Appeal Details
Counselvise Citation
[2014] 140 COUNSELVISE.COM (IT) 82523 (ITAT-HYDERABAD)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
4 year(s) 5 month(s) 12 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
27-11-2014
Appeal Filed By
Department
Order Result
Dismissed
Bench Allotted
A
Next Hearing Date
09-02-2011
Assessment Year
2009-2010
Appeal Filed On
15-06-2010
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A', HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER ITA NO. 918/HYD/2010 ASSESSMENT YEAR: 2009-10 ASST. DIRECTOR OF INCOME- TAX (INTERNATIONAL TAXATION) I, HYDERABAD VS. M/S BARTRONICS INDIA LTD., HYDERABAD. PAN AAACB8231F APPELLANT RESPONDENT REVENUE BY: SRI P. SOMA SEKHAR REDDY ASSESSEE BY: SRI P. MURALI MOHAN RAO DATE OF HEARING: 28/11/2013 DATE OF PRONOUNCEMENT: 27/01/2014 O R D E R PER CHANDRA POOJARI, AM: THIS APPEAL PREFERRED BY THE REVENUE IS DIRECTED AG AINST THE ORDER OF THE CIT(A)-VI, HYDERABAD DATED 25/03/2010 FOR THE ASSESSMENT YEAR 2009-10 WHEREIN THE REVENUE HAS RAI SED THE FOLLOWING GROUNDS OF APPEAL: 1. THE LD. CIT(A) ERRED IN LAW AND ON THE FACTS OF THE CASE. 2. THE LEARNED CIT(A) HAS ERRED IN NOT APPRECIATING THE FULL FACTS OF THE CASE, NOR HAS BROUGHT OUT ON RECORD THE FULL FACTS FROM THE ASSESSEE REGARDING NON-SUBMISSION OF ANY AGREEMENT OR DELAYED SUBMISSION OF THE SUPPLEMENTARY AGREEMENTS. 3 THE LD. CIT(A) HAS ERRED IN FACTS AND LAW BY HOLD ING THAT SOFTWARE AND SOURCE CODE ARE TWO SEPARATE ITEMS OF TRANSACTIONS WHEREAS THE SOURCE CODE IS HIGHLY CRIT ICAL TO ANY SOFTWARE HAVING HIGHER INTRINSIC VALUE COMPARED TO A SOFTWARE APPLICATION AS A WHOLE. 4. THE LD. CIT(A) HAS ERRED IN LAWS TREATING THE TR ANSACTION AS BUSINESS INCOME, WHEREAS THE TRANSACTION IS ACTUALL Y IN THE NATURE OF ROYALTIES AND FEES FOR TECHNICAL SERVICES . I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 2 5. THE LD. CIT(A) HAS ERRED IN LAWS BY HOLDING THE ROYALTIES IN ARTICLE 12 OF DTAA (INDIA AND SINGAPORE) OR SECTION 9 OF IT ACT AS FEES FOR TECHNICAL SERVICES DOES NOT APPLY. 2. BRIEFLY THE FACTS OF THE CASE ARE THAT THE ASSES SEE IS A COMPANY ENGAGED IN THE BUSINESS OF PROVIDING ENTERPRISE SOL UTIONS BASED ON SMART CARDS, BAR CODING, BIOMETRICS ETC. A SURVEY U /S 133A WAS CONDUCTED ON 11/02/2009 IN THE BUSINESS PREMISES OF THE ASSESSEE BY THE DEPARTMENT TO VERIFY THE TDS PAYMENTS MADE BY T HE ASSESSEE. IT WAS NOTICED BY THE ASSESSING OFFICER THAT AN AMOUNT OF USD 2,00,57,969 (INR 97,41,67,421/-) AND USD 19,82,454 (INR 9,67,88,361/-) HAD BEEN ACCOUNTED AS PAYABLE/PAID T O GAMMA MACHINERY AND EQUIPMENTS PTE LTD., SINGAPORE (GAMMA ) AND INTRA ASIA TRADING PTE LTD., SINGAPURE (INTRA) FOR THE PU RPOSE OF COMPLETE SOURCE CODE FOR CONTACT/CONTACT LESS SMART CARDS OP ERATING SYSTEMS FOR TRANSPORT APPLICATION, CONFORMING TO NATIONAL I NFORMATICS CENTRE, GOVT OF INDIA STANDARDS WITH INTELLECTUAL PROPERTY RIGHTS ALONG WITH NECESSARY DEVELOPMENT, TESTING, SOFT AND HARD MASKI NG PROCESS INSTRUCTIONS AND USER DOCUMENTATION FOR VARIOUS COM PANIES IC MODULES/MICRO CONTROLLER RANGE OF VARIOUS EEPROM SI ZES. THE ADIT, AFTER ASCERTAINING THE DETAILS, FINALLY CONCLUDED T HAT THE ABOVE AMOUNTS PAYABLE/PAID BY THE ASSESSEE COMPANY IS LIA BLE FOR TDS U/S 195 OF THE IT ACT AND ACCORDINGLY WORKED OUT THE LI ABILITY U/S 201(1) AND INTEREST U/S 201(1A). THE DETAILS OF AMOUNTS PA ID TO THE FOREIGN COMPANIES AND TDS LIABILITY U/S 201(1) AND INTEREST U/S 201(1A) DETERMINED BY THE ADIT WERE AS UNDER:- NAME OF THE FOREIGN COMPANY PAYMENT GROSSED UP (RS.) TDS LIABILITY U/S 201(1) INTEREST U/S 201(1A) INTRA ASIA TRADING PTE LTD., SINGAPORE 107542623 10754262 322628 GAMMA MACHINERY & EQUIPMENTS PTE LTD., SINGAPORE 1082408246 108240825 6494449 TOTAL 118995087 6817077 I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 3 AGGRIEVED, THE ASSESSEE CARRIED THE MATTER IN APPEA L BEFORE THE CIT(A). 3. BEFORE THE CIT(A), IT WAS SUBMITTED THAT THE BUS INESS OF THE ASSESSEE IS COVERED BY ARTICLES 7 AND 5 OF DTAAS AN D UNDER ARTICLE 7 OF THE DTAAS, INCOME EARNED BY A NON-RESIDENT IN IN DIA UNDER THE HEAD BUSINESS CAN BE TAXED IN INDIA ONLY IF THE NON-RESIDENT HAS A PERMANENT ESTABLISHMENT (PE) IN INDIA. PERMANENT ESTABLISHMENT ITSELF IS DEFINED IN ARTICLE 7, AND IT MEANS A PERM ANENT BRANCH OR A PERMANENT OFFICE LOCATED IN INDIA. IF THE BUSINESS IS CARRIED ON THROUGH EMPLOYEES AND IF THOSE EMPLOYEES STAY IN INDIA FOR LESS THAN 183 DAYS IN THE CASES OF SINGAPORE THERE WILL BE NON PE IN I NDIA AND THE CORRESPONDING BUSINESS PROFIT OF THE NON-RESIDENT B ECOMES NON- TAXABLE. 3.1 FURTHER, IT WAS SUBMITTED THAT NONE OF THE TWO FOREIGN PARTIES HAS A PE SITUATED IN INDIA, SINCE NONE OF THEM HAVE A BRANCH OR AN OFFICE IN INDIA AND, THEREFORE, IN THE ABSENCE OF A PE THERE CAN BE NO TAXABLE BUSINESS PROFIT ARISING IN INDIA FOR ANY OF THE ABOVE FOREIGN PARTIES, IN VIEW OF ARTICLE 7 OF EACH OF THE DTAAS. IT WAS ALSO SUBMITTED THAT THOUGH THE SERVICES RENDERED BY THE SINGAPORE INDIVIDUAL MUST BE CONSIDERED AS INDEPENDENT PERSON AL SERVICES, AS AN ALTERNATIVE SUBMISSION, IT SHOULD BE CONSIDERED UNDER THE HEAD BUSINESS. SINCE THERE IS NO PE FOR ANY OF THESE PAR TIES IN INDIA, THE BUSINESS INCOME IS EXEMPT FROM TAXATION UNDER ARTIC LE 7 READ WITH ARTICLE 5. 3.2 WITHOUT PREJUDICE TO THE ABOVE SUBMISSIONS, IT WAS SUBMITTED THAT THE RATES OF TAX ADOPTED BY THE ASSESSING OFFI CER ARE NOT IN ACCORDANCE WITH THE DTAA RATES. 3.3 FURTHER, IT WAS SUBMITTED THAT THE APPLICATIONS OF SMART CARDS IN VARIOUS FIELD SUCH AS BANKS AND SOCIAL SEGMENT IS U NIVERSAL AND I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 4 SOFTWARE RELATING TO THE APPLICATION ARE DEVELOPED BY THE SOFTWARE DEVELOPERS MATCHING THE REQUIREMENT AND MADE AVAILA BLE TO THE BUYERS AS TAILOR-MADE-OFF SHELF PRODUCTS. THUS, THE ACQUISITION/PURCHASE OF THE SET IS A PRODUCT ALONG WITH THE ATTACHED IP RIGHTS DISTINGUISHED CLEARLY AND PAID ACCORDINGLY A ND ACCOUNTED ACCORDINGLY. IT WAS SUBMITTED THAT THE ASSESSEE IS UNDER THE IMPRESSION THAT THE PAYMENTS MADE SQUARELY FALL UN DER GOODS. IT WAS FINALLY SUBMITTED THAT AS THERE IS NO INCOME DEEMED TO BE ACCRUED OR ARISE IN INDIA OUT OF THE ABOVE AND IT IS BEING BUS INESS PROFIT FOR THE NON-RESIDENT COMPANY AND AS THERE IS NO PERMANENT E STABLISHMENT EXIST IN INDIA, THE PROVISIONS OF SECTION 195 AND S ECTION 201 OF THE IT ACT ARE NOT APPLICABLE TO THE ASSESSEE COMPANY AND TAX DEDUCTION DOES NOT ARISE. THE ASSESSEE RELIED ON VARIOUS CASE LAWS BEFORE THE CIT(A) WHICH WERE EXTRACTED BY THE CIT(A) AT PAGES 15 TO 21 OF THE IMPUGNED ORDER. 4. THE CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AS WELL AS THE SUBMISSIONS OF THE ADIT DURING APPEL LATE PROCEEDINGS, DISCUSSED THE ISSUE ELABORATELY WITH VARIOUS CASE L AWS FROM PARAS 6 TO 7 SPREAD OVER PAGES 21 TO 55 AND HELD THAT THE AMOUNTS PAID TO INTRA ASIA TRADING PVT. LTD., SINGAPURE AND GAMMA M ACHINERY AND EQUIPMENTS PTE LTD., SINGAPORE, TOWARDS PURCHASE OF SOFTWARE DO NOT ATTRACT TDS. THE CONCLUDING PARAS OF CIT(A) ARE AS UNDER: 8.0 ON THE FACTUAL FINDINGS OF THE ADIT IN THE FACTS AN D CIRCUMSTANCES OF THE CASE, THE AR STRONGLY OBJECTED TO THE SAME AND CONTENDED THAT THE APPELLANT IS NOT LIABLE TO DEDUCT TAXES U/S 195(1) OF THE ACT. ON A CAREFUL PERUSAL O F THE ORDER U/S 201(1) OF THE ADIT AND THE SUPPLEMENTARY AGREEMENTS ENTERED INTO BY THE PARTIES I AM OF THE CONSIDERED OPINION THAT THE ADIT IS NOT ENTIRELY CORRECT IN HIS APPROACH. IN THE CAS E OF TATA CONSULTANCY SERVICES VS. STATE OF AP [2004] 271 ITR 401 9SC), THE HONBLE SUPREME COURT OBSERVED THAT THE INTELL ECTUAL PROPERTY INCORPORATED ON MEDIA FOR THE PURPOSE OF TRANSFER SHOULD BE CONSIDERED AS SALE OF GOOD UNDER THE APGS T ACT. IN THE NORMAL CIRCUMSTANCES, CASES DECIDED UNDER SALES TAX LAW ARE NOT APPLICABLE TO INCOME TAX LAW. HOWEVER, THE AFORESAID CASE LAW IS RELIED ONLY FOR THE LIMITED PROPOSITION THAT INTELLECTUAL PROPERTY INCORPORATED ON MEDIA FOR THE PURPOSE OF I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 5 TRANSFER SHOULD BE CONSIDERED AS SALE OF GOODS. IN THE PRESENT CASE, THE ADIT HAVING ACCEPTED THAT THE FOREIGN COM PANIES TRANSFERRED THE SOFTWARE TO THE APPELLANT IN THEIR CAPACITY AS TRADING AGENCIES AND INTERMEDIARIES, IT CANNOT BE S AID THAT THEY HAVE PARTED WITH THEIR EXCLUSIVE RIGHTS ENTITLING T HEM WITH ROYALTY. IT CANNOT ALSO BE SAID THAT THE SAME WOULD CONSTITUTE FEES FOR TECHNICAL SERVICES PAID TO THE FOREIGN COM PANIES AS CONSIDERATION FOR RENDERING OF TECHNICAL SERVICES A SSOCIATED WITH THE SOURCE CODE FOR SMART CARD OPERATING SYSTEM A ND RELATED TECHNICAL SERVICES FOR THE SAME REASON THAT THE FOR EIGN COMPANIES INVOLVED IN THE TRANSACTION MERELY TRANSF ERRED THE STOCK IN TRADE HELD BY THEM IN THEIR REGULAR COURSE OF BUSINESS WITHOUT RENDERING ANY TECHNICAL SERVICES. 8.1 THUS, THE APPELLANT AS WELL AS THE FOREIGN COMP ANIES ACTED ON THE AGREEMENTS ENTERED INTO BY THEM. THE A PPELLANT COMPANY MADE THE OUTRIGHT PURCHASE ON THEIR OWN ACC OUNT AND THOSE TRANSACTIONS WERE SUPPORTED BY PROPER DOCUMEN TS SUCH AS INVOICES, SHIPPING DOCUMENTS ETC. THEREFORE I AM OF THE VIEW THAT IMPROPER ANALYSATION OF THE FACTS BY THE ADIT( IT) LED HIM TO AN IMPROPER CONCLUSION THAT IN RESPECT OF A PACKAGE TRANSACTION WHICH IS NOW UNDER CONSIDERATION THE ENTIRE AMOUNT HAS TO BE CONSIDERED EITHER AS ROYALTY OR FEES FOR TECHNIC AL SERVICES. THUS, THE ADIT(IT) MISSED THE TRACK FROM SUM AND SU BSTANCE OF THE TRANSACTION INVOLVING PURCHASE OF PRODUCTS UNDE R DIFFERENT AGREEMENTS. IN VIEW OF THAT, THE SUPPLEMENTARY AGRE EMENT ALONE WILL MAKE THE FOREIGN COMPANIES LIABLE TO TAX FOR THE PURPOSE OF INDIAN INCOME TA ACT, 1961 WHICH CONSEQU ENTLY MAKE THE APPELLANT LIABLE U/S 195(1) FOR THE PAYMEN T MADE BY IT TOWARDS INTELLECTUAL PROPERTY RIGHTS SOURCE CODE. O N THE OTHER HAND, PAYMENTS MADE FOR PURCHASE OF THE SOFTWARE IT SELF BEING COVERED AS THE SALE OF GOODS AND HENCE THE SAME CAN NOT BE SUBJECT TO TAX FOR THE PURCHASE OF SOFTWARE WHICH I S OUTSIDE THE PURVIEW OF TAXATION OF WITHHOLDING TAX. 8.2 IN EARLIER PART OF THIS ORDER, I HAVE ALREADY H ELD THAT THE AMOUNT INVOLVED IN THIS TRANSACTION CONSTITUTE BUSI NESS INCOME OF THE FOREIGN COMPANIES AND NOT LIABLE FOR DEDUCTI ON OF TAX AT SOURCE U/S 195(1) OF THE IT ACT AND SINCE THE PAYME NTS INVOLVED WERE IDENTIFIED AS BUINESS INCOME OF THE FOREIGN COMPANIES THE QUESTION OF GIVING A FINDING REGARDING RATE OF TAX APPLICABLE FOR THESE TRANSACTIONS DOES NOT ARISE. 