAR 2016-17 FROM WHICH THE WORK CAN BE PERCEIVED, REPRODUCED OR OTHERWISE COMMUNICATED EITHER DIRECTLY OR WITH THE AID OF A M ACHINE OR DEVICE. THE COPY OF THE PROGRAMME MAY BE FIXED IN THE MAGNE TIC MEDIUM OF A FLOPPY DISC OR IN THE MAIN MEMORY OR HARD DRIVE O F A COMPUTER OR IN ANY OTHER MEDIUM. 170. SO FAR AS THE TRANSFER OF COPYRIGHTED ARTICLES AND COPYRIGHT RIGHTS ARE CONCERNED, THE REGULATION GOES ON TO SAY (PAGE 148 OF THE PAPER BOOK) THAT THE QUESTION WHETHER THERE WAS A T RANSFER OF A COPYRIGHT RIGHT OR ONLY OF A COPYRIGHTED ARTICLE MU ST BE DETERMINED TAKING INTO ACCOUNT ALL THE FACTS AND CIRCUMSTANCES OF THE CASE AND THE BENEFITS AND BURDEN OF OWNERSHIP WHICH HAVE BEE N TRANSFERRED. SEVERAL EXAMPLES HAVE BEEN GIVEN BELOW THESE REGULA TIONS TO FIND OUT WHETHER A PARTICULAR TRANSFER IS A TRANSFER OF A COPYRIGHT RIGHT OR A TRANSFER OF A COPYRIGHTED ARTICLE. 171. THE COMMENTARY OF 'CHARL P. DU TOIT' ON THIS Q UESTION HAS BEEN PLACED AT PAGES 202 TO 204 OF PAPER BOOK NO. I I. THE COMMENTARY IS TITLED 'BENEFICIAL OWNERSHIP OF ROYAL TIES IN BILATERAL TAX TREATIES.' HE HAS OPINED THAT ARTICLES SUCH AS BOOKS AND RECORDS ARE COPYRIGHTED ARTICLES AND IF THEY ARE SO LD, THE USER DOES NOT OBTAIN THE RIGHT TO USE ANY SIGNIFICANT RIGHTS IN THE UNDERLYING COPYRIGHT ITSELF, WHICH IS WHAT SHOULD DETERMINE TH E CHARACTERIZATION OF THE REVENUE AS SALE PROCEEDS RATHER THAN ROYALTI ES. HE HAS FURTHER OPINED THAT CONSIDERATION RELATING TO SALE OF SOFTW ARE CAN AMOUNT TO ROYALTY ONLY IN LIMITED CIRCUMSTANCES. 172. FOR THE ABOVE REASONS, WE ARE OF THE VIEW THAT THE PAYMENT BY THE CELLULAR OPERATOR IS NOT FOR ANY COPYRIGHT IN T HE SOFTWARE BUT IS ONLY FOR THE SOFTWARE AS SUCH AS A COPY RIGHTED ART ICLE. IT FOLLOWS THAT THE PAYMENT CANNOT BE CONSIDERED AS ROYALTY WITHIN THE MEANING OF EXPLANATION 2 BELOW SECTION 9(1) OF THE INCOME-TAX ACT OR ARTICLE OF THE DTAA WITH SWEDEN. -------- 184. IN VIEW OF THE FOREGOING DISCUSSION, WE HOLD T HAT THE SOFTWARE SUPPLIED WAS A COPYRIGHTED ARTICLE AND NOT A COPYRI GHT RIGHT, AND THE PAYMENT RECEIVED BY THE ASSESSEE IN RESPECT OF THE SOFTWARE CANNOT BE CONSIDERED AS ROYALTY EITHER UNDER THE INCOME-TA X ACT OR THE DTAA. 22. THE HONBLE HIGH COURT OF DELHI IN DIT VS. INFR ASOFT LTD. (SUPRA) THEN REFERS TO THE DECISION OF THE HONBLE HIGH COURT OF DELHI ITSELF IN DIT