8.3 CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE, THE TRANSACTION UNDER THE CONSIDERATION EFFECTED BY THE APPELLANT SHOULD BE CONSIDERED AS BUSINESS TRANSACTION AS ENV ISAGED UNDER ARTICLE 7 OF IND-SINGAPORE DTAA. SINCE THE AP PELLANT HAS BROUGHT A READYMADE OFF THE SHELF COMPUTER PROGRAMM E WHICH DOES NOT GRANT ANY RIGHT TO UTILIZE THE COPY RIGHT OF THE COMPUTER PROGRAMME, I AM OF THE VIEW THAT THE PAYMENTS MADE BY THE I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 6 APPELLANT COMPANY CANNOT BE HELD AS ROYALTIES COM ING INTO THE AMBIT OF ARTICLE 12 OF DTAA OR FEE FOR TECHNICAL S ERVICES U/S 9(1)(VII) OF IT ACT AND ACCORDINGLY NO TAX NEED TO BE DEDUCTED U/S 195 OF THE IT ACT. 9. IN VIEW OF THE ABOVE, I HOLD THAT THE AMOUNTS PA ID TO INFRA ASIA TRADING PVT. LTD., SINGAPORE AND GAMMA MACHINE RY AND EQUIPMENTS PTE LTD., SINGAPORE TOWARDS PURCHASE OF SOFTWARE DOES NOT ATTRACT TDS OR WITHHOLDING TAX ON THE FOLL OWING AMOUNTS: 1. PAYMENTS TO GAMMA MACHINERY RS. 97,41,67,421 [$20057969] 2. PAYMENT TO INFRA ASIA TRADING - RS. 9,67,88,361 [$1982454] 5. AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE US. 6. BEFORE US, THE LEARNED DR SUBMITTED THAT THE CON SIDERATION PAID BY THE ASSESSEE COMPANY FOR THE SOURCE CODE(S) OF THE SMART CARD OPERATING SYSTEMS IS CHARACTERISED AS ROYALTIES A S PER THE DTAA, AS THE CONSIDERATION IS FOR THE USE OR RIGHT TO USE TH E SECRET FORMULA OR PROCESS AND ALSO FOR INFORMATION CONCERNING INDUST RIAL, COMMERCIAL OR SCIENTIFIC EXPERIENCE. IT WAS FURTHER SUBMITTED TH AT THE SAID CONSIDERATION ALSO FALLS WITHIN THE DEFINITION OF FEES FOR TECHNICAL SERVICES AS DEFINED IN THE TREATY. IT WAS ALSO SUB MITTED THAT AS PER PARAS 1 AND 2 OF THE ARTICLE 12, THE ROYALTIES OR F EES FOR TECHNICAL SERVICES ARISING IN A CONTRACTING STATE (INDIA) MAY ALSO BE TAXED IN THE CONTRACTING STATE IN WHICH THEY ARISE ACCORDING TO THE LAWS OF THAT STATE, AND PROVIDED IF THE BENEFICIAL OWNER OF THE ROYALTIES IS A RESIDENT OF THE OTHER CONTRACTING STATE (SINGAPORE) , THE TAX SO CHARGED SHALL NOT EXCEED 10 PER CENT OF THE GROSS AMOUNT OF THE ROYALTIES. 6.1 THE DR SUBMITTED THAT SECTION 195 OF THE IT ACT , 1961 PUTS RESPONSIBILITY ON THE PERSON RESPONSIBLE (BATRONICS OR ITS PRINCIPAL OFFICER) FOR PAYING TO A NON-RESIDENT (INTRA/GAMMA) , TO DEDUCT TAX ON THE SUM CHARGEABLE TO TAX. FURTHER IT WAS SUBMITTED THAT FROM THE ABOVE PROVISIONS, IT IS CLEAR THAT THE DEDUCTOR-ASS ESSEE WAS VERY MUCH REQUIRED TO MAKE DEDUCTION OF TAX AT SOURCE WH ILE MAKING PAYMENT ON ACCOUNT OF THE TRANSACTIONS UNDER CONSID ERATION. IT WAS I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 7 CONTENDED THAT SINCE THE ASSESSEE HAD NOT MADE ANY SUCH DEDUCTION OF TAX WHILE MAKING THE REMITTANCE TO THE NON-RESID ENT AND AS SUCH THE DEDUCTOR ASSESSEE IS LIABLE FOR THE CONSEQUENCE S OF ITS FAILURE TO DEDUCT TAX AND, THEREFORE, THE ASSESSING OFFICER HA S RIGHTLY MADE THE ADDITION U/S 201(1) AND 201(1A) OF THE ACTION. 7. ON THE OTHER HAND, THE LEARNED COUNSEL FOR THE A SSESSEE HAS FILED DETAILED WRITTEN SUBMISSIONS, WHICH ARE AS UN DER: A) THE PROVISIONS OF SECTION 195 OF THE INCOME TAX AC T, 1961 ARE NOT APPLICABLE IN THE RESPONDENT'S CASE. AS SUBMITTED IN THE FOREGOING PARAS, THE AO HAS RAI SED THE DEMAND IN DISPUTE BY INVOKING THE PROVISIONS OF SECTIONS 1 95 OF THE INCOME TAX ACT, 1961. IN THIS CONNECTION, IT IS SUBMITTED THAT THE VERY PROVISIONS OF SECTION 195 ARE NOT APPLICABLE TO THE ASSESSEE HEREIN FOR THE IMPUGNED PAYMENTS ARE MADE TO NON-RESIDENT FOREIGN COMPANIES WHICH ARE NOT COVERED BY THE PROVISIONS O F SECTION 195 OF THE I.T. ACT, 1961. GROUND WAS TAKEN BY THE ASSE SSEE HEREIN BEFORE THE 1 ST APPELLATE AUTHORITY ON THIS ISSUE AND THE ASSESSEE HEREIN RELIED ON THE ORDER OF THE CIT (APPEALS) IN PARA NOS. 7.2 TO 9 AT PAGE NOS. 37 TO 57 OF HIS ORDER. B) THE PAYMENTS UNDER CONSIDERATION ARE 'BUSINESS INC OMES' OF THE NON- RESIDENT COMPANIES. THE AR SUBMITTED THAT THE PROVISIONS OF SECTION 195 OF THE ACT ARE NOT APPLICABLE TO THE ASSESSEE HEREIN, SINCE THE PAYMENTS UNDER CONSIDERATION CONSTITUTED 'BUSINESS INCOME' O F THE NON- RESIDENT COMPANIES. THIS FACT IS VERY MUCH ACCEPTED BY THE AO VIDE CLAUSE (5) OF PARA NO.5 AT PAGE NOS. 21 AND 22 OF HIS ORDER. THE RELEVANT EXTRACT FROM THE ASSESSMENT ORDER IS AS UNDER: '5) THE COMPANY'S ARGUMENT THAT THE PAYMENT UNDER CONSIDERATION CONSTITUTE 'BUSINESS INCOME' OF THE N ON- I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 8 RESIDENT IS VALID, CONSIDERING THE FACT THAT THE NON RESIDENT IS IN THE BUSINESS OF TRADING IN THE 'UNIQ UE SOURCE CODE ITEMS' HELD AS STOCK IN TRADE OR IN THE BUSINESS OF RENDERING OF SERVICES IN THE REALM OF SOFTWARE AND RELATED TECHNOLOGY, AS THE CASE MAY BE . AS SUCH THE 'BUSINESS INCOME' OF THE NON-RESIDENT RECIPIENT WOULD BE CHARGEABLE UNDER THE HEAD 'PROFI TS AND GAINS OF BUSINESS OR PROFESSION' AS PER THE INCOME TAX ACT, 1961. THE COMPANY ALSO RIGHTLY OBSERVED THAT IF THERE IS NO 'PERMANENT ESTABLISHME NT' (PE) IN INDIA FOR THAT NON-RESIDENT, THERE WILL BE NO TAXABLE INCOME ACCRUING IN INDIA AS PER ARTICLES 7 AND 5 OF THE DTAA. BUT A THOROUGH READING OF ARTICLE 7 GIVES THE UNDERSTANDING THAT 'WHERE PROFITS INCLUDE ITEMS OF INCOME WHICH ARE DEALT WITH SEPARATELY IN OTHER ARTICLES OF THIS AGREEMENT, THEN THE PROVISIONS OF THOSE ARTICLES SHALL NOT BE AFFECTED BY THE PROVISI ONS OF THIS ARTICLE' (PARA 7). IN THE INSTANT CASE THOUGH THE CONSIDERATION FOR THE SOURCE CODE FOR THE SMART CAR D OPERATING SYSTEM CONSTITUTES 'BUSINESS PROFIT' OF T HE NON- RESIDENT, THE SAME CONSIDERATION CAN ALSO BE CHARACTERISED AS 'ROYALTIES' OR 'FEES FOR TECHNICAL SERVICES', AS THE CASE MAY BE. IN SUCH A SITUATION, WHERE THE BUSINESS INCOME/PROFIT OF THE NON-RESIDENT INCLUDE 'ROYALTIES' OR 'FEES FOR TECHNICAL SERVICES', THE T AXABILITY OF THESE ITEMS OF INCOME SHALL BE GOVERNED BY THE ARTICLE 12 OF THE DTAA WITH SINGAPORE. THIS IS IN SYNC WITH THE PRINCIPLE 'GENERALIA SPECIALIBUS NON-DEROGANT' WHICH LAYS DOWN THAT 'GENERAL PROVISIONS' WILL NOT OVERRI DE THE 'SPECIAL PROVISION'. IN THE CASE OF THE COMPANY, TH E PROVISIONS DEALING WITH 'ROYALTIES' OR 'FEES FOR TE CHNICAL SERVICES' UNDER THE ACT AS WELL AS DTAA ARE 'SPECIAL PROVISIONS' AND SHOULD BE GIVEN EFFECT TO THE EXTEN T OF I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 9 ITS SCOPE, LEAVING THE GENERAL PROVISION TO CONTROL CASES WHERE SPECIFIC PROVISIONS DO NOT APPLY.' WHILE ACCEPTING THAT THE IMPUGNED PAYMENTS CONSTITU TE THE 'BUSINESS INCOME OF THE NON-RESIDENT COMPANIES, THE AO HAS TAKEN A 'U' TURN BY OBSERVING THAT SAME CONSIDERATI ON CAN ALSO BE CHARACTERISED AS 'ROYALTIES' OR 'FEES FOR T ECHNICAL SERVICES', AS THE CASE MAY BE. THIS VIEW OF THE AO IS VAGUE AND BASE L ESS. THERE IS NO AMBIGUITY IN THE STATUE IN THIS REGARD. THE APPLICATION OF THE PRINCIPLE OF 'GENERALIA SPECIALIBUS NON-DEROGANT' IS MIS-QUOTED IN THE ASSESSEE'S CASE. EVEN IF THE SECOND VIEW TAKEN BY THE AO WERE TO BE CONSIDERED FOR ARGUMENT SAKE, THE AR SUBMITTED THAT IF TWO REASONABLE CONSTRUCTIONS OF A TAXING PROVISION ARE POSSIBLE, THAT CONSTRUCTION WHICH FAVOURS THE ASSESSEE MUST B E ADOPTED. THIS IS WELL ACCEPTED RULE OF CONSTRUCTION RECOGNISED BY THE SUPREME COURT IN THE CASE OF CIT VS VEGETABLE PRODUCTS LTD (1973) 88 ITR 192 (SC). IN THIS REGARD, THE ASSESSEE HEREIN, RELIED ON THE OBSERVATION OF THE CIT (APPEAL) IN PARA NOS. 6.0, 6.1, 6.2, 6.3 , 6.4, 6.5 AND 6.6 AT PAGE NUMBERS 21 TO 26 OF HIS ORDER. C) THERE IS NO NEED TO AO TO TRAVERSE BEYOND ARTICLE NO 7 OF THE DTAA BETWEEN INDIA AND SINGAPORE AND EXAMINE THE IMPUGNED TRANSACTIONS IN THE LIGHT OF ARTICLE NO 12 OF THE DTAA. THE AR SUBMITTED THAT THE ASSESSEE HERE IN HAS ACQ UIRED FROM THE NON-RESIDENT COMPANIES 'A READYMADE OFF THE SHE LF COMPUTER PROGRAMME TO BE USED IN ITS BUSINESS AND T HAT 'NO RIGHT' HAS BEEN GRANTED TO THE ASSESSEE HERE IN TO UTILIZE THE COPY RIGHT OF THE PROGRAMME. SINCE IN THE IMPUGNED TRANSACTIONS, A COMPUTER PROGRAMME CALLED 'SOFTWARE' HAS BEEN PUR CHASED, THE CONSIDERATION CANNOT BE TREATED AS, 'ROYALTY'. IN S UPPORT OF THIS, THE RESPONDENT HERE IN HAS RELIED ON THE FOLLOWING CASE LAWS: I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 10 1. CIT VS NEYVELI LIGNITE CORPORATION LTD [2000] 243 ITR 459 (MAD). 2. SONATA SOFTWARE LTD VS. INCOME TAX OFFICER [2006] 6 SOT 700 (BANG). 3. MPHASIS BFL LTD. VS INCOME TAX OFFICER [2006] 9 SO T 756 (BANG). 4. LUCENT TECHNOLOGIES HINDUSTAN LTD VS. INCOME TAX OFFICER [2005] 92 ITO 366 (BANG). THE ABOVE MENTIONED CASE LAWS AND THE ISSUE HAVE BE EN DISCUSSED BY THE CIT(APPEALS) IN PARA NOS. 6.6 TO 6 .8 AT PAGE NOS. 24 TO 29 OF HIS ORDER. THE ASSESSEE HEREIN REL IES ON THE OBSERVATIONS OF THE CIT(APPEALS). D) AO'S OBSERVATIONS OF FAILURE ON THE PART OF THE RE SPONDENT HERE IN TO BRING ON RECORD THE ORIGINAL DEVELOPER OF THE SO URCE CODE HAVE NO MERIT. THE AR SUBMITTED THAT VIDE PARA NO. 4.11 AT PAGE NO . 14 OF HIS ORDER, THE AO OBSERVED, AMONG OTHER THINGS, THAT TH E RESPONDENT HERE IN HAVING OBTAINED THE 'SOURCE CODE(S)' FROM INTRA/GAMMA (THE NON RESIDENT COMPANY) A MERE TRADI NG HOUSE, WHICH IS NEITHER A DEVELOPER NOR A BUSINESS HOUSE EXPERTISED IN DEVELOPMENT OF SOFTWARE/COMPUTER PROG RAMME, FAILED TO BRING ON RECORD THE ORIGINAL DEVELOPER, W HO DEVELOPED THE 'SOURCE CODE' FOR OPERATING SYSTEMS AND THAT IT WAS UNABLE TO BRING ON RECORD ON WHAT TERMS AND CONDITIONS THE 'S OURCE CODE' WAS PRODUCED BY INTRA/GAMMA FROM THE ORIGINAL DEVEL OPER /OWNER OF THE 'SOURCE CODE'. IN THIS CONNECTION, THE AR SUBMITTED THAT THE ASSES SEE HERE IN HAS NO OBLIGATION TO BRING ON RECORD EITHER THE ORI GINAL OWNER OR THE TERMS AND CONDITIONS FOR PRODUCING THE SOURCE C ODE TO THE NON-RESIDENT COMPANIES. IN THIS REGARD, THE AR REL IES ON THE OBSERVATIONS OF THE CIT (APPEALS) VIDE PARA NOS. 6. 9 AT PAGES 28 AND 29 OF HIS ORDER. I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 11 E) 'SOFTWARE' AND 'SOURCE CODE' ARE TWO SEPARATE IT EMS OF TRANSACTION THE AR SUBMITTED THAT THE OBSERVATION OF THE AO THA T 'SOFTWARE' AND 'SOURCE CODE' ARE NOT TWO SEPARATE ITEMS, THE AO HAS NOT TAKEN INTO CONSIDERATION THE SUPPLEMENTARY AGREEMEN TS FILED BEFORE HIM DURING THE COURSE OF ASSESSMENT PROCEEDI NGS. THE SUPPLEMENTARY AGREEMENTS CLEARLY SHOW THE BIFURCATI ON OF THE PAYMENTS TOWARDS 'SOFTWARE' AND THE 'SOURCE CODE'. THE REASONS FOR REJECTING THE PLEA OF THE ASSESSEE HERE IN ON THE BIFURCATION OF THE PAYMENTS AS GIVEN BY THE AO HAVE NO BASIS. MERELY BECAUSE THERE IS NO BIFURCATION SHOWN IN THE INVOICES AND THERE IS NO REFERENCE TO THE BIFURCATION IN THE STA TEMENTS OF THE KEY MANAGERIAL/TECHNICAL PERSONNEL, THE BIFURCATION IN THE NATURE OF PAYMENTS CANNOT BE DENIED ESPECIALLY IN VIEW OF THE AGREEMENTS AND SUPPLEMENTARY AGREEMENTS EXISTING IN SUPPORT OF THE BIFURCATION. ALSO, MERELY BECAUSE THE ASSESSEE HEREIN FAILED TO MAKE AVAILABLE TO THE DEPARTMENT ANY COMMUNICATI ON (E-MAIL, ETC) ON THE PRICE NEGOTIATED, IT CANNOT BE INFERRED THAT THERE IS NO BIFURCATION IN THE PAYMENTS. THE AR SUBMITTED THE AGREEMENT COPIES AND SUPPLEME NTARY AGREEMENT COPIES WERE FURNISHED BEFORE THE AO DURIN G THE COURSE OF ASSESSMENT PROCEEDINGS. THE OBSERVATION OF THE A O IN PARA NO. 4.10 AT PAGE 13 OF HIS ORDER THAT THE FACT THAT THE' SUPPLEMENTARY AGREEMENT' WAS SIGNED AND AGREED BY T HE CONTRACTING PARTIES MAKES NO DIFFERENCE, GIVEN THE FACT THAT THE DELIVERY OF THE 'UNIQUE SOURCE CODE SET(S)' AND CON SIDERATION THEREOF WERE SETTLED BETWEEN THE PARTIES AND AS SUC H THERE WAS NO PURPOSE FOR THE PARTIES TO REVISE THEIR AGREEMEN T TO AVOID TAX AS THE SAID TRANSACTION WAS BEING SCRUTINIZED BY TH E DEPARTMENT HAS NO BASIS. WITH REGARD TO THE OBSERVATIONS OF THE AO IN PARA N O.4.7 AT PAGE I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 12 NO.1 0 OF THE IMPUGNED ORDER, THE AR SUBMITTED THAT THE STATEMENTS OF THE REPRESENTATIVE OF THE RESPONDENT COMPANY HEREIN AND THE EXISTENCE OF THE SUPPLEMENTARY AGREE MENTS HAVE ALREADY BEEN CONSIDERED BY THE LD. CIT(APPEALS) IN HIS APPELLATE ORDER. IN THIS REGARD, THE ASSESSEE HEREIN RELIES ON THE O BSERVATIONS OF THE CIT(APPEALS) IN PARA NOS. 6.10 AND 6.11 AT PAGE NOS. 29 TO 33 OF HIS ORDER. (F) DECISION OF KARNATAKA HIGH COURT IN THE CASE OF CIT(LNTI.TAXATION) VS. SAMSUNG ELECTRONICS CO. LTD. ! [185 TAXMAN 3131 (KAR) IS DISTINGUISHABLE. DURING THE COURSE OF APPEAL PROCEEDINGS BEFORE THE CIT(A), THE AO RELIED ON THE ABOVE MENTIONED CASE LAW. HE SUBMITTED THAT THE JUDGMENT OF KARNATAKA HIGH COURT IN THE ABOVE MENTIONED CASE CANNOT BE MADE APPLICABLE TO T HE CASE OF THE ASSESSEE HEREIN SINCE IT IS DISTINGUISH ABLE ON FACTS. THE AR RELIED ON THE OBSERVATIONS OF THE CIT(APPEAL S) IN PARA NOS. 7.0 &7.1 AT PAGE NOS. 34 TO 37 OF HIS ORD ER. (G) DECISION OF DELHI HIGH COURT IN THE CASE OF D CLT VS. INFRA SOFT LTD [2013] 39 TAXMANN.COM 88 (DELHI) IS APPLICABLE. I. THE DELHI HIGH COURT UPHELD THE ORDER OF THE TRIBU NAL THAT AMOUNT RECEIVED BY THE ASSESSEE UNDER THE LICENSE AGREEMENT FOR ALLOWING THE USE OF THE SOFTWARE WOULD NOT BE ROYALTY UNDER THE DTAA. 11. IT HELD THAT WHAT WAS TRANSFERRED WAS NEITHER THE COPY RIGHT IN THE SOFTWARE NOR THE USE OF THE COPY RIGHT IN THE SOFTWARE, BUT WHAT WAS TRANSFERRED WAS THE RIGH T TO USE THE COPY RIGHTED MATERIAL OR ARTICLE WHICH W AS DISTINGUISHABLE FROM THE RIGHTS IN A COPY RIGHT. ILL. IT FURTHER HELD THAT THE RIGHT THAT WAS TRAN SFERRED WAS NOT A RIGHT TO USE THE COPY RIGHT BUT WAS ONLY LIMI TED TO THE RIGHT TO USE THE COPY RIGHTED MATERIAL AND THE I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 13 SAME WOULD NOT GIVE RISE TO ANY ROYALTY INCOME AND WOULD BE BUSINESS INCOME. IV. THE DELHI HIGH COURT ALSO EXPRESSED ITS DISAG REEMENT WITH THE DECISION OF THE HIGH COURT IN THE CASE OF CIT VS. SAMSUNG ELECTRONICS CO. LTD., [2011] 203 TAXMAN 477 (KAR) THAT RIGHT TO MAKE A COPY OF THE SOFTWARE AND STORING THE SAME IN THE HARD DISK OF THE DESIGNATED COMPUTER AND TAKING BACKUP WOULD AMOUNT TO COPY RIGHT WORK. THE AR SUBMITTED THAT THE ABOVE DECISION OF DELHI H IGH COURT IS SQUARELY APPLICABLE TO THE CASE OF THE RES PONDENT HERE IN. (H) THERE IS NO TAXABLE INCOME ACCRUED TO THE NON-R ESIDENT PARTIES. THE AR SUBMITTED THAT ON ACCOUNT OF THE IMPUGNED T RANSACTIONS OF THE RESPONDENT HERE IN WITH INFRA ASIA TRADING PTE LTD., SINGAPORE AND GAMMA MACHINERY AND EQUIPMENTS PTE LTD SINGAPORE, NO TAXABLE INCOME ACCRUED TO THEM AND CONSEQUENTLY THERE IS NO NEED TO DEDUCT TAX AT SOUR CE U/S 195 OF THE I.T.ACT, 1961. IN THIS REGARD, THE AR RELIED ON THE OBSERVATIONS O F THE CLT (APPEALS) IN PARA NO. 5.0 AT PAGE NOS. 10 TO 21 OF HIS ORDER. IN THE LIGHT OF THE ABOVE SUBMISSIONS, THE AR PRAYE D THAT THE ORDER OF THE CIT(A) MAY BE UPHELD. 8. WE HAVE HEARD THE ARGUMENTS OF BOTH THE PARTIES, PERUSED THE RECORD AND HAVE GONE THROUGH THE ORDERS OF THE REVE NUE AUTHORITIES. THE ASSESSING OFFICER HELD THAT THE ASSESSEE COMPAN Y DEFAULTED UNDER THE PROVISIONS OF SECTION 195(1) WHILE MAKING PAYMENT TO FOREIGN COMPANIES, NAMELY I) INTRA ASIA TRADING PTE LTD. AND GAMMA MACHINERY AND EQUIPMENTS PTE LTD., SINGAPORE, FOR A CQUIRING INTELLECTUAL PROPERTY RIGHTS AND THE SMART CARD OPE RATING SYSTEM SOFTWARE AND, THEREFORE, FAILURE IN VIOLATING THE P ROVISIONS OF SECTION I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 14 5(2)(B) READ WITH SECTION 9(1)(VI) OR 9(1)(VII) OF THE IT ACT, THE ASSESSEE WAS LIABLE TO BE TREATED AS ASSESSEE IN D EFAULT AS PER SECTION 201(1) OF THE ACT. ACCORDINGLY, THE ADIT D ETERMINED THE TDS LIABILITY U/S 201(1) AND INTEREST U/S 201(1A) FOR I NTRA ASIA TRADING PTE LTD AND FOR GAMMA MACHINERY AND EQUIPMENT PTE LTD. RS. 11,89,95,087/- AND RS. 68,17,077/-. THE CONTENTION OF THE AR IS THAT AS THE ASSESSEE DOES NOT HAVE ANY PATENTS OR COPY R IGHTS FOR THE PRODUCTS PURCHASED AND IT CLEARLY INDICATES THAT TH E PRODUCTS ARE FOR THE BUSINESS PURPOSE OF THE ASSESSEE AND, THEREFORE , WOULD NOT COME INTO THE AMBIT OF SECTION 195(1) OF THE ACT. THE A R CONTENDED THAT THE TRANSACTIONS EFFECTED BY THE ASSESSEE WITH FORE IGN COMPANIES ARE IN THE LIGHT OF VARIOUS CLAUSES EMBEDDED IN THE GEN ERAL AGREEMENT AS WELL AS SUPPLEMENTARY AGREEMENT ENTERED INTO BY THE ASSESSEE. THE AMOUNTS PAID BY THE ASSESSEE WOULD CONSTITUTE BUSIN ESS INCOME IN THE HANDS OF FOREIGN COMPANIES AND, THEREFORE, NOT LIABLE FOR TAX DEDUCTION AT SOURCE U/S 195 OF THE IT ACT. THE CIT( A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND THE ADIT THOROUGHLY EXAMINED AND DISCUSSED THE ISSUE IN DISPUTE WITH VA RIOUS CASE LAWS AND GAVE A CATEGORICAL FINDING THAT THE APPELLANT AS WELL AS THE FOREIGN COMPANIES ACTED ON THE AGREEMENTS ENTERED I NTO BY THEM. THE APPELLANT COMPANY MADE THE OUTRIGHT PURCHASE ON THE IR OWN ACCOUNT AND THOSE TRANSACTIONS WERE SUPPORTED BY PROPER DOC UMENTS SUCH AS INVOICES, SHIPPING DOCUMENTS ETC. THEREFORE HE WAS OF THE VIEW THAT IMPROPER ANALYSATION OF THE FACTS BY THE ADIT(IT) L ED HIM TO AN IMPROPER CONCLUSION THAT IN RESPECT OF A PACKAGE TR ANSACTION WHICH IS NOW UNDER CONSIDERATION THE ENTIRE AMOUNT HAS TO BE CONSIDERED EITHER AS ROYALTY OR FEES FOR TECHNICAL SERVICES . THUS, THE ADIT(IT) MISSED THE TRACK FROM SUM AND SUBSTANCE OF THE TRAN SACTION INVOLVING PURCHASE OF PRODUCTS UNDER DIFFERENT AGREEMENTS. IN VIEW OF THAT, THE SUPPLEMENTARY AGREEMENT ALONE WILL MAKE THE FOREIGN COMPANIES LIABLE TO TAX FOR THE PURPOSE OF INDIAN INCOME TAX ACT, 1961 WHICH CONSEQUENTLY MAKE THE APPELLANT LIABLE U/S 195(1) F OR THE PAYMENT MADE BY IT TOWARDS INTELLECTUAL PROPERTY RIGHTS SOU RCE CODE. ON THE I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 15 OTHER HAND, PAYMENTS MADE FOR PURCHASE OF THE SOFTW ARE ITSELF BEING COVERED AS THE SALE OF GOODS AND HENCE THE SAME CAN NOT BE SUBJECT TO TAX FOR THE PURCHASE OF SOFTWARE WHICH IS OUTSID E THE PURVIEW OF TAXATION OF WITHHOLDING TAX. 9. WE FIND FROM THE ORDER OF THE ADIT U/S 201(1), THAT THE ADIT AGREED WITH THE VIEW OF THE ASSESSEE COMPANY THAT T HE PAYMENT UNDER CONSIDERATION CONSTITUTED BUSINESS INCOME O F THE NON-RESIDENT WAS VALID CONSIDERING THE FACT THAT THE FOREIGN COM PANIES WERE IN THE BUSINESS OF TRADING IN THE UNIQUE SOURCE CODE ITE M HELD AS STOCK IN TRADE AND IN THE ABSENCE OF PERMANENT ESTABLISHMEN T, THERE WILL NOT BE TAXABLE INCOME ACCRUING IN INDIA AS PER ARTICLES 7 & 5 OF INDO- SINGAPORE DTAA. HOWEVER, THE ADIT OBSERVED THAT AS THE SAME CONSIDERATION CAN BE CONSIDERED AS ROYALTIES OR F EES FOR TECHNICAL SERVICES AS THE CASE MAY BE, THE TAXABILITY OF THO SE ITEMS OF INCOME SHOULD BE GOVERNED BY THE ARTICLE 12 OF THE DTAA. W E ARE OF THE VIEW THAT THE TRANSACTION EFFECTED BY THE ASSESSEE WOULD COME INTO THE AMBIT OF ARTICLE 7 OF THE DTAA BETWEEN INDIA AND SI NGAPORE, THEREFORE, THERE IS NO NEED FOR THE ASSESSING OFFIC ER TO TRAVERSE BEYOND THAT ARTICLE AND EXAMINE THE TRANSACTION IN THE LIGHT OF ARTICLE 12. THE ARTICLE 7(1) & 7(5) OF THE DTAA WITH SINGA PORE ARE AS UNDER: 7(1). THE INCOME OR PROFIT OF AN ENTERPRISE OF A CO NTRACTING STATE SHALL BE TAXABLE ONLY IN THAT CONTRACTING STA TE UNLESS THE ENTERPRISE CARRIES ON BUSINESS IN THE OTHER CONTRAC TING STATE THROUGH A PERMANENT ESTABLISHMENT SITUATED THEREIN. IF THE ENTERPRISE CARRIED ON BUSINESS AS AFORESAID, THE IN COME OR PROFITS OF THE ENTERPRISE MAY BE TAXED IN THE OTHER CONTRACTING STATE BUT ONLY ON SO MUCH OF SUCH INCOME OR PROFITS AS IS ATTRIBUTABLE TO THAT PERMANENT ESTABLISHMENT. 7(5) FOR THE PURPOSE OF THIS ARTICLE, THE TERM INC OME OR PROFITS MEANS INCOME DERIVED BY AN ENTERPRISE FORM THE COND UCT OF A TRADE OR BUSINESS; BUT DOES NOT INCLUDE INCOME DERI VED BY AN ENTERPRISE IN THE FORM OF RENTS, ROYALTIES, TECHNIC AL, SERVICES FEE, INTEREST, DIVIDENDS, CAPITAL GAINS, FEES FOR THE MA NAGEMENT OF THE BUSINESS OF ANOTHER ENTERPRISE, OR REMUNERATION OR FEE RECEIVED BY AN ENTERPRISE FOR THE FURNISHING TO ANO THER ENTERPRISE OF THE SERVICES OF ITS TECHNICAL, SKILLE D OR OTHER I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 16 PERSONNEL EXCEPT WHERE THE PROPERTY OR OTHER RIGHT GIVING RISE TO ANY SUCH ITEM OF INCOME IS EFFECTIVELY CONNECTED WI TH THE PERMANENT ESTABLISHMENT OF THE ENTERPRISE. THE TERM INCOME OR PROFITS SHALL NOT ALSO INCLUDE INCOME FROM THE OPE RATION OF SHIPS OR AIRCRAFT. 10. WE HAVE ALSO GONE THROUGH THE ARTICLE 12 OF THE DTAA WITH SINGAPORE STIPULATES AS UNDER: ROYALTIES AND FEES FOR TECHNICAL SERVICES 1. ROYALTIES AND FEES FOR TECHNICAL SERVICES ARISING I N A CONTRACTING STATE AND PAID TO A RESIDENT OF THE OTHER CONTRACTING STA TE MAY BE TAXED IN THAT OTHER STATE. 