VS. 21 ITA NO.9130/DEL/2019 ASSESSMENT YEAR 2016-17 ERICSSON A.B. (2012) 343 ITR 470 (DEL), WHEREIN IT WAS HELD THAT ONCE IT IS HELD THAT PAYMENT IN QUESTION IS NOT ROYALTY WHICH WOULD COME WITHIN THE MISCHIEF OF CLAUSE (VI), THE EXPLANATION WILL HAVE NO APPLIC ATION AND THAT THE QUESTION OF APPLICABILITY OF THE EXPLANATION WOULD ARISE ONLY W HEN PAYMENT IS TO BE TREATED AS 'ROYALTY' WITHIN THE MEANING OF CLAUSE (VI) OR ' FEE FOR TECHNICAL SERVICES' AS PROVIDED IN CLAUSE (VII) OF THE ACT. AFTER REFERRI NG TO DIFFERENT TERMS OF LICENSING SOFTWARE AGREEMENT, THE HONBLE HIGH COURT OBSERVED AS UNDER:- 85. THE LICENSING AGREEMENT SHOWS THAT THE LICENSE IS NON-EXCLUSIVE, NON- TRANSFERABLE AND THE SOFTWARE HAS TO BE USES IN ACC ORDANCE WITH THE AGREEMENT. ONLY ONE COPY OF THE SOFTWARE IS BEING S UPPLIED FOR EACH SITE. THE LICENSEE IS PERMITTED TO MAKE ONLY ONE COPY OF THE SOFTWARE AND ASSOCIATED SUPPORT INFORMATION AND THAT ALSO FOR BA CKUP PURPOSES. IT IS ALSO STIPULATED THAT THE COPY SO MADE SHALL INCLUDE INFRASOFTS COPYRIGHT AND OTHER PROPRIETARY NOTICES. ALL COPIES OF THE SO FTWARE ARE THE EXCLUSIVE PROPERTY OF INFRASOFT. THE SOFTWARE INCLUDES A LICE NCE AUTHORISATION DEVICE, WHICH RESTRICTS THE USE OF THE SOFTWARE. THE SOFTWA RE IS TO BE USED ONLY FOR LICENSEES OWN BUSINESS AS DEFINED WITHIN THE INFRA SOFT LICENCE SCHEDULE. WITHOUT THE CONSENT OF THE ASSESSEE THE SOFTWARE CA NNOT BE LOANED, RENTED, SOLD, SUBLICENSED OR TRANSFERRED TO ANY THI RD 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 LIC ENSEE IS FURTHER RESTRICTED FROM MAKING COPIES, DECOMPILE, DISASSEMB LE OR REVERSE-ENGINEER THE SOFTWARE WITHOUT INFRASOFTS WRITTEN CONSENT. T HE SOFTWARE CONTAINS A MECHANISM WHICH INFRASOFT MAY ACTIVATE TO DENY THE LICENSEE USE OF THE SOFTWARE IN THE EVENT THAT THE LICENSEE IS IN BREAC H OF PAYMENT TERMS OR ANY OTHER PROVISIONS OF THIS AGREEMENT. ALL COPYRIG HTS AND INTELLECTUAL PROPERTY RIGHTS IN AND TO THE SOFTWARE, AND COPIES MADE BY LICENSEE, ARE OWNED BY OR DULY LICENSED TO INFRASOFT. 