2. HOWEVER, SUCH ROYALTIES AND FEES FOR TECHNICAL SEVI CES MAY ALSO BE TAXED IN THE CONTRACTING STATE IN WHICH THEY ARISE AND ACCORDING TO THE LAWS OF THAT STATE, BUT IF THE RECIPIENT IS THE BEN EFICIAL OWNER OF THE ROYALTIES OR FEES FOR TECHNICAL SERVICES, THE TAX S O CHARGED SHALL NOT EXCEED: A. IN THE CASE OF ROYALTIES REFERRED TO IN PARAGRAPH 3 (A) AND FEES FOR TECHNICAL SERVICES AS DEFINED IN THIS ARTICLE (OTHE R THAN SERVICES DESCRIBED IN SUB-PARAGRAPH (B) OF THIS PARAGRAPH), 15 PER CENT. OF THE GROSS AMOUNT OF THE ROYALTIES AND FEES; B. IN THE CASE OF ROYALTIES REFERRED TO IN PARAGRAPH 3 (B) AND FEES FOR TECHNICAL SERVICES AS DEFINED IN THIS ARTICLE THAT ARE ANCILLARY AND SUBSIDIARY TO THE ENJOYMENT OF PROPERTY FOR WHICH R OYALTIES UNDER PARAGRAPH 3(B) ARE RECEIVED, 10 PER CENT. OF THE GR OSS AMOUNT OF THE ROYALTIES AND FEES. 3. THE TERM 'ROYALTIES' AS USED IN THIS ARTICLE MEANS PAYMENTS OF ANY KIND RECEIVED AS A CONSIDERATION FOR THE USE OF, OR THE RIGHT TO USE: A. ANY COPYRIGHT OF A LITERARY, ARTISTIC OR SCIENTIFIC WORK, INCLUDING CINEMATOGRAPH FILM OR FILMS OR TAPES USED FOR RADIO OR TELEVISION BROADCASTING, ANY PATENT, TRADE MARK, DESIGN OR MOD EL, PLAN, SECRET FORMULA OR PROCESS, OR FOR INFORMATION CONCERNING I NDUSTRIAL, COMMERCIAL OR SCIENTIFIC EXPERIENCE, INCLUDING GAIN S DERIVED FROM THE ALIENATION OF ANY SUCH RIGHT, PROPERTY OR INFORMATI ON; B. ANY INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EQUIPMENT, OTHER THAN PAYMENTS DERIVED BY AN ENTERPRISE FROM ACTIVITIES D ESCRIBED IT! PARAGRAPH 4(B) OR 4(C) OF ARTICLE 8. 4. THE TERM 'FEES FOR TECHNICAL SERVICES' AS USED IN T HIS ARTICLE MEANS PAYMENTS OF ANY KIND TO ANY PERSON IN CONSIDERATION FOR SERVICES OF A MANAGERIAL, TECHNICAL OR CONSULTANCY NATURE (INCLUD ING THE PROVISION OF SUCH SERVICES THROUGH TECHNICAL OR OTHER PERSONNEL) IF SUCH SERVICES: I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 17 A. ARE ANCILLARY AND SUBSIDIARY TO THE APPLICATION OR ENJOYMENT OF THE RIGHT, PROPERTY. OR INFORMATION FOR WHICH A PAYMENT DESCRIBED IN PARAGRAPH 3 IS RECEIVED; OR B. MAKE AVAILABLE TECHNICAL KNOWLEDGE, EXPERIENCE, SKI LL, KNOW-HOW OR PROCESSES, WHICH ENABLES THE PERSON ACQUIRING THE S ERVICES TO APPLY THE TECHNOLOGY CONTAINED THEREIN; OR C. CONSIST OF THE DEVELOPMENT AND TRANSFER OF A TECHNI CAL PLAN OR TECHNICAL DESIGN, BUT EXCLUDES ANY SERVICE THAT DOE S NOT ENABLE THE PERSON ACQUIRING THE SERVICE TO APPLY THE TECHNOLOG Y CONTAINED THEREIN. FOR THE PURPOSES OF (B) AND (C) ABOVE, THE PERSON A CQUIRING THE SERVICE SHALL BE DEEMED TO INCLUDE AN AGENT, NOMINEE, OR TR ANSFEREE OF SUCH PERSON. 5. NOTWITHSTANDING PARAGRAPH 4, 'FEES FOR TECHNICAL SE RVICES' DOES NOT INCLUDE PAYMENTS: A. FOR SERVICES THAT ARE ANCILLARY AND SUBSIDIARY, AS WELL AS INEXTRICABLY AND ESSENTIALLY LINKED, TO THE SALE OF PROPERTY OTH ER THAN A SALE DESCRIBED IN PARAGRAPH 3(A); B. FOR SERVICES THAT ARE ANCILLARY AND SUBSIDIARY TO T HE RENTAL OF SHIPS, AIRCRAFT, CONTAINERS OR OTHER EQUIPMENT USED IN CON NECTION WITH THE OPERATION OF SHIPS OR AIRCRAFT IN INTERNATIONAL TRA FFIC; C. FOR TEACHING IN OR BY EDUCATIONAL INSTITUTIONS; D. FOR SERVICES FOR THE PERSONAL USE OF THE INDIVIDUAL OR INDIVIDUALS MAKING THE PAYMENT; E. TO AN EMPLOYEE OF THE PERSON MAKING THE PAYMENTS OR TO ANY INDIVIDUAL OR FIRM OF INDIVIDUALS (OTHER THAN A COM PANY) FOR PROFESSIONAL SERVICES AS DEFINED IN ARTICLE 14; F. FOR SERVICES RENDERED IN CONNECTION WITH AN INSTALL ATION OR STRUCTURE USED FOR THE EXPLORATION OR EXPLOITATION OF NATURAL RESOURCES REFERRED TO IN PARAGRAPH 2(J) OF ARTICLE 5; G. FOR SERVICES REFERRED TO IN PARAGRAPHS 4 AND 5 OF A RTICLE 5. 6. THE PROVISIONS OF PARAGRAPHS 1 AND 2 SHALL NOT APPL Y IF THE BENEFICIAL OWNER OF THE ROYALTIES OR FEES FOR TECHNICAL SERVIC ES, BEING A RESIDENT OF A CONTRACTING STATE, CARRIES ON BUSINESS IN THE OTHER CONTRACTING STATE IN WHICH THE ROYALTIES OR FEES FOR TECHNICAL SERVICES ARISE, THROUGH A PERMANENT ESTABLISHMENT SITUATED THEREIN, OR PERFOR MS IN THAT OTHER STATE INDEPENDENT PERSONAL SERVICES FROM A FIXED BASE SIT UATED THEREIN, AND THE RIGHT, PROPERTY OR CONTRACT IN RESPECT OF WHICH THE ROYALTIES OR FEES FOR TECHNICAL SERVICES ARE PAID IS EFFECTIVELY CONNECTE D WITH SUCH PERMANENT ESTABLISHMENT OR FIXED BASE. IN SUCH CASE, THE PROV ISIONS OF ARTICLE 7 OR ARTICLE 14, AS THE CASE MAY BE, SHALL APPLY. I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 18 7. ROYALTIES AND FEES FOR TECHNICAL SERVICES SHALL BE DEEMED TO ARISE IN A CONTRACTING STATE WHEN THE PAYER IS THAT STATE IT SELF, A POLITICAL SUB- DIVISION, A LOCAL AUTHORITY, A STATUTORY BODY OR A RESIDENT OF THAT STATE. WHERE, HOWEVER, THE PERSON PAYING THE ROYALTIES OR FEES FOR TECHNICAL SERVICES, WHETHER HE IS A RESIDENT OF A CONTRACTING STATE OR NOT, HAS IN A CONTRACTING STATE A PERMANENT ESTABLISHMENT OR A FI XED BASE IN CONNECTION WITH WHICH THE LIABILITY TO PAY THE ROYA LTIES OR FEES FOR TECHNICAL SERVICES WAS INCURRED, AND SUCH ROYALTIES OR FEES F OR TECHNICAL SERVICES ARE BORNE BY SUCH PERMANENT ESTABLISHMENT OR FIXED BASE, THEN SUCH ROYALTIES OR FEES FOR TECHNICAL SERVICES SHALL BE D EEMED TO ARISE IN THE STATE IN WHICH THE PERMANENT ESTABLISHMENT OR FIXED BASE IS SITUATED. 8. WHERE, BY REASON OF A SPECIAL RELATIONSHIP BETWEEN THE PAYER AND THE BENEFICIAL OWNER OR BETWEEN BOTH OF THEM AND SO ME OTHER PERSON, THE AMOUNT OF ROYALTIES OR FEES FOR TECHNICAL SERVI CES PAID EXCEEDS THE AMOUNT WHICH WOULD HAVE BEEN PAID IN THE ABSENCE OF SUCH RELATIONSHIP, THE PROVISIONS OF THIS ARTICLE SHALL APPLY ONLY TO THE LAST-MENTIONED AMOUNT. IN SUCH CASE, THE EXCESS PART OF THE PAYMEN TS SHALL REMAIN TAXABLE ACCORDING TO THE LAWS OF EACH CONTRACTING S TATE, DUE REGARD BEING HAD TO THE OTHER PROVISIONS OF THIS AGREEMENT . 10.1 CLAUSE 1 OF ARTICLE 12 LAYS DOWN THAT ROYALTY OR FEES FOR INCLUDED SERVICES ARISING IN A CONTRACTING STATE AND PAID TO A RESIDENTS OF THE OTHER CONTRACTING STATE MAY BE TAXED IN THAT OTHER STATE. 11. CLAUSE 2 OF ARTICLE 12 LAYS DOWN THAT ROYALTY A ND FEES FOR INCLUDED SERVICES MAY ALSO BE TAXED IN A CONTRACTI NG STATE IN WHICH THEY ARISE. HOWEVER, IF THE BENEFICIAL OWNER OF TH E ROYALTIES OR FEES FOR INCLUDED SERVICES PAID TO THE RESIDENTS OF THE OTHER CONTRACTING STATE THEN THE TAX HAS BEEN LIMITED IN PERCENTAGE D EPENDING UPON THE NUMBER OF YEARS THE CONVENTION HAS EFFECT. 12. CLAUSE 3 OF ARTICLE 12 LAYS DOWN THAT THE TERM ROYALTY MEANS PAYMENT OF ANY KIND RECEIVED AS CONSIDERATION FOR T HE USE OF, OR THE RIGHT TO USE, ANY COPYRIGHT OF A LITERARY, ARTISTI C, OR SCIENTIFIC WORK.............., INCLUDING GAINS DERIVED FROM TH E ALIENATION OF ANY SUCH RIGHT, PROPERTY OR INFORMATION. THE TERM ROYALTY HA S BEEN DEFINED BY CLAUSE 3 OF ARTICLE 12 AS PAYMENT RECEIVED FOR THE USE OF, OR THE RIGHT TO USE ANY COPYRIGHT. I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 19 13. THE AMOUNT RECEIVED BY THE ASSESSEE COMPANY HAD BEEN TREATED AS ROYALTY INCOME BY THE AO ON THE BASIS OF EXPLANATION 2 TO SECTION 9(1)(VI) OF THE ACT HOLDING THAT THERE WAS TRANSFER OF SOME RIGHTS (INCLUDING THE GRANTING OF A LICENCE) IN RES PECT OF THE COPYRIGHT. 14. WHAT IS THUS REQUIRED TO BE EXAMINED IS WHETHER INCOME OF THE ASSESSEE IS ROYALTY INCOME AS COVERED BY ARTICLE 12 OF THE DTAA IF NOT THEN THE SAME WOULD BE TAXABLE AS BUSINESS INCO ME AS COVERED BY THE PROVISIONS OF ARTICLE 7 OF THE DTAA. 15. TO BE TAXABLE AS ROYALTY INCOME COVERED BY ARTI CLE12 OF THE DTAA THE INCOME OF THE ASSESSEE SHOULD HAVE BEEN GE NERATED BY THE 'USE OF OR THE RIGHT TO USE OF' ANY COPYRIGHT. 16. THE ISSUE WHETHER CONSIDERATION FOR SOFTWARE W AS ROYALTY CAME UP FOR CONSIDERATION BEFORE THE SPECIAL BENCH OF TH E TRIBUNAL IN DELHI IN THE CASE OF MOTOROLA INC VS DEPUTY CIT (200 5) 147 TAXMAN 39 (DELHI). THE TRIBUNAL HAS HELD AS UNDE R: 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 COPYRIGHTED ARTICLE. IF IT IS FOR COPYRIGHT, IT SHO ULD BE CLASSIFIED AS ROYALTY BOTH UNDER THE INCOME-TAX ACT AND UNDER THE DTAA AND IT WOULD BE TAXABLE IN THE HANDS OF THE ASSESSE E ON THAT BASIS. IF THE PAYMENT IS REALLY FOR A COPYRIGHTED A RTICLE, THEN IT ONLY REPRESENTS THE PURCHASE PRICE OF THE ARTICLE A ND, THEREFORE, CANNOT BE CONSIDERED AS ROYALTY EITHER UNDER THE AC T OR UNDER THE DTAA. THIS ISSUE REALLY IS THE KEY TO THE ENTIR E 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 14OF THIS ACT DEFINES 'COPYRIGHT' AS 'THE EXCLUSIVE RIGHT SUBJECT TO THE PROVISIONS OF THIS ACT, TO DO OR AUTHORIZE THE DOING OF ANY OF TH E FOLLOWING ACTS IN RESPECT OF A WORK OR ANY SUBSTANTIAL PART THEREO F, NAMELY: --------- 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 RI GHT TO SELL OR I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 20 GIVE ON COMMERCIAL RENTAL OR OFFER FOR SALE OR FOR COMMERCIAL RENTAL ANY COPY OF THE COMPUTER PROGRAMME. THIS ADD ITIONAL RIGHT WAS SUBSTITUTED W.E.F. 15.1.2000. THE DIFFERE NCE BETWEEN THE EARLIER PROVISION AND THE PRESENT ONE IS NOT OF ANY RELEVANCE. WHAT IS TO BE NOTED IS THAT THE RIGHT ME NTIONED IN SUB-CLAUSE (II) OF CLAUSE (B) OF SECTION 14IS AVAI LABLE ONLY TO THE OWNER OF THE COMPUTER PROGRAMME. IT FOLLOWS THA T IF ANY OF THE CELLULAR OPERATORS DOES NOT HAVE ANY OF THE RIG HTS MENTIONED IN CLAUSES (A) AND (B) OF SECTION 14, IT WOULD MEAN THAT IT DOES NOT HAVE ANY RIGHT IN A COPYRIGHT. IN THAT CASE, TH E PAYMENT MADE BY THE CELLULAR OPERATOR CANNOT BE CHARACTERIZ ED AS ROYALTY EITHER UNDER THE INCOME-TAX ACT OR UNDER TH E DTAA. THE QUESTION, THEREFORE, TO BE ANSWERED IS WHETHER ANY OF THE OPERATORS CAN EXERCISE ANY OF THE RIGHTS MENTIONED IN THE ABOVE PROVISIONS 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 RIGHTF ULLY DO WITH REFERENCE TO THE SOFTWARE. WE MAY REMIND OURSELVES THAT JTM IS TAKEN AS A REPRESENTATIVE OF ALL THE CELLULAR OPERA TORS AND THAT IT WAS COMMON GROUND BEFORE US THAT ALL THE CONTRACTS WITH THE CELLULAR OPERATORS ARE SUBSTANTIALLY THE SAME. CLAU SE 20.1 OF THE AGREEMENT, UNDER THE TITLE 'LICENSE', SAYS THAT JTM IS GRANTED A NON-EXCLUSIVE RESTRICTED LICENSE TO USE THE SOFTWAR E AND DOCUMENTATION BUT ONLY FOR ITS OWN OPERATION AND MA INTENANCE OF THE SYSTEM AND NOT OTHERWISE. THIS CLAUSE APPEAR S TO MILITATE AGAINST THE POSITION, IF IT WERE A COPYRIGHT, THAT THE HOLDER OF THE COPYRIGHT CAN DO ANYTHING WITH 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 OPERATION AND MAINTENANC E OF THE SYSTEM. THERE IS A CLEAR BAR ON THE SOFTWARE BEING USED BY JTM IN THE PUBLIC DOMAIN OR FOR THE PURPOSE OF COMMERCI AL EXPLOITATION. 