23. THE HONBLE HIGH COURT CONCLUDED BY HOLDING AS UNDER:- 87. IN ORDER TO QUALIFY AS ROYALTY PAYMENT, IT IS NECESSARY TO ESTABLISH THAT THERE IS TRANSFER OF ALL OR ANY RIGHTS (INCLUD ING THE GRANTING OF ANY LICENCE) IN RESPECT OF COPYRIGHT OF A LITERARY, ART ISTIC OR SCIENTIFIC WORK. IN ORDER TO TREAT THE CONSIDERATION PAID BY THE LICENS EE AS ROYALTY, IT IS TO BE ESTABLISHED THAT THE LICENSEE, BY MAKING SUCH PAYME NT, OBTAINS ALL OR ANY 22 ITA NO.9130/DEL/2019 ASSESSMENT YEAR 2016-17 OF THE COPYRIGHT RIGHTS OF SUCH LITERARY WORK. DIST INCTION HAS TO BE MADE BETWEEN THE ACQUISITION OF A 'COPYRIGHT RIGHT' AND A 'COPYRIGHTED ARTICLE'. COPYRIGHT IS DISTINCT FROM THE MATERIAL OBJECT, COP YRIGHTED. COPYRIGHT IS AN INTANGIBLE INCORPOREAL RIGHT IN THE NATURE OF A PRI VILEGE, QUITE INDEPENDENT OF ANY MATERIAL SUBSTANCE, SUCH AS A MANUSCRIPT. JU ST BECAUSE ONE HAS THE COPYRIGHTED ARTICLE, IT DOES NOT FOLLOW THAT ON E HAS ALSO THE COPYRIGHT IN IT. IT DOES NOT AMOUNT TO TRANSFER OF ALL OR ANY RI GHT INCLUDING LICENCE IN RESPECT OF COPYRIGHT. COPYRIGHT OR EVEN RIGHT TO US E COPYRIGHT IS DISTINGUISHABLE FROM SALE CONSIDERATION PAID FOR C OPYRIGHTED ARTICLE. THIS SALE CONSIDERATION IS FOR PURCHASE OF GOODS AND IS NOT ROYALTY. 88. THE LICENSE GRANTED BY THE ASSESSEE IS LIMITED TO THOSE NECESSARY TO ENABLE THE LICENSEE TO OPERATE THE PROGRAM. THE RIG HTS TRANSFERRED ARE SPECIFIC TO THE NATURE OF COMPUTER PROGRAMS. COPYIN G THE PROGRAM ONTO THE COMPUTER'S HARD DRIVE OR RANDOM ACCESS MEMORY OR MA KING 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 THE EFFECTIVE OPERATION OF THE PROGRAM BY THE USER, SHO ULD BE DISREGARDED IN ANALYZING THE CHARACTER OF THE TRANSACTION FOR TAX PURPOSES. PAYMENTS IN THESE TYPES OF TRANSACTIONS WOULD BE DEALT WITH AS BUSINESS INCOME IN ACCORDANCE WITH ARTICLE 7. 89. THERE IS A CLEAR DISTINCTION BETWEEN ROYALTY PA ID 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 ROY ALTY DEFINITION. VIEWED FROM THIS ANGLE, A NON -EXCLUSIVE AND NON-TRANSFERA BLE LICENCE ENABLING THE USE OF A COPYRIGHTED PRODUCT CANNOT BE CONSTRUED AS AN AUTHORITY TO ENJOY ANY OR ALL OF THE ENUMERATED RIGHTS INGRAINED IN AR TICLE 12 OF DTAA. WHERE THE PURPOSE OF THE LICENCE OR THE TRANSACTION IS ON LY TO RESTRICT USE OF THE COPYRIGHTED PRODUCT FOR INTERNAL BUSINESS PURPOSE, IT WOULD NOT BE LEGALLY CORRECT TO STATE THAT THE COPYRIGHT ITSELF OR RIGHT TO USE COPYRIGHT HAS BEEN TRANSFERRED TO ANY EXTENT. THE PARTING OF INTELLECT UAL PROPERTY RIGHTS INHERENT IN AND ATTACHED TO THE SOFTWARE PRODUCT IN FAVOUR OF THE LICENSEE/CUSTOMER IS WHAT IS CONTEMPLATED BY THE TR EATY. MERELY AUTHORIZING OR ENABLING A CUSTOMER TO HAVE THE BENE FIT OF DATA OR INSTRUCTIONS CONTAINED THEREIN WITHOUT ANY FURTHER RIGHT TO DEAL WITH THEM INDEPENDENTLY DOES NOT, AMOUNT TO TRANSFER OF RIGHT S IN RELATION TO COPYRIGHT OR CONFERMENT OF THE RIGHT OF USING THE COPYRIGHT. THE TRANSFER OF RIGHTS IN OR OVER COPYRIGHT OR THE CONFERMENT OF THE RIGHT OF US E OF COPYRIGHT IMPLIES THAT THE TRANSFEREE/LICENSEE SHOULD ACQUIRE RIGHTS EITHE R IN ENTIRETY OR PARTIALLY CO-EXTENSIVE WITH THE OWNER/ TRANSFEROR WHO DIVESTS HIMSELF OF THE RIGHTS HE POSSESSES PRO TANTO. 23 ITA NO.9130/DEL/2019 ASSESSMENT YEAR 2016-17 90. THE LICENSE GRANTED TO THE LICENSEE PERMITTING HIM TO DOWNLOAD THE COMPUTER PROGRAMME AND STORING IT IN THE COMPUTER F OR HIS OWN USE IS ONLY INCIDENTAL TO THE FACILITY EXTENDED TO THE LICENSEE TO MAKE USE OF THE COPYRIGHTED PRODUCT FOR HIS INTERNAL BUSINESS PURPO SE. THE SAID PROCESS IS NECESSARY TO MAKE THE PROGRAMME FUNCTIONAL AND TO H AVE ACCESS TO IT AND IS QUALITATIVELY DIFFERENT FROM THE RIGHT CONTEMPLA TED BY THE SAID PARAGRAPH BECAUSE IT IS ONLY INTEGRAL TO THE USE OF COPYRIGHT ED 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. 91. THERE IS NO TRANSFER OF ANY RIGHT IN RESPECT 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 PURCHA SE PRICE OF AN ARTICLE AND CANNOT BE CONSIDERED AS ROYALTY EITHER UNDER TH E INCOME TAX ACT OR UNDER THE DTAA. 24. THE HONBLE HIGH COURT THEN REFERRED TO THE DEC ISION OF THE HONBLE HIGH COURT OF KARNATAKA IN CIT VS. SAMSUNG ELECTRONICS C O. LTD. (SUPRA) AND DISTINGUISHED THE SAME HOLDING AS UNDER:- 98. WE ARE NOT IN AGREEMENT WITH THE DECISION OF TH E ANDHRA PRADESH HIGH COURT IN THE CASE OF SAMSUNG ELECTRONICS CO. L TD (SUPRA) THAT RIGHT TO MAKE A COPY OF THE SOFTWARE AND STORING THE SAME IN THE HARD DISK OF THE DESIGNATED COMPUTER AND TAKING BACKUP COPY WOULD AM OUNT TO COPYRIGHT WORK UNDER SECTION 14(1) OF THE COPYRIGHT ACT AND T HE PAYMENT MADE FOR THE GRANT OF THE LICENCE FOR THE SAID PURPOSE WOULD CONSTITUTE ROYALTY. THE LICENSE GRANTED TO THE LICENSEE PERMITTING HIM TO D OWNLOAD THE COMPUTER PROGRAMME AND STORING IT IN THE COMPUTER FOR HIS OW N USE WAS ONLY INCIDENTAL TO THE FACILITY EXTENDED TO THE LICENSEE TO MAKE USE OF THE COPYRIGHTED PRODUCT FOR HIS INTERNAL BUSINESS PURPO SE. THE SAID PROCESS WAS NECESSARY TO MAKE THE PROGRAMME