158. SECONDLY, UNDER THE DEFINITION OF 'COPYRIGHT' IN SECTION 4 OF THE COPYRIGHT ACT, THE EMPHASIS IS THAT IT IS AN EXCLUSIVE RIGHT GRANTED TO THE HOLDER THEREOF. THIS CONDITION IS NO T SATISFIED IN THE CASE OF JTM BECAUSE THE LICENSE GRANTED TO IT B Y THE ASSESSEE IS EXPRESSLY STATED IN CLAUSE 20.1 AS A 'N ON EXCLUSIVE RESTRICTED LICENSE'. THIS MEANS THAT THE SUPPLIER O F THE SOFTWARE, NAMELY, THE ASSESSEE, CAN SUPPLY SIMILAR SOFTWARE T O ANY NUMBER OF CELLULAR OPERATORS TO WHICH JTM CAN HAVE NO OBJECTION AND FURTHER ALL THE CELLULAR OPERATORS CA N USE THE SOFTWARE ONLY FOR THE PURPOSE OF THEIR OWN OPERATIO N AND MAINTENANCE OF THE SYSTEM AND NOT FOR ANY OTHER PUR POSE. THE USER OF THE SOFTWARE BY THE CELLULAR OPERATORS IN T HE PUBLIC DOMAIN IS TOTALLY PROHIBITED, WHICH IS EVIDENT FROM THE USE OF THE WORDS IN ARTICLE 20.1 OF THE AGREEMENT, 'RESTRICTED ' AND 'NOT OTHERWISE'. THUS JTM HAS A VERY LIMITED RIGHT SO FA R AS THE USE I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 21 OF SOFTWARE IS CONCERNED. IT NEEDS NO REPETITION TO CLARIFY THAT JTM HAS NOT BEEN GIVEN ANY OF THE SEVEN RIGHTS MENT IONED IN CLAUSE (A) OF SECTION 14OR THE ADDITIONAL RIGHT ME NTIONED IN SUB-CLAUSE (II) OF CLAUSE (B) OF THE SECTION WHICH RELATES TO A COMPUTER PROGRAMME AND, THEREFORE, WHAT JTM OR ANY OTHER CELLULAR OPERATOR HAS ACQUIRED UNDER THE AGREEMENT IS NOT A COPYRIGHT BUT IS ONLY A COPYRIGHTED ARTICLE. 159. CLAUSE 20.4 OF THE SUPPLY CONTRACT WITH JTM IS AS UNDER: 20.4 IN PURSUANCE OF THE FOREGOING JT MOBILES SHALL : (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-EXPORT PERMITS FROM RELEVANT AUTHORITIES. THIS CLAUSE PLACES STRIN GENT RESTRICTIONS ON THE CELLULAR OPERATOR SO FAR AS THE USE OF SOFTWARE IS CONCERNED. IT FIRST SAYS THAT THE CELLULAR OPERA TOR CANNOT MAKE THE SOFTWARE OR PORTIONS THEREOF AVAILABLE TO ANY P ERSON 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 PURP OSES. THE CELLULAR OPERATOR HAS BEEN DENIED THE RIGHT TO MAKE COPIES OF THE SOFTWARE OR PARTS THEREOF EXCEPT FOR ARCHIVAL B ACKUP 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 WHICH PERMITS THE COPYRIGHT HOLDER TO REPRODUCE THE WORK IN ANY MATERIAL FORM INCLUDING THE STORING OF IT IN ANY ME DIUM 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 I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 22 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 B ACKUP PURPOSES, TO ALSO MARK THE COPIED SOFTWARE WITH COP YRIGHT OR OTHER MARKING TO SHOW THAT THE RIGHTS OF THE ASSESS EE 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 PER MITTED AND SHALL NOT ALSO LICENSE OR SELL OR IN ANY MANNER ALI ENATE OR PART WITH ITS POSSESSION. THIS HAS TO BE READ WITH CLAUS E 20.5 WHICH SAYS THAT THE LICENSE CAN BE TRANSFERRED, BUT ONLY WHEN THE GSM SYSTEM ITSELF IS SOLD BY THE CELLULAR OPERATOR TO A THIRD PARTY. THIS IN A WAY SHOWS THAT THE SOFTWARE IS ACTUALLY P ART 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 COPYRIGHT HOLDER TO SELL OR LET OUT ON COMMERCIAL RENTAL THE COMPUTER PROGRAMME. FOR THIS REASON ALSO IT CANNOT BE SAID THAT JTM OR ANY CELLULAR OPE RATOR 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 S HOWS THAT THE CELLULAR OPERATOR CANNOT EXPLOIT THE COMPUTER SOFTW ARE COMMERCIALLY WHICH IS THE VERY ESSENCE OF A COPYRIG HT. IN OTHER WORDS A HOLDER OF A COPYRIGHT IS PERMITTED TO EXPLO IT THE COPYRIGHT COMMERCIALLY AND IF HE IS NOT PERMITTED T O DO SO THEN WHAT HE HAS ACQUIRED CANNOT BE CONSIDERED AS A COPY RIGHT. IN THAT CASE, IT CAN ONLY BE SAID THAT HE HAS ACQUIRED A COPYRIGHTED ARTICLE. A SMALL EXAMPLE MAY CLARIFY THE POSITION. THE PURCHASER OF A BOOK ON INCOME-TAX ACQUIRES ONLY A COPYRIGHTED ARTICLE. ON THE OTHER HAND, A RECORDING COMPANY WHICH HAS RECOR DED A VOCALIST HAS ACQUIRED THE COPYRIGHT IN THE MUSIC RE NDERED AND IS, THEREFORE, PERMITTED TO EXPLOIT THE RECORDING C OMMERCIALLY. IN THIS CASE THE MUSIC RECORDING COMPANY HAS NOT MEREL Y ACQUIRED A COPYRIGHTED ARTICLE IN THE FORM OF A RECORDING, B UT HAS ACTUALLY ACQUIRED A COPYRIGHT TO REPRODUCE THE MUSIC AND EXP LOIT THE SAME COMMERCIALLY. IN THE PRESENT CASE WHAT JTM OR ANY OTHER CELLULAR OPERATOR HAS ACQUIRED UNDER THE SUPPLY CON TRACT IS ONLY I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 23 THE COPYRIGHTED SOFTWARE, WHICH IS AN ARTICLE BY IT SELF 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 T HE AUTHOR 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 TRANSF ER OF THE OWNERSHIP OF A PHYSICAL THING IN WHICH COPYRIGHT EX ISTS GIVES TO THE PURCHASER THE RIGHT TO DO WITH IT (THE PHYSICAL THING) WHATEVER HE PLEASES, EXCEPT THE RIGHT TO MAKE COPIE S 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 AR TICLE BUT AT THE SAME TIME JUST BECAUSE ONE HAS THE COPYRIGHTED ARTICLE, IT DOES NOT FOLLOW THAT ONE HAS ALSO THE COPYRIGHT IN IT. MR. SHARMA'S OBJECTION 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 (ACQ UIRED BY JTM) AND IT WOULD NOT BE A CASE OF MERELY GIVING THE RIG HT TO USE AND CONSEQUENTLY ARTICLE 13 OF THE DTAA WOULD NOT APPLY . MR. DASTUR, HOWEVER, WAS FAIR ENOUGH TO CONCEDE THAT IF THE DEPARTMENT IS RIGHT 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 THIS CLAUSE ROPES IN 'TRANSFER OF ALL OR ANY RIGHTS' AND IS NOT RESTRICTED TO 'USE' OR 'RIGHT TO USE', T HE COPYRIGHT. HOWEVER, HE ADDED THAT SINCE THE BASIC PROPOSITION OF THE DEPARTMENT HAS BEEN DEMONSTRATED TO BE WRONG, CLAUS E (V) OF EXPLANATION 2 BELOW SECTION 9(1) IS NOT AN IMPEDIME NT TO ACCEPTING THE ASSESSEE'S CONTENTION. I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 24 165. WE MAY ALSO USEFULLY REFER TO THE COMMENTARY O N THE OECD MODEL CONVENTION (DATED 28.1.2003) WHICH IS OF PERSUASIVE VALUE AND WHICH THROWS CONSIDERABLE LIGH T ON THE CHARACTER OF THE TRANSACTION AND THE TREATMENT TO B E GIVEN TO THE PAYMENTS FOR TAX PURPOSES. PARAGRAPH 14 OF THE COMM ENTARY, A COPY OF WHICH WAS FILED IN PAPER BOOK NO. V IS RELE VANT: 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 REPRODUCE T HE PROGRAM. THIS WOULD BE THE COMMON SITUATION IN TRANSACTIONS FOR THE ACQUISITION OF A PROGRAM COPY. THE RIGHTS TRANSFERR ED IN THESE CASES ARE SPECIFIC TO THE NATURE OF COMPUTER PROGRA MS. THEY ALLOW THE USER TO COPY THE PROGRAM, FOR EXAMPLE ONT O THE USER'S COMPUTER HARD DRIVE OR FOR ARCHIVAL PURPOSES. IN TH IS CONTEXT, IT IS IMPORTANT TO NOTE THAT THE PROTECTION AFFORDED I N RELATION TO COMPUTER PROGRAMS UNDER COPYRIGHT LAW MAY DIFFER FR OM COUNTRY TO COUNTRY. IN SOME COUNTRIES THE ACT OF COPYING TH E PROGRAM ONTO THE HARD DRIVE OR RANDOM ACCESS MEMORY OF A CO MPUTER WOULD, WITHOUT A LICENSE, CONSTITUTE A BREACH OF CO PYRIGHT. HOWEVER, THE COPYRIGHT LAWS OF MANY COUNTRIES AUTOM ATICALLY GRANT THIS RIGHT TO THE OWNER OF SOFTWARE WHICH INC ORPORATES A COMPUTER PROGRAM. REGARDLESS OF WHETHER THIS RIGHT IS GRANTED UNDER LAW OR UNDER A LICENSE AGREEMENT WITH THE COP YRIGHT HOLDER, COPYING THE PROGRAM ONTO THE COMPUTER'S HAR D 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 THE EFFECTIVE OPERATION OF THE PROGRAM BY TH E USER, SHOULD BE DISREGARDED IN ANALYZING THE CHARACTER 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.' 166. WE MAY ALSO USEFULLY REFER TO THE PROPOSED AME NDMENTS TO THE REGULATIONS OF THE INTERNAL REVENUE SERVICE (IR S) IN THE USA. AGAIN THESE REGULATIONS MAY NOT BE BINDING ON US BUT THEY HAVE A PERSUASIVE VALUE AND THROW LIGHT ON THE QUES TION BEFORE US, NAMELY THE DIFFERENCE BETWEEN A COPYRIGHT RIGHT AND A COPYRIGHTED ARTICLE. THESE REGULATIONS HAVE BEEN PL ACED AT PAGES 136 TO 157 OF PAPER BOOK NO. II. THE ACTUAL R EGULATIONS AS WELL AS THE EXPLANATORY NOTE EXPLAINING THE OBJE CT AND THE PURPOSE OF THE PROPOSED REGULATIONS HAVE ALSO BEEN GIVEN. IN PARAGRAPH 1 OF THE NOTE TITLED 'BACKGROUND', IT HAS BEEN STATED THAT THE PROPOSED REGULATIONS REQUIRE THAT A TRANSA CTION INVOLVING A COMPUTER PROGRAMME MAY BE TREATED AS BE ING ONE OF THE FOUR POSSIBLE CATEGORIES. TWO SUCH CATEGORIE S ARE THE I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 25 TRANSFER OF COPYRIGHT RIGHTS AND THE TRANSFER OF A COPYRIGHTED ARTICLE. THE U.S. REGULATIONS DISTINGUISHED BETWEEN TRANSFER OF COPYRIGHT RIGHTS AND TRANSFER OF COPYRIGHTED ARTICL ES BASED ON THE TYPE OF RIGHTS TRANSFERRED TO THE TRANSFEREE. B RIEFLY STATED, IF THE TRANSFEREE ACQUIRES A COPY OF A COMPUTER PROGRA MME BUT DOES NOT ACQUIRE ANY OF THE RIGHTS IDENTIFIED IN CE RTAIN SECTIONS (OF THE U.S. REGULATIONS), THE REGULATION CLASSIFIE D THE TRANSACTION AS THE TRANSFER OF A COPYRIGHTED ARTICL E. PARAGRAPH 3 OF THE EXPLANATORY NOTE SAYS THAT IF A TRANSFER OF A COMPUTER PROGRAMME RESULTS IN THE TRANSFEREE ACQUIRING ANY O NE OR MORE OF THE LISTED RIGHTS, IT IS A TRANSFER OF A COPYRIG HT 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 COMPUTER PROGRAMME FROM WHICH THE WORK CAN BE PERCEIVED, REP RODUCED OR OTHERWISE COMMUNICATED EITHER DIRECTLY OR WITH T HE AID OF A MACHINE OR DEVICE. THE COPY OF THE PROGRAMME MAY BE FIXED IN THE MAGNETIC MEDIUM OF A FLOPPY DISC OR IN THE MAIN MEMORY OR HARD DRIVE OF 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 TRANSFER OF A COPYRIGHT RIGHT OR ONLY OF A COPYRIGHTED ARTIC LE MUST BE DETERMINED TAKING INTO ACCOUNT ALL THE FACTS AND CI RCUMSTANCES OF THE CASE AND THE BENEFITS AND BURDEN OF OWNERSHI P WHICH HAVE BEEN TRANSFERRED. SEVERAL EXAMPLES HAVE BEEN G IVEN BELOW THESE REGULATIONS TO FIND OUT WHETHER A PARTI CULAR TRANSFER I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 26 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 N O. II. THE COMMENTARY IS TITLED 'BENEFICIAL OWNERSHIP OF ROYAL TIES IN BILATERAL TAX TREATIES.' HE HAS OPINED THAT ARTICLE S SUCH AS BOOKS AND RECORDS ARE COPYRIGHTED ARTICLES AND IF T HEY ARE SOLD, THE USER DOES NOT OBTAIN THE RIGHT TO USE ANY SIGNI FICANT RIGHTS IN THE UNDERLYING COPYRIGHT ITSELF, WHICH IS WHAT SHOU LD DETERMINE THE CHARACTERIZATION OF THE REVENUE AS SALE PROCEED S RATHER THAN ROYALTIES. HE HAS FURTHER OPINED THAT CONSIDERATION RELATING TO SALE OF SOFTWARE CAN AMOUNT TO ROYALTY ONLY IN LIMI TED CIRCUMSTANCES. 