FUNCTIONAL AND TO HAVE ACCESS TO IT AND IS QUALITATIVELY DIFFERENT FROM THE RIGHT CONTE MPLATED BY THE SAID PROVISION BECAUSE IT IS ONLY INTEGRAL TO THE USE OF COPYRIGHTED PRODUCT. THE RIGHT TO MAKE A BACKUP COPY PURELY AS A TEMPORARY P ROTECTION AGAINST LOSS, DESTRUCTION OR DAMAGE HAS BEEN HELD BY THE DELHI HI GH COURT IN DIT V. M/S NOKIA NETWORKS OY (SUPRA) AS NOT AMOUNTING TO ACQUI RING A COPYRIGHT IN THE SOFTWARE. 24 ITA NO.9130/DEL/2019 ASSESSMENT YEAR 2016-17 25. FURTHER, THE HONBLE HIGH COURT OF DELHI IN PR. CIT VS M.TECH INDIA LTD. (P.) [2017] 381 ITR 31 (DEL.) HELD AS UNDER:- 12. IN THE CASES WHERE AN ASSESSEE ACQUIRES THE RI GHT TO USE A SOFTWARE, THE PAYMENT SO MADE WOULD AMOUNT TO ROYALTY. HOWEVE R IN CASES WHERE THE PAYMENTS ARE MADE FOR PURCHASE OF SOFTWARE AS A PRODUCT, THE CONSIDERATION PAID CANNOT BE CONSIDERED TO BE FOR U SE OR THE RIGHT TO USE THE SOFTWARE. IT IS WELL SETTLED THAT WHERE SOFTWAR E IS SOLD AS A PRODUCT IT WOULD AMOUNT TO SALE OF GOODS. IN THE CASE OF TATA CONSULTANCY SERVICES V. STATE OF ANDHRA PRADESH: (2004) 271 ITR 401 (SC), T HE SUPREME COURT EXAMINED THE TRANSACTIONS RELATING TO THE PURCHASE AND SALE OF SOFTWARE RECORDED ON A CD IN THE CONTEXT OF THE ANDHRA PRADE SH GENERAL SALES TAX ACT. THE COURT HELD THE SAME TO BE GOODS WITHIN THE MEANING OF SECTION 2(B) OF THE SAID ACT AND CONSEQUENTLY EXIGIBLE TO SALES TAX UNDER THE SAID ACT. CLEARLY, THE CONSIDERATION PAID FOR PURCHASE OF GOO DS CANNOT BE CONSIDERED AS ROYALTY. THUS, IT IS NECESSARY TO MAKE A DISTI NCTION BETWEEN THE CASES WHERE CONSIDERATION IS PAID TO ACQUIRE THE RIGHT TO USE A PATENT OR A COPYRIGHT AND CASES WHERE PAYMENT IS MADE TO ACQUIR E PATENTED OR A COPYRIGHTED PRODUCT/MATERIAL. IN CASES WHERE PAYMEN TS ARE MADE TO ACQUIRE PRODUCTS WHICH ARE PATENTED OR COPYRIGHTED, THE CONSIDERATION PAID WOULD HAVE TO BE TREATED AS A PAYMENT FOR PURCHASE OF THE PRODUCT RATHER THAN CONSIDERATION FOR USE OF THE PATENT OR COPYRIG HT. 26. THE HONBLE HIGH COURT HAS THUS, MADE DISTINCTI ON BETWEEN THE CASES WHERE CONSIDERATION IS PAID TO ACQUIRE RIGHT TO USE , PATENT OR COPYRIGHT AND CASES WHERE PAYMENT IS MADE TO ACQUIRE PATENTED OR COPYRIGHTED PRODUCTS / MATERIAL AND HAS HELD THAT WHERE THE PAYMENT IS MAD E TO ACQUIRE PRODUCTS WHICH ARE PATENTED OR COPYRIGHTED, CONSIDERATION PA ID WOULD HAVE TO BE TREATED AS PAYMENT FOR PURCHASE OF PRODUCT RATHER THAN CONS IDERATION FOR USE OF PATENT OR COPYRIGHT. IN PARA 13, THE HONBLE HIGH COURT I N PR.CIT VS. M.TECH INDIA (P) LTD. (SUPRA) REFERS TO EARLIER DECISION OF COORDINA TE BENCH OF THE HONBLE HIGH COURT OF DELHI IN DIT VS. INFRASOFT LTD. (SUPRA) AN D ALSO REFERS TO THE RELIANCE 25 ITA NO.9130/DEL/2019 ASSESSMENT YEAR 2016-17 PLACED UPON BY THE REVENUE ON THE DECISION OF THE H ONBLE HIGH COURT OF KARNATAKA IN CIT VS. SAMSUNG ELECTRONICS CO. LTD. ( SUPRA) AND HOLDS THAT THE BENCH IN DIT VS. INFRASOFT LTD. (SUPRA) HAS UNEQUIV OCALLY EXPRESSED ITS VIEW THAT IT WAS NOT IN AGREEMENT WITH THAT DECISION. T HE QUESTION WAS THUS, DECIDED HOLDING THE CONSIDERATION PAID COULD NOT BE CONSIDERED AS ROYALTY FOR USE OR RIGHT TO USE SOFTWARE. 27. FURTHER, REFERENCE MAY ALSO BE MADE TO EARLIER DECISION OF THE HONBLE HIGH COURT OF DELHI IN DIT VS. ERICSSON A.B. (SUPRA ). RELYING ON THE RATIO LAID DOWN BY THE HON'BLE SUPREME COURT IN TATA CONSULTAN CY SERVICES VS. STATE OF ANDHRA PRADESH (2004) 271 ITR 401 (SC), THE HONBLE HIGH COURT OF DELHI IN DIT VS. ERICSSON A.B. (SUPRA) HAD HELD AS UNDER:- 56. A FORTIORARI WHEN THE ASSESSEE SUPPLIES THE SOF TWARE WHICH IS INCORPORATED ON A CD, IT HAS SUPPLIED TANGIBLE PROP ERTY AND THE PAYMENT MADE BY THE CELLULAR OPERATOR FOR ACQUIRING SUCH PR OPERTY CANNOT BE REGARDED AS A PAYMENT BY WAY OF ROYALTY. .. 59. BE THAT AS IT MAY, IN ORDER TO QUALIFY AS ROYAL TY PAYMENT, WITHIN THE MEANING OF SECTION 9(1)(VI) AND PARTICULARLY CLAUSE (V) OF EXPLANATION 2 THERETO, IT IS NECESSARY TO ESTABLISH 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. SECTION 2(O) OF THE CO PYRIGHT ACT MAKES IT CLEAR THAT A COMPUTER PROGRAMME IS TO BE REGARDED AS A 'L ITERARY WORK'. THUS, IN ORDER TO TREAT THE CONSIDERATION PAID BY THE CELLUL AR OPERATOR AS ROYALTY, IT IS TO BE ESTABLISHED THAT THE CELLULAR OPERATOR, BY MAKING SUCH PAYMENT, OBTAINS ALL OR ANY OF THE COPYRIGHT RIGHTS OF SUCH LITERARY WORK. IN THE PRESENT CASE, THIS HAS NOT BEEN ESTABLISHED. IT IS NOT EVEN THE CASE OF THE REVENUE THAT ANY RIGHT CONTEMPLATED UNDER SECTION 1 4 OF THE COPYRIGHT ACT, 1957, STOOD VESTED IN THIS CELLULAR OPERATOR A S A CONSEQUENCE OF ARTICLE 20 OF THE SUPPLY CONTRACT. DISTINCTION HAS TO BE MA DE BETWEEN THE ACQUISITION OF A 'COPYRIGHT RIGHT' AND A 'COPYRIGHT ED ARTICLE'. 