172. FOR THE ABOVE REASONS, WE ARE OF THE VIEW THAT THE PAYMENT BY THE CELLULAR OPERATOR IS NOT FOR ANY COP YRIGHT IN THE SOFTWARE BUT IS ONLY FOR THE SOFTWARE AS SUCH AS A COPYRIGHTED ARTICLE. IT FOLLOWS THAT THE PAYMENT CANNOT BE CONS IDERED AS ROYALTY WITHIN THE MEANING OF EXPLANATION 2 BELOW S ECTION 9(1) OF THE INCOME-TAX ACT OR ARTICLE ARTICLE OF THE DTA A WITH SWEDEN. -------- 184. IN VIEW OF THE FOREGOING DISCUSSION, WE HOLD T HAT THE SOFTWARE SUPPLIED WAS A COPYRIGHTED ARTICLE AND NOT A COPYRIGHT RIGHT, AND THE PAYMENT RECEIVED BY THE ASSESSEE IN RESPECT OF THE SOFTWARE CANNOT BE CONSIDERED AS ROYALTY EITHER UNDER THE INCOME-TAX ACT OR THE DTAA. 17. REFERRING TO THE COMMENTARY ON THE OECD MODEL C ONVENTION (DATED 28.1.2003), WHICH WAS CONSIDERED TO BE OF PE RSUASIVE VALUE, THE TRIBUNAL NOTICED THAT THE RIGHTS ACQUIRED IN RE LATION TO THE COPYRIGHT ARE LIMITED TO THOSE NECESSARY TO ENABLE THE USER TO OPERATE THE PROGRAM, FOR EXAMPLE, WHERE THE TRANSFEREE IS G RANTED LIMITED RIGHTS TO REPRODUCE THE PROGRAM. THIS WOULD BE THE COMMON SITUATION IN TRANSACTIONS FOR THE ACQUISITION OF A PROGRAM CO PY. THE RIGHTS TRANSFERRED IN THESE CASES ARE SPECIFIC TO THE NATU RE OF COMPUTER PROGRAMS. THEY ALLOW THE USER TO COPY THE PROGRAM, FOR EXAMPLE ONTO THE USER'S COMPUTER HARD DRIVE OR FOR ARCHIVAL PUR POSES. COPYING THE PROGRAM ONTO THE COMPUTER'S HARD DRIVE OR RANDOM AC CESS MEMORY OR MAKING AN ARCHIVAL COPY IS AN ESSENTIAL STEP IN UTI LIZING THE PROGRAM. THEREFORE, RIGHTS IN RELATION TO THESE ACTS OF COPY ING, WHERE THEY DO NO MORE THAN ENABLE THE EFFECTIVE OPERATION OF THE PROGRAM BY THE I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 27 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 INCOME IN ACCORDA NCE WITH ARTICLE 7 OF DTAA. 18. THE TRIBUNAL FURTHER REFERRED TO THE PROPOSED A MENDMENTS TO THE REGULATIONS OF THE INTERNAL REVENUE SERVICE (IR S) IN THE USA NOT AS BINDING BUT AS HAVING PERSUASIVE VALUE AND THROW ING LIGHT ON THE QUESTION I.E., THE DIFFERENCE BETWEEN A COPYRIGHT R IGHT AND A COPYRIGHTED ARTICLE. THE TRIBUNAL NOTICED THAT THE U.S. REGULATIONS DISTINGUISHED BETWEEN TRANSFER OF COPYRIGHT RIGHTS AND TRANSFER OF COPYRIGHTED ARTICLES BASED ON THE TYPE OF RIGHTS TR ANSFERRED TO THE TRANSFEREE. BRIEFLY STATED, IF THE TRANSFEREE ACQUI RES A COPY OF A COMPUTER PROGRAMME BUT DOES NOT ACQUIRE ANY OF THE RIGHTS IDENTIFIED IN CERTAIN SECTIONS (OF THE U.S. REGULATIONS), THE REGULATION CLASSIFIED THE TRANSACTION AS THE TRANSFER OF A COPYRIGHTED AR TICLE. IF A TRANSFER OF A COMPUTER PROGRAMME RESULTS IN THE TRANSFEREE ACQU IRING ANY ONE OR MORE OF THE LISTED RIGHTS, IT IS A TRANSFER OF A CO PYRIGHT RIGHT. IF A PERSON ACQUIRES A COPY OF A COMPUTER PROGRAMME BUT DOES NOT ACQUIRE ANY OF THE FOUR LISTED COPYRIGHT RIGHTS, HE GETS ONLY A COPYRIGHTED ARTICLE BUT NO COPYRIGHT. THE FOUR RIGH TS BEING: (I) 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. 19. THE TRIBUNAL FURTHER NOTICED THAT A COPYRIGHTED ARTICLE HAS BEEN DEFINED IN THE REGULATION AS INCLUDING A COPY OF A COMPUTER PROGRAMME FROM WHICH THE WORK CAN BE PERCEIVED, REP RODUCED OR OTHERWISE COMMUNICATED EITHER DIRECTLY OR WITH THE AID OF A MACHINE OR I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 28 DEVICE. THE COPY OF THE PROGRAMME MAY BE FIXED IN T HE MAGNETIC MEDIUM OF A FLOPPY DISC OR IN THE MAIN MEMORY OR HA RD DRIVE OF A COMPUTER OR IN ANY OTHER MEDIUM. 20. THE TRIBUNAL HAS HELD RIGHTLY SO THAT THE QUEST ION WHETHER THERE WAS A TRANSFER OF A COPYRIGHT RIGHT OR ONLY OF A CO PYRIGHTED ARTICLE MUST BE DETERMINED TAKING INTO ACCOUNT ALL THE FACTS AND CIRCUMSTANCES OF THE CASE AND THE BENEFITS AND BURDEN OF OWNERSHIP W HICH HAVE BEEN TRANSFERRED. 21. THE APPEAL FILED BY THE REVENUE AGAINST THE JUD GMENT OF THE SPECIAL BENCH OF THE ITAT WAS DISMISSED BY THE HIGH COURT OF DELHI IN THE CASE OF DIT V. M/S NOKIA NETWORKS OY (2 012) 253 CTR (DEL) 417. THE BENCH APPROVED THE FINDINGS OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE MOTOROLA CASE (SUPRA) THAT COPYRIGHT IS DISTINCT FROM THE MATERIAL OBJECT, COPYRIGHTED. IT IS AN INTANGIBLE INCORPOREAL RIGHT IN THE NATURE OF A PRIVILEGE, QUI TE INDEPENDENT OF ANY MATERIAL SUBSTANCE, SUCH AS A MANUSCRIPT. HE HAS AN INDIVIDUAL RIGHT OF EXCLUSIVE ENJOYMENT. THE TRANSFER OF THE MANUSCR IPT DOES NOT, OF ITSELF, SERVE TO TRANSFER THE COPYRIGHT THEREIN. TH E TRANSFER OF THE OWNERSHIP OF A PHYSICAL THING IN WHICH COPYRIGHT EX ISTS GIVES TO THE PURCHASER THE RIGHT TO DO WITH IT (THE PHYSICAL THI NG) WHATEVER HE PLEASES, EXCEPT THE RIGHT TO MAKE COPIES AND ISSUE THEM TO THE PUBLIC. JUST BECAUSE ONE HAS THE COPYRIGHTED ARTICLE, IT DO ES NOT FOLLOW THAT ONE HAS ALSO THE COPYRIGHT IN IT. 22. IN THE CASE OF DIT V. ERICSSON A.B. (2012) 343 ITR 470 (DEL), ONE ISSUE THAT THE DELHI HIGH COURT WAS CONS IDERING WAS WHETHER THE CONSIDERATION FOR SUPPLY OF SOFTWARE WA S PAYMENT BY WAY OF ROYALTY AND HENCE ASSESSABLE BOTH UNDER SECTION 9(1)(VI) AND THE DOUBLE TAXATION AVOIDANCE AGREEMENT BETWEEN THE GOV ERNMENT OF INDIA AND SWEDEN? THE HIGH COURT RELYING ON THE JUD GMENT OF THE SUPREME COURT OF INDIA IN TATA CONSULTANCY SERVICE S VS. I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 29 STATE OF ANDHRA PRADESH, (2004) 271 ITR 401 (S C), HELD THAT SOFTWARE INCORPORATED ON A MEDIA WOULD BE GOOD S AND LIABLE TO SALES TAX. THE HIGH COURT HAS HELD AS UNDER: 56. A FORTIORARI WHEN THE ASSESSEE SUPPLIES THE SOF TWARE WHICH IS INCORPORATED ON A CD, IT HAS SUPPLIED TANGIBLE P ROPERTY AND THE PAYMENT MADE BY THE CELLULAR OPERATOR FOR ACQUI RING SUCH PROPERTY CANNOT BE REGARDED AS A PAYMENT BY WAY OF ROYALTY. .. 59.BE THAT AS IT MAY, IN ORDER TO QUALIFY AS ROYALT Y PAYMENT, WITHIN THE MEANING OF SECTION 9(1)(VI) AND PARTICUL ARLY CLAUSE (V) OF EXPLANATION 2 THERETO, IT IS NECESSARY TO ESTABL ISH THAT THERE IS TRANSFER OF ALL OR ANY RIGHTS (INCLUDING THE GRA NTING OF ANY LICENCE) IN RESPECT OF COPYRIGHT OF A LITERARY, ART ISTIC OR SCIENTIFIC WORK. SECTION 2(O) OF THE COPYRIGHT ACT MAKES IT CL EAR THAT A COMPUTER PROGRAMME IS TO BE REGARDED AS A 'LITERARY WORK'. THUS, IN ORDER TO TREAT THE CONSIDERATION PAID BY T HE CELLULAR OPERATOR AS ROYALTY, IT IS TO BE ESTABLISHED THAT T HE CELLULAR OPERATOR, BY MAKING SUCH PAYMENT, OBTAINS ALL OR AN Y OF THE COPYRIGHT RIGHTS OF SUCH LITERARY WORK. IN THE PRES ENT CASE, THIS HAS NOT BEEN ESTABLISHED. IT IS NOT EVEN THE CASE O F THE REVENUE THAT ANY RIGHT CONTEMPLATED UNDER SECTION 1 4 OF THE COPYRIGHT ACT, 1957, STOOD VESTED IN THIS CELLULAR OPERATOR AS A CONSEQUENCE OF ARTICLE 20 OF THE SUPPLY CONTRACT. D ISTINCTION HAS TO BE MADE BETWEEN THE ACQUISITION OF A 'COPYRIGHT RIGHT' AND A 'COPYRIGHTED ARTICLE'. 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 AUTHORI TY FOR ADVANCE 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 BY 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 DEFINIT ION IN THE ACT. ARTICLE 13(3) BRINGS WITHIN THE AMBIT OF THE DEFINI TION OF ROYALTY A PAYMENT MADE FOR THE USE OF OR THE RIGHT TO USE A C OPYRIGHT OF A LITERARY WORK. THEREFORE, WHAT IS CONTEMPLATED IS A PAYMENT THAT IS DEPENDENT UPON USER OF THE COPYRIGHT AND NOT A L UMP SUM PAYMENT AS IS THE POSITION IN THE PRESENT CASE. WE THUS HOLD THAT PAYMENT RECEIVED BY THE ASSESSEE WAS TOWARDS T HE 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. I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 30 23. THE DELHI HIGH COURT IN DIT VS. ERICSSON A.B. [2012] 343 ITR 470 (DEL.) FURTHER HELD THAT ONCE IT IS HELD TH AT PAYMENT IN QUESTION IS NOT ROYALTY WHICH WOULD COME WITHIN THE MISCHIEF OF CLAUSE (VI), THE EXPLANATION WILL HAVE NO APPLICATION AND THAT THE QUESTION OF APPLICABILITY OF THE EXPLANATION WOULD ARISE ONLY WHEN PAYMENT IS TO BE TREATED AS 'ROYALTY' WITHIN THE MEANING OF CLAUS E (VI) OR 'FEE FOR TECHNICAL SERVICES' AS PROVIDED IN CLAUSE (VII) OF THE ACT. 24. IN THE CASE OF DASSAULT SYSTEMS K. K., IN RE (2010) 322 ITR 125 (AAR) THE AUTHORITY ON ADVANCE RULIN G HAS HELD AS UNDER: PASSING ON A RIGHT TO USE AND FACILITATING THE USE OF A PRODUCT FOR WHICH THE OWNER HAS A COPYRIGHT IS NOT THE SAME THI NG AS TRANSFERRING OR ASSIGNING RIGHTS IN RELATION TO THE COPYRIGHT. THE ENJOYMENT OF SOME OR ALL THE RIGHTS WHICH THE COPYR IGHT OWNER HAS, IS NECESSARY TO TRIGGER THE ROYALTY DEFINITION . VIEWED FROM THIS ANGLE, A NON-EXCLUSIVE AND NON-TRANSFERABLE LI CENCE ENABLING THE USE OF A COPYRIGHTED PRODUCT CANNOT BE CONSTRUED AS AN AUTHORITY TO ENJOY ANY OR ALL OF THE ENUMERAT ED RIGHTS INGRAINED IN A COPYRIGHT. WHERE THE PURPOSE OF THE LICENCE OR THE TRANSACTION IS ONLY TO ESTABLISH ACCESS TO THE COPYRIGHTED PRODUCT FOR INTERNAL BUSINESS PURPOSE, IT WOULD NOT BE LEGALLY CORRECT TO STATE THAT THE COPYRIGHT ITSELF HAS BEEN TRANSFERRED TO ANY EXTENT. IT DOES NOT MAKE ANY DIFFERENCE EVEN IF THE COMPUTER PROGRAMME PASSED ON TO THE USER IS A HIGHL Y SPECIALIZED ONE. THE PARTING OF INTELLECTUAL PROPER TY RIGHTS INHERENT IN AND ATTACHED TO THE SOFTWARE PRODUCT IN FAVOUR OF THE LICENSEE/CUSTOMER IS WHAT IS CONTEMPLATED BY THE DE FINITION CLAUSE IN THE ACT AS WELL AS THE TREATY. AS OBSERVE D EARLIER, THOSE RIGHTS ARE INCORPORATED IN SECTION 14. 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, IN OUR VIEW, AMOU NT TO TRANSFER OF RIGHTS IN RELATION TO COPYRIGHT OR CONF ERMENT OF THE RIGHT OF USING THE COPYRIGHT. HOWEVER, WHERE, FOR E XAMPLE, THE OWNER OF COPYRIGHT OVER A LITERARY WORK GRANTS AN E XCLUSIVE LICENCE TO MAKE OUT COPIES AND DISTRIBUTE THEM WITH IN A SPECIFIED TERRITORY, THE GRANTEE WILL PRACTICALLY S TEP INTO THE SHOES OF THE OWNER/GRANTOR AND HE ENJOYS THE COPYRI GHT TO THE EXTENT OF ITS GRANT TO THE EXCLUSION OF OTHERS. AS THE RIGHT ATTACHED TO COPYRIGHT IS CONVEYED TO SUCH LICENCEE, HE HAS THE AUTHORITY TO COMMERCIALLY DEAL WITH IT. IN CASE OF INFRINGEMENT OF COPYRIGHT, HE CAN MAINTAIN A SUIT TO PREVENT IT. DI FFERENT I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 31 CONSIDERATIONS WILL ARISE IF THE GRANT IS NON-EXCLU SIVE THAT TOO CONFINED TO THE USER PURELY FOR IN-HOUSE OR INTERNA L PURPOSE. THE TRANSFER OF RIGHTS IN OR OVER COPYRIGHT OR THE CONF ERMENT OF THE RIGHT OF USE OF COPYRIGHT IMPLIES THAT THE TRANSFER EE/LICENSEE SHOULD ACQUIRE RIGHTS EITHER IN ENTIRETY OR PARTIAL LY CO-EXTENSIVE WITH THE OWNER/ TRANSFEROR WHO DIVESTS HIMSELF OF T HE RIGHTS HE POSSESSES PRO TANTO. THAT IS WHAT, IN OUR VIEW, FOL LOWS FROM THE LANGUAGE EMPLOYED IN THE DEFINITION OF 'ROYALTY' RE AD WITH THE PROVISIONS OF THE COPYRIGHT ACT, VIZ., SECTION 14 A ND OTHER COMPLEMENTARY PROVISIONS. WE MAY REFER TO ONE MORE ASPECT HERE. IN THE DEFINITION OF ROYALTY UNDER THE ACT, T HE PHRASE 'INCLUDING THE GRANTING OF A LICENCE' IS FOUND. THA T DOES NOT MEAN THAT EVEN A NON-EXCLUSIVE LICENCE PERMITTING U SER FOR IN HOUSE PURPOSE WOULD BE COVERED BY THAT EXPRESSION. ANY AND EVERY LICENCE IS NOT WHAT IS CONTEMPLATED. IT SHOUL D TAKE COLOUR FROM THE PRECEDING EXPRESSION 'TRANSFER OF RIGHTS I N RESPECT OF COPYRIGHT'. APPARENTLY, GRANT OF 'LICENCE' HAS BEEN REFERRED TO IN THE DEFINITION TO DISPEL THE POSSIBLE CONTROVERSY A LICENCE WHATEVER BE ITS NATURE, CAN BE CHARACTERIZED AS TRA NSFER. 