26 ITA NO.9130/DEL/2019 ASSESSMENT YEAR 2016-17 60. MR. DASTUR IS RIGHT IN THIS SUBMISSION WHICH IS BASED ON THE COMMENTARY ON THE OECD MODEL CONVENTION. SUCH A DIS TINCTION HAS BEEN ACCEPTED IN A RECENT RULING OF THE AUTHORITY FOR AD VANCE RULING (AAR) IN DASSAULT SYSTEMS KK 229 CTR 125. WE ALSO FIND FORCE IN THE SUBMISSION OF MR. DASTUR THAT EVEN ASSUMING THE PAYMENT MADE B Y THE CELLULAR OPERATOR IS REGARDED AS A PAYMENT BY WAY OF ROYALTY AS DEFINED IN EXPLANATION 2 BELOW SECTION 9 (1) (VI), NEVERTHELES S, IT CAN NEVER BE REGARDED AS ROYALTY WITHIN THE MEANING OF THE SAID TERM IN ARTICLE 13, PARA 3 OF THE DTAA. THIS IS SO BECAUSE THE DEFINITION IN THE DTAA IS NARROWER THAN THE DEFINITION IN THE ACT. ARTICLE 13(3) BRING S WITHIN THE AMBIT OF THE DEFINITION OF ROYALTY A PAYMENT MADE FOR THE USE OF OR THE RIGHT TO USE A COPYRIGHT OF A LITERARY WORK. THEREFORE, WHAT IS CO NTEMPLATED IS A PAYMENT THAT IS DEPENDENT UPON USER OF THE COPYRIGHT AND NO T A LUMP SUM PAYMENT AS IS THE POSITION IN THE PRESENT CASE. WE THUS HOLD THAT PAYMENT RECEIVED BY THE ASSESSEE WAS TOWARDS THE TITLE AND GSM SYSTEM OF WHICH SOFTWARE WAS AN INSEPARABLE PARTS INCAPABLE OF INDEPENDENT USE AND IT WAS A CONTRACT FOR SUPPLY OF GOODS. THEREFORE, NO PART OF THE PAYMENT THEREFORE CAN BE CLASSIFIED AS PAYMENT TOWARDS ROYALTY. 28. THE HONBLE HIGH COURT OF DELHI IN DIT VS. INFR ASOFT LTD. (SUPRA) HAS TAKEN NOTE OF THE SAID DECISION OF DIT VS. ERICSSON A.B. (SUPRA) IN PARA 71 AND IN PARA 72 HELD AS UNDER:- 72. THE DELHI HIGH COURT FURTHER IN ERICSSON CASE (SUPRA) FURTHER HELD THAT ONCE IT IS HELD THAT PAYMENT IN QUESTION IS NO T ROYALTY WHICH WOULD COME WITHIN THE MISCHIEF OF CLAUSE (VI), THE EXPLAN ATION WILL HAVE NO APPLICATION AND THAT THE QUESTION OF APPLICABILITY OF THE EXPLANATION WOULD ARISE ONLY WHEN PAYMENT IS TO BE TREATED AS 'ROYALT Y' WITHIN THE MEANING OF CLAUSE (VI) OR 'FEE FOR TECHNICAL SERVICES' AS P ROVIDED IN CLAUSE (VII) OF THE ACT. 29. THE HONBLE HIGH COURT OF DELHI IN DIT VS. NOKI A NETWORKS OY (2013) 358 ITR 259 (DEL) HAD HELD THAT EXPLANATION 4 WAS A DDED TO SECTION 9(1)(VI) OF THE ACT BY FINANCE ACT, 2012 WITH RETROSPECTIVE EFF ECT FROM 01.06.1976 TO 27 ITA NO.9130/DEL/2019 ASSESSMENT YEAR 2016-17 PROVIDE THAT ALL CONSIDERATION FOR USE OF SOFTWARE SHALL BE ASSESSABLE AS ROYALTY. HOWEVER, THE DEFINITION IN DTAA HAS BEE N LEFT UNCHANGED. IT IS AN ADMITTED FACT THAT THOUGH EXPLANATION 5 HAS BEEN IN SERTED IN SECTION 9(1)(VI) OF THE ACT BUT NO AMENDMENT HAS BEEN MADE TO THE DEFIN ITION OF ROYALTY UNDER DTAA AND SINCE THE PROVISIONS OF DTAA ARE BENEFICI AL TO THE ASSESSEE, THEN THE SAID PROVISIONS WOULD BE APPLIED. 30. IN VIEW OF THE ABOVE SAID PROPOSITIONS, WE HOLD THAT WHAT HAS BEEN TRANSFERRED IS LIMITED RIGHT TO USE COPYRIGHTED MAT ERIAL, THEN THE RECEIPTS ON SALE OF LICENSING OF SOFTWARE IS NOT ROYALTY IN VIE W OF THE BENEFICIAL PROVISIONS OF THE DTAA BETWEEN INDIA AND SWEDEN. WE FURTHER HOLD THAT AMENDED DEFINITION OF ROYALTY UNDER THE DOMESTIC LAW CANNOT BE EXTEN DED TO THE DEFINITION OF ROYALTY UNDER DTAA, WHERE THE TERM ROYALTY ORIG INALLY DEFINED HAS NOT BEEN AMENDED. AS PER DEFINITION OF ROYALTY UNDER DTAA , IT IS PAYMENT RECEIVED IN CONSIDERATION FOR USE OR RIGHT TO USE ANY COPYRIGHT OF LITERARY, ARTISTIC OR SCIENTIFIC WORK, ETC.; THUS, PURCHASE OF COPYRIGHTE D ARTICLE DOES NOT FALL IN REALM OF ROYALTY. WE ALSO HOLD THAT SINCE THE PROVISIO NS OF DTAA OVERRIDES THE PROVISIONS OF INCOME TAX ACT AND ARE MORE BENEFICIA L AND THE DEFINITION OF ROYALTY HAVING NOT UNDERGONE ANY AMENDMENT IN TAX TREATY, THE ASSESSEE WAS NOT LIABLE TO BE TAXED ON AFORESAID RECEIPTS OF LICENSING SOFTWARE AND ALSO ON SALE OF HARDWARE. ACCORDINGLY, WE HOLD SO. THE GROUND OF APPEAL NOS. 3 TO 6 ARE THUS ALLOWED. 28 ITA NO.9130/DEL/2019 ASSESSMENT YEAR 2016-17 31. THE GROUND OF APPEAL NOS. 7 TO 9 ARE ALTERNAT IVE AND IN VIEW OF OUR DECIDING THE ISSUE OF TAXABILITY OF ROYALTY INCOM E, BECOMES ACADEMIC; HENCE, DISMISSED. 32. THE GROUND OF APPEAL NO.10 OF CHARGING INTERES T U/S 234A & 234B OF THE ACT IS CONSEQUENTIAL; HENCE, DISMISSED. 33. THE GROUND OF APPEAL NO.11 IS PREMATURE; HENCE , DISMISSED. 34. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 06 TH JULY, 2020. SD/- SD/- (PRASHANT MAHARISHI) (SUSHMA CHOWLA) +, - / ACCOUNTANT MEMBER ! / VICE PRESIDENT / DATED : 06 TH JULY, 2020 * AMIT KUMAR * +%3$/&7(8+(&9 COPY OF THE ORDER IS FORWARDED TO : 1. 01 / THE APPELLANT 2. $201 / THE RESPONDENT 3. :& ; < / THE CIT(A) 4. = :& / THE PR. CIT 5. 6. (>?$/&/ * * / DR, ITAT, DELHI ?)@9 GUARD FILE. +% / BY ORDER , 2(&$/& // TRUE COPY // ' AB-C , * ASSISTANT REGISTRAR, ITAT, DELHI