25. THE AUTHORITY ON ADVANCE RULING IN THE CASE OF DASSAULT SYSTEMS K. K., IN RE (SUPRA) NEGATED THE CONTEN TION OF THE REVENUE THAT THE RIGHT PERMITTING THE LICENSEE TO M AKE A COPY OF THE PROGRAMME BY LOADING THE PROGRAMME ON THE HARD DISK OF THE COMPUTER AMOUNTED TO ASSIGNMENT OF A RIGHT IN THE C OPYRIGHT IN TERMS OF SECTION 14 OF THE COPYRIGHT ACT AS UNDER: IT HAS BEEN CONTENDED ON BEHALF OF THE REVENUE THAT THE RIGHT TO REPRODUCE THE WORK IN ANY MATERIAL FORM INCLUDING T HE STORING OF IT IN ANY MEDIUM BY ELECTRONIC MEANS (VIDE SECTION 14(A)(I) OF THE COPYRIGHT ACT) MUST BE DEEMED TO HAVE BEEN CONV EYED TO THE END USER. IT IS POINTED OUT THAT A CD WITHOUT R IGHT OF REPRODUCTION ON THE HARD DISC IS OF NO VALUE TO THE END-USER AND SUCH A RIGHT SHOULD NECESSARILY BE TRANSFERRED TO M AKE IT WORKABLE. IT APPEARS TO US THAT THE CONTENTION IS B ASED ON A MISUNDERSTANDING OF THE SCOPE OF RIGHT IN SUB-CLAUS E (I) OF SECTION 14(A). AS STATED IN COPINGER'S TREATISE ON COPYRIGHT, 'THE EXCLUSIVE RIGHT TO PREVENT COPYING OR REPRODUC TION OF A WORK IS THE MOST FUNDAMENTAL AND HISTORICALLY OLDEST RIG HT OF A COPYRIGHT OWNER'. WE DO NOT THINK THAT SUCH A RIGHT HAS BEEN PASSED ON TO THE END-USER BY PERMITTING HIM TO DOWN LOAD THE COMPUTER PROGRAMME AND STORING IT IN THE COMPUTER F OR HIS OWN USE. THE COPYING/ REPRODUCTION OR STORAGE IS ONLY I NCIDENTAL TO THE FACILITY EXTENDED TO THE CUSTOMER TO MAKE USE O F THE COPYRIGHTED PRODUCT FOR HIS INTERNAL BUSINESS PURPO SE. AS ADMITTED BY THE REVENUE'S REPRESENTATIVE, THAT PROC ESS IS NECESSARY TO MAKE THE PROGRAMME FUNCTIONAL AND TO H AVE I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 32 ACCESS TO IT AND IS QUALITATIVELY DIFFERENT FROM TH E RIGHT CONTEMPLATED BY THE SAID PROVISION BECAUSE IT IS ON LY INTEGRAL TO THE USE OF COPYRIGHTED PRODUCT. APART FROM SUCH INC IDENTAL FACILITY, THE CUSTOMER HAS NO RIGHT TO DEAL WITH TH E PRODUCT JUST AS THE OWNER WOULD BE IN A POSITION TO DO. IN SO FA R AS THE LICENSED MATERIAL REPRODUCED OR STORED IS CONFINED TO THE FOUR CORNERS OF ITS BUSINESS ESTABLISHMENT, THAT TOO ON A NON- EXCLUSIVE BASIS, THE RIGHT REFERRED TO IN SUB-CLAU SE (I) OF SECTION 14(A) WOULD BE WHOLLY OUT OF PLACE. OTHERWISE, IN R ESPECT OF EVEN OFF-THE-SHELF SOFTWARE AVAILABLE IN THE MARKET , IT CAN BE VERY WELL SAID THAT THE RIGHT OF REPRODUCTION WHICH IS A FACET OF COPYRIGHT VESTED WITH THE OWNER IS PASSED ON TO THE CUSTOMER. SUCH AN INFERENCE LEADS TO UNINTENDED AND IRRATIONA L RESULTS. WE MAY IN THIS CONTEXT REFER TO SECTION 52(AA) OF THE COPYRIGHT ACT (EXTRACTED SUPRA) WHICH MAKES IT CLEAR THAT 'THE MA KING OF COPIES OR ADAPTATION' OF A COMPUTER PROGRAMME BY TH E LAWFUL POSSESSOR OF A COPY OF SUCH PROGRAMME, FROM SUCH CO PY (I) IN ORDER TO UTILIZE THE COMPUTER PROGRAM, FOR THE PURP OSE FOR WHICH IT WAS SUPPLIED OR (II) TO MAKE BACK UP COPIES PURE LY AS A TEMPORARY PROTECTION AGAINST LOSS, DESTRUCTION, OR DAMAGE IN ORDER TO UTILIZE THE COMPUTER PROGRAMME FOR THE PUR POSE OF WHICH IT WAS SUPPLIED' WILL NOT CONSTITUTE INFRINGE MENT OF COPYRIGHT. CONSEQUENTLY, CUSTOMIZATION OR ADAPTATIO N, IRRESPECTIVE OF THE DEGREE, WILL NOT CONSTITUTE 'IN FRINGEMENT' AS LONG AS IT IS TO ENSURE THE UTILIZATION OF THE COMP UTER PROGRAMME FOR THE PURPOSE FOR WHICH IT WAS SUPPLIED. ONCE THE RE IS NO INFRINGEMENT, IT IS NOT POSSIBLE TO HOLD THAT THERE IS TRANSFER OR LICENSING OF 'COPYRIGHT' AS DEFINED IN THE COPYRIGH T ACT AND AS UNDERSTOOD IN COMMON LAW. THIS IS BECAUSE, AS POINT ED OUT EARLIER, COPYRIGHT IS A NEGATIVE RIGHT IN THE SENSE THAT IT IS A RIGHT PROHIBITING SOMEONE ELSE TO DO AN ACT, WITHOUT AUTH ORIZATION OF THE SAME, BY THE OWNER. IT SEEMS TO US THAT REPRODU CTION AND ADAPTATION ENVISAGED BY SECTION 14(A)(I) AND (VI) C AN CONTEXTUALLY MEAN ONLY REPRODUCTION AND ADAPTATION FOR THE PURPOSE OF COMMERCIAL EXPLOITATION. COPYRIGHT BEING A NEGATIVE RIGHT (IN THE SENSE EXPLAINED IN PARAGRAPH 9 SUPRA) , IT WOULD ONLY BE APPROPRIATE AND PROPER TO TEST IT IN TERMS OF INFRINGEMENT. WHAT HAS BEEN EXCLUDED UNDER SECTION 52(AA) IS NOT COMMERCIAL EXPLOITATION, BUT ONLY UTILIZING THE COPYRIGHTED PRODUCT FOR ONE'S OWN USE. THE EXCLUSION SHOULD BE GIVEN DUE MEANING AND EFFECT; OTHERWISE, SECTION 52(AA) WILL BE PRACTICALLY REDUNDANT. IN FACT, AS THE LAW NOW STANDS, THE OWNE R NEED NOT NECESSARILY GRANT LICENCE FOR MERE REPRODUCTION OR ADAPTATION OF WORK FOR ONE'S OWN USE. EVEN WITHOUT SUCH LICENCE, THE BUYER OF PRODUCT CANNOT BE SAID TO HAVE INFRINGED THE OWNER' S COPYRIGHT. WHEN THE INFRINGEMENT IS RULED OUT, IT WOULD BE DIF FICULT TO REACH THE CONCLUSION THAT THE BUYER/LICENSEE OF PRODUCT H AS ACQUIRED A COPYRIGHT THEREIN. I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 33 26. THE AUTHORITY ON ADVANCE RULING IN THE CASE OF DASSAULT SYSTEMS K. K., IN RE (SUPRA) FURTHER APPROVED T HE REASONING OF THE SPECIAL BENCH OF INCOME-TAX APPELLATE TRIBUNAL IN MOTOROLA INC.(SUPRA)AND NOTICED THAT THE SAID DECISION HAS B EEN FOLLOWED IN SEVERAL DECISIONS OF THE INCOME-TAX APPELLATE TRIBU NAL TILL DATE. 27. THE AUTHORITY ON ADVANCE RULING FOLLOWING THE D ECISION IN THE DASSAULT CASE (SUPRA) IN THE CASE OF GEOQUEST SYS TEMS B.V.V. DIT (INTERNATIONAL TAXATION-I) [(2010)234C TR(AAR)73] HELD AS UNDER: 9. THE REVENUE HAS SOUGHT TO PLACE RELIANCE ON THE PROVISO TO SECTION 9(1)(VI) AND SUB-SECTION (1A) OF SECTION 11 5A IN ORDER TO CONTEND THAT THE ACT CONTEMPLATED CHARGING OF 'ROYA LTY' FOR AUTHORIZATION TO USE COMPUTER SOFTWARE AS SUCH AND IT IS NOT NECESSARY THAT THE COPYRIGHT THEREIN SHOULD BE SPEC IFICALLY TRANSFERRED. WE ARE NOT IMPRESSED BY THIS ARGUMENT. THE EXPRESSION 'COMPUTER SOFTWARE' HAS BEEN DEFINED BY EXPLANATION 3 TO SECTION 9(1)(VI) FOR THE PURPOSE OF THE SECOND PROVISO TO THE SAID CLAUSE. THE COMPUTER SOFTWARE IS DEFINED TO ME AN ANY COMPUTER PROGRAMME RECORDED ON ANY DISC, TAPE, PERF ORATED MEDIA OR OTHER INFORMATION STORAGE DEVICE AND INCLU DES ANY SUCH PROGRAMME OR ANY CUSTOMIZED ELECTRONIC DATA. U NDER THE SECOND PROVISO THE INCOME BY WAY OF 'ROYALTY' CONSI STING OF LUMP SUM PAYMENT MADE BY A RESIDENT FOR THE TRANSFER OF ALL OR ANY RIGHTS (INCLUDING THE GRANT OF LICENCE) IN RESPECT OF THE COMPUTER SOFTWARE BY A NON-RESIDENT MANUFACTURER ALONG WITH A COMPUTER BASED EQUIPMENT UNDER A SCHEME APPROVED AS PER THE 1986 POLICY ON COMPUTER SOFTWARE EXPORT, SOFTWARE DEVELO PMENT AND TRAINING, IS EXCLUDED FROM THE PURVIEW OF 'ROYALTY' CLAUSE. IT DOES NOT, HOWEVER, MEAN THAT WHEREVER COMPUTER SOFTWARE IS TRANSFERRED ON OUTRIGHT SALE BASIS OR IS LEASED OR LICENSED, IT WOULD BECOME ROYALTY INCOME. WHETHER OR NOT THE INC OME IS IN THE NATURE OF ROYALTY HAS TO BE JUDGED WITH REFEREN CE TO THE EXHAUSTIVE DEFINITION IN EXPLANATION 2. IN THIS CON TEXT, SUB- CLAUSE (V) OF EXPLANATION 2 WHICH HAS BEEN REFERRED TO BY BOTH SIDES BECOME RELEVANT. IT IS IN THE LIGHT OF THE LA NGUAGE OF THAT CLAUSE ONE HAS TO SEE WHETHER THE INCOME IN QUESTIO N OUGHT TO BE TREATED AS 'ROYALTY'. THE TRANSFER OF RIGHTS ENV ISAGED BY SUB- CLAUSE (V) SHOULD BE IN RESPECT OF THE 'COPYRIGHT' AMONG OTHERS. MERE TRANSFER OF COMPUTER SOFTWARE DEHORS ANY COPYR IGHT ASSOCIATED WITH IT DOES NOT FALL WITHIN THE AMBIT O F THE SAID CLAUSE (V). THAT IS WHAT HAS BEEN HELD IN THE TWO R ULINGS REFERRED TO EARLIER. I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 34 28. THE SUPREME COURT OF INDIA IN TATA CONSULTANC Y CASE (SUPRA) WAS CONSIDERING THE QUESTION WHETHER THE SA LE OF SOFTWARE WAS SALE OF GOODS AND THUS EXIGIBLE TO SALES TAX. T HE SUPREME COURT HELD THAT SOFTWARE MAY BE INTELLECTUAL PROPERTY AND CONTAINED ON A MEDIUM WAS A MARKETABLE COMMODITY AND AN OBJECT OF TRADE AND COMMERCE. THE SUPREME COURT OF INDIA HELD AS UNDER: 15. SORABJEE SUBMITTED THAT THE QUESTION AS TO WHET HER SOFTWARE IS TANGIBLE OR INTANGIBLE PROPERTY HAS BEEN CONSIDE RED BY THE AMERICAN COURTS. HE FAIRLY POINTED OUT THAT IN AMER ICA THERE IS A DIFFERENCE OF OPINION AMONGST THE VARIOUS COURTS. H E SUBMITTED THAT, HOWEVER, THE MAJORITY OF THE COURTS HAVE HELD THAT A SOFTWARE IS AN INTANGIBLE PROPERTY. HE SHOWED TO TH E COURT A NUMBER OF AMERICAN JUDGMENTS, VIZ., THE CASES OF CO MMERCE UNION BANK V. TIDWELL 538 S.W.2D 405; STATE OF ALAB AMA V. CENTRAL COMPUTER SERVICES. INC 349 SO. 2D 1156; THE FIRST NATIONAL BANK OF FORT WORTH V. BOB BULLOCK 584 S.W. 2D 548; FIRST NATIONAL BANK OF SPRINGFIELD V. DEPARTMENT OF REVENUE 421 NE2D 175; COMPUSERVE, INC. V. LINDLEY 535 N.E. 2D 3 60 AND NORTHEAST DATACOM, INC., ET AL V. CITY OF WALLINGFO RD 563 A2D 688. IN THESE CASES, IT HAS BEEN HELD THAT 'COMPUTE R SOFTWARE' IS TANGIBLE PERSONAL PROPERTY. THE REASONING FOR ARRIV ING AT THIS CONCLUSION IS BASICALLY THAT THE INFORMATION CONTAI NED IN THE SOFTWARE PROGRAMS CAN BE INTRODUCED INTO THE USER'S COMPUTER BY SEVERAL DIFFERENT METHODS, NAMELY, (A) IT COULD BE PROGRAMMED MANUALLY BY THE ORIGINATOR OF THE PROGRA M AT THE LOCATION OF THE USER'S COMPUTER, WORKING FROM HIS O WN INSTRUCTIONS OR (B) IT COULD BE PROGRAMMED BY A REM OTE PROGRAMMING TERMINAL LOCATED MILES AWAY FROM THE US ER'S COMPUTER, WITH THE INPUT INFORMATION BEING TRANSMIT TED BY TELEPHONE; OR (C) MORE COMMONLY THE COMPUTER COULD BE PROGRAMMED BY USE OF PUNCH CARDS, MAGNETIC TAPES OR DISCS, CONTAINING THE PROGRAM DEVELOPED BY THE VENDOR. IT HAS BEEN NOTICED THAT USUALLY THE VENDOR WILL ALSO PROVIDE M ANUALS, SERVICES AND CONSULTATION DESIGNED TO INSTRUCT THE USER'S EMPLOYEES IN THE INSTALLATION AND UTILIZATION OF TH E SUPPLIED PROGRAM. IT HAS BEEN HELD THAT EVEN THOUGH THE INTE LLECTUAL PROCESS IS EMBODIED IN A TANGIBLE AND PHYSICAL MANN ER, THAT IS ON THE PUNCH CARDS, MAGNETIC TAPES, ETC. THE LOGIC OR INTELLIGENCE OF THE PROGRAM REMAINS INTANGIBLE PROP ERTY. IT IS HELD THAT IT IS THIS INTANGIBLE PROPERTY RIGHT WHIC H IS ACQUIRED WHEN COMPUTER SOFTWARE IS PURCHASED OR LEASED. IT H AS BEEN HELD THAT WHAT IS CREATED AND SOLD IS INFORMATION A ND THE MAGNETIC TAPES OR THE DISCS ARE ONLY THE MEANS OF T RANSMITTING THESE INTELLECTUAL CREATIONS FROM THE ORIGINATOR TO THE USER. IT HAS BEEN HELD THAT THE SAME INFORMATION COULD HAVE BEEN TRANSMITTED FROM THE ORIGINATOR TO THE USER BY WAY OF TELEPHONE I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 35 LINES OR FED DIRECTLY INTO THE USER'S COMPUTER BY T HE ORIGINATOR OF THE PROGRAMME AND THAT AS THERE WOULD BE NO TAX IN THOSE CASES MERELY BECAUSE THE METHOD OF TRANSMISSION IS BY MEA NS OF A TAPE OR A DISC, IT DOES NOT CONSTITUTE PURCHASE OF TANGIBLE PERSONAL PROPERTY AND THE SAME REMAINS INTANGIBLE P ERSONAL PROPERTY. IT HAS BEEN HELD THAT WHAT THE CUSTOMER P AID FOR IS THE INTANGIBLE KNOWLEDGE WHICH CANNOT BE SUBJECTED TO T HE PERSONAL PROPERTY TAX. IN THESE CASES, DIFFERENCE IS SOUGHT TO BE MADE BETWEEN PURCHASE OF A BOOK, MUSIC CASSETTE/VIDEO OR FILM AND PURCHASE OF SOFTWARE ON THE FOLLOWING LINES: 'WHEN ONE BUYS A VIDEO CASSETTE RECORDING, A BOOK, SHEET MUSIC OR A MUSICAL RECORDING, ONE ACQUIRES A LIMITED RIGHT TO USE AND ENJOY THE MATERIAL'S CONTENT. ONE DOES NOT ACQUIRE, HOWEVER, ALL THAT THE OWNER HAS TO SELL. THESE ADDITIONAL INCIDENTS OF OW NERSHIP INCLUDE THE RIGHT TO PRODUCE AND SELL MORE COPIES, THE RIGHT TO CHANGE THE UNDERLYING WORK, THE RIGHT TO LICENSE IT S USE TO OTHER AND THE RIGHT TO TRANSFER THE COPYRIGHT ITSELF. IT IS THESE INCIDENTS OF THE INTELLECTUAL, INTANGIBLE COMPETENT OF THE SO FTWARE PROPERTY THAT WALLINGFORD HAS IMPERMISSIBLY ASSESSED AS TANG IBLE PROPERTY BY LINKING THESE INCORPOREAL INCIDENTS WIT H THE TANGIBLE MEDIUM IN WHICH THE SOFTWARE IS STORED AND TRANSMIT TED.' 16. IT HAS BEEN FAIRLY BROUGHT TO THE ATTENTION OF THE COURT THAT MANY OTHER AMERICAN COURTS HAVE TAKEN A DIFFERENT V IEW. SOME OF THOSE CASES ARE SOUTH CENTRAL BELL TELEPHONE CO. V. SIDNEY J. BARTHELEMY 643 SO.2D 1240; COMPTROLLER OF THE TR EASURY V. EQUITABLE TRUST COMPANY 464 A.2D 248; CHITTENDEN TR UST CO. V. COMMISSIONER OF TAXES 465 A.2D 1100; UNIVERSITY COM PUTING COMPANY V. COMMISSIONER OF REVENUE FOR THE STATE OF TENNESSEE 677 S.W.2D 445 AND HASBRO INDUSTRIES, INC . V. JOHN H. NORBERG, TAX ADMINISTRATOR 487 A.2D 124. IN THES E CASES, THE COURTS HAVE HELD THAT WHEN STORED ON MAGNETIC TAPE, DISC OR COMPUTER CHIP, THIS SOFTWARE OR SET OF INSTRUCTIONS IS PHYSICALLY MANIFESTED IN MACHINE READABLE FORM BY ARRANGING EL ECTRONS, BY USE OF AN ELECTRIC CURRENT, TO CREATE EITHER A MAGN ETIZED OR UNMAGNETIZED SPACE. THIS MACHINE READABLE LANGUAGE OR CODE IS THE PHYSICAL MANIFESTATION OF THE INFORMATION IN BINARY FORM. IT HAS BEEN NOTICED THAT AT LEAST THREE PROGRAM COPIES EXIST IN A SOFTWARE TRANSACTION: (I) AN ORIGINAL, (II) A DUPLI CATE, AND(III) THE BUYER'S FINAL COPY ON A MEMORY DEVICE. IT HAS BEEN NOTICED THAT THE PROGRAM IS DEVELOPED IN THE SELLER'S COMPUTER T HEN THE SELLER DUPLICATES THE PROGRAM COPY ON SOFTWARE AND TRANSPORTS THE DUPLICATES TO THE BUYER'S COMPUTER. THE DUPLICA TE IS READ INTO THE BUYER'S COMPUTER AND COPIED ON A MEMORY DE VICE. IT HAS BEEN HELD THAT THE SOFTWARE IS NOT MERELY KNOWL EDGE, BUT RATHER IS KNOWLEDGE RECORDED IN A PHYSICAL FORM HAV ING A PHYSICAL EXISTENCE, TAKING UP SPACE ON A TAPE, DISC OR HARD DRIVE, MAKING PHYSICAL THINGS HAPPEN AND CAN BE PER CEIVED BY THE SENSES. IT HAS BEEN HELD THAT THE PURCHASER DOE S NOT RECEIVE MERE KNOWLEDGE BUT RECEIVES AN ARRANGEMENT OF MATTER I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 36 WHICH MAKES HIS OR HER COMPUTER PERFORM A DESIRED F UNCTION. IT HAS BEEN HELD THAT THIS ARRANGEMENT OF MATTER RECOR DED ON TANGIBLE MEDIUM CONSTITUTES A CORPOREAL BODY. IT HA S BEEN HELD THAT A SOFTWARE RECORDED IN PHYSICAL FORM BECOMES I NEXTRICABLY INTERTWINED WITH, OR PART AND PARCEL OF THE CORPORE AL OBJECT UPON WHICH IT IS RECORDED, BE THAT A DISK, TAPE, HARD DR IVE, OR OTHER DEVICE. IT HAS BEEN HELD THAT THE FACT THAT THE INF ORMATION CAN BE TRANSFERRED AND THEN PHYSICALLY RECORDED ON ANOTHER MEDIUM DOES NOT MAKE COMPUTER SOFTWARE ANY DIFFERENT FROM ANY OTHER TYPE OF RECORDED INFORMATION THAT CAN BE TRANSFERRE D TO ANOTHER MEDIUM SUCH AS FILM, VIDEO TAPE, AUDIO TAPE OR BOOK S. IT HAS BEEN HELD THAT BY SALE OF THE SOFTWARE PROGRAMME TH E INCORPOREAL RIGHT TO THE SOFTWARE IS NOT TRANSFERRE D. IT IS HELD THAT THE INCORPOREAL RIGHT TO SOFTWARE IS THE COPYRIGHT WHICH REMAINS WITH THE ORIGINATOR. WHAT IS SOLD IS A COPY OF THE SOFTWARE. IT IS HELD THAT THE ORIGINAL COPYRIGHT VERSION IS NOT THE ONE WHICH OPERATES THE COMPUTER OF THE CUSTOMER BUT THE PHYSI CAL COPY OF THAT SOFTWARE WHICH HAS BEEN TRANSFERRED TO THE BUY ER. IT HAS BEEN HELD THAT WHEN ONE BUYS A COPY OF A COPYRIGHTE D NOVEL IN A BOOKSTORE OR RECORDING OF A COPYRIGHTED SONG IN A RECORD STORE, ONE ONLY ACQUIRES OWNERSHIP OF THAT PARTICUL AR COPY OF THE NOVEL OR SONG BUT NOT THE INTELLECTUAL PROPERTY IN THE NOVEL OR SONG. . 19. THUS THIS COURT HAS HELD THAT THE TERM 'GOODS', FOR THE PURPOSES OF SALES TAX, CANNOT BE GIVEN A NARROW MEA NING. IT HAS BEEN HELD THAT PROPERTIES WHICH ARE CAPABLE OF BEIN G ABSTRACTED, CONSUMED AND USED AND/OR TRANSMITTED, T RANSFERRED, DELIVERED, STORED OR POSSESSED ETC. ARE 'GOODS' FOR THE PURPOSES OF SALES TAX. THE SUBMISSION OF MR. SORABJ EE THAT THIS AUTHORITY IS NOT OF ANY ASSISTANCE AS A SOFTWARE IS DIFFERENT FROM ELECTRICITY AND THAT SOFTWARE IS INTELLECTUAL INCOR POREAL PROPERTY WHEREAS ELECTRICITY IS NOT, CANNOT BE ACCEPTED. IN INDIA THE TEST, TO DETERMINE WHETHER A PROPERTY IS 'GOODS', FOR PUR POSES OF SALES TAX, IS NOT WHETHER THE PROPERTY IS TANGIBLE OR INTANGIBLE OR INCORPOREAL. THE TEST IS WHETHER THE CONCERNED ITEM IS CAPABLE OF ABSTRACTION, CONSUMPTION AND USE AND WHETHER IT CAN BE TRANSMITTED, TRANSFERRED, DELIVERED, STORED, POSSES SED ETC. ADMITTEDLY IN THE CASE OF SOFTWARE, BOTH CANNED AND UNCANNED, ALL O F THESE ARE POSSIBLE. 29. THE SUPREME COURT OF INDIA IN TATA CONSULTANC Y CASE (SUPRA) REFERRED TO THE JUDGMENT OF THE SUPREME COU RT IN ASSOCIATED CEMENT COMPANIES LTD. VS COMMISSIONER O F CUSTOMS (2001) 4 SCC 593 AS UNDER: I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 37 43. SIMILAR WOULD BE THE POSITION IN THE CASE OF A PROGRAMME OF ANY KIND LOADED ON A DISC OR A FLOPPY. FOR EXAMPLE IN THE CASE OF MUSIC THE VALUE OF A POPULAR MUSIC CASSETTE IS S EVERAL TIMES MORE THAN THE VALUE OF A BLANK CASSETTE. HOWEVER, I F A PRE RECORDED MUSIC CASSETTE OR A POPULAR FILM OR A MUSI CAL SCORE IS IMPORTED INTO INDIA DUTY WILL NECESSARILY HAVE TO B E CHARGED ON THE VALUE OF THE FINAL PRODUCT. IN THIS BEHALF WE M AY NOTE THAT IN STATE BANK OF INDIA V. COLLECTOR OF CUSTOMS MANU/SC/0017/2000 : (2000) 1 SCC 727 THE BANK HAD, UNDER AN AGREEMENT WITH THE FOREIGN COMPANY, IMPORTED A C OMPUTER SOFTWARE AND MANUALS, THE TOTAL VALUE OF WHICH WAS US DOLLARS 4,084,475. THE BANK FILED AN APPLICATION FOR REFUND OF CUSTOMS DUTY ON THE GROUND THAT THE BASIC COST OF SOFTWARE WAS US DOLLARS 401.047. WHILE THE REST OF THE AMOUNT OF US DOLLARS 3,683,428 WAS PAYABLE ONLY AS A LICENCE FEE FOR ITS RIGHT TO USE THE SOFTWARE FOR THE BANK COUNTRYWIDE. THE CLAIM FO R THE REFUND OF THE CUSTOMS DUTY PAID ON THE AFORESAID AMOUNT OF US DOLLARS 3,683,428 WAS NOT ACCEPTED BY THIS COURT AS IN ITS OPINION, ON A CORRECT INTERPRETATION OF SECTION 14 READ WITH THE RULES, DUTY WAS PAYABLE ON THE TRANSACTION VALUE DETERMINED THE REIN, AND AS PER RULE 9 IN DETERMINING THE TRANSACTION VALUE THERE HAS TO BE ADDED TO THE PRICE ACTUALLY PAID OR PAYABLE FOR THE IMPORTED GOODS, ROYALTIES AND THE LICENCE FEE FOR WHICH THE BUYER IS REQUIRED TO PAY, DIRECTLY OR INDIRECTLY, AS A CONDI TION OF SALE OF GOODS TO THE EXTENT THAT SUCH ROYALTIES AND FEES AR E NOT INCLUDED IN THE PRICE ACTUALLY PAID OR PAYABLE. THIS CLEARLY GOES TO SHOW THAT WHEN TECHNICAL MATERIAL IS SUPPLIED WHETHER IN THE FORM OF DRAWINGS OR MANUALS THE SAME ARE GOODS LIABLE TO CU STOMS DUTY ON THE TRANSACTION VALUE IN RESPECT THEREOF. 44. IT IS A MISCONCEPTION TO CONTEND THAT WHAT IS B EING TAXED IS INTELLECTUAL INPUT. WHAT IS BEING TAXED UNDER THE C USTOMS ACT READ WITH THE CUSTOMS TARIFF ACT AND THE CUSTOMS VA LUATION RULES IS NOT THE INPUT ALONE BUT GOODS WHOSE VALUE HAS BEEN ENHANCED BY THE SAID INPUTS. THE FINAL PRODUCT AT T HE TIME OF IMPORT IS EITHER THE MAGAZINE OR THE ENCYCLOPAEDIA OR THE ENGINEERING DRAWINGS AS THE CASE MAY BE. THERE IS N O SCOPE FOR SPLITTING THE ENGINEERING DRAWING OR THE ENCYCLOPAE DIA INTO INTELLECTUAL INPUT ON THE ONE HAND AND THE PAPER ON WHICH IT IS SCRIBED ON THE OTHER. FOR EXAMPLE, PAINTINGS ARE AL SO TO BE TAXED. VALUABLE PAINTINGS ARE WORTH MILLIONS. A PAI NTING OR A PORTRAIT MAY BE SPECIALLY COMMISSIONED OR AN ARTICL E MAY BE TAILOR MADE. THIS ASPECT IS IRRELEVANT SINCE WHAT I S TAXED IS THE FINAL PRODUCT AS DEFINED AND IT WILL BE AN ABSURDIT Y TO CONTEND THAT THE VALUE FOR THE PURPOSES OF DUTY OUGHT TO BE THE COST OF THE CANVAS AND THE OIL PAINT EVEN THOUGH THE COMPOS ITE PRODUCT, I.E., THE PAINTING, IS WORTH MILLIONS. I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 38 48. THE ABOVE VIEW, IN OUR VIEW, APPEARS TO BE LOGI CAL AND ALSO IN CONSONANCE WITH THE CUSTOMS ACT. SIMILARLY IN AD VENT SYSTEMS LTD. V. UNISYS CORPORATION 1925 F 2D 670 IT WAS CONTENDED BEFORE THE COURT IN THE UNITED STATES THA T SOFTWARE REFERRED TO IN THE AGREEMENT BETWEEN THE PARTIES WA S A 'PRODUCT' AND NOT A 'GOOD' BUT INTELLECTUAL PROPERT Y OUTSIDE THE AMBIT OF THE UNIFORM COMMERCIAL CODE. IN THE SAID C ODE, GOODS WERE DEFINED AS 'ALL THINGS (INCLUDING SPECIALLY MA NUFACTURED GOODS) WHICH ARE MOVEABLE AT THE TIME OF THE IDENTI FICATION FOR SALE'. HOLDING THAT COMPUTER SOFTWARE WAS A 'GOOD' THE COURT HELD AS FOLLOWS : 'COMPUTER PROGRAMS ARE THE PRODUC T OF AN INTELLECTUAL PROCESS, BUT ONCE IMPLANTED IN A MEDIU M THEY ARE WIDELY DISTRIBUTED TO COMPUTER OWNERS. AN ANALOGY C AN 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-RE ADABLE DISC IT BECOMES A READILY MERCHANTABLE COMMODITY. SIMILARLY , WHEN A PROFESSOR DELIVERS A LECTURE, IT IS NOT A GOOD, BUT , WHEN TRANSCRIBED AS A BOOK, IT BECOMES A GOOD. THAT A CO MPUTER PROGRAM MAY BE COPYRIGHTABLE AS INTELLECTUAL PROPER TY DOES NOT ALTER THE FACT THAT ONCE IN THE FORM OF A FLOPPY DI SC OR OTHER MEDIUM, THE PROGRAM IS TANGIBLE, MOVEABLE AND AVAIL ABLE IN THE MARKETPLACE. THE FACT THAT SOME PROGRAMS MAY BE TAI LORED FOR SPECIFIC PURPOSES NEED NOT ALTER THEIR STATUS AS 'G OODS' BECAUSE THE CODE DEFINITION INCLUDES 'SPECIALLY MANUFACTURE D GOODS'.' 30. THE SUPREME COURT OF INDIA IN TATA CONSULTANCY CASE (SUPRA) FURTHER HELD AS UNDER: 25. TO BE NOTED THAT THIS AUTHORITY IS DIRECTLY DEA LING WITH THE QUESTION IN ISSUE. EVEN THOUGH THE DEFINITION OF TH E TERM 'GOODS' IN THE CUSTOMS ACT IS NOT AS WIDE OR EXHAUSTIVE AS THE DEFINITION OF THE TERM 'GOODS' IN THE SAID ACT, IT HAS STILL B EEN HELD THAT THE INTELLECTUAL PROPERTY WHEN IT IS PUT ON A MEDIA BEC OMES GOODS. . 27. IN OUR VIEW, THE TERM 'GOODS' AS USED IN ARTICL E 366(12) OF THE CONSTITUTION OF INDIA AND AS DEFINED UNDER THE SAID ACT ARE VERY WIDE AND INCLUDE ALL TYPES OF MOVABLE PROPERTI ES, 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 SOFTWAR E PROGRAMME MAY CONSIST OF VARIOUS COMMANDS WHICH ENA BLE THE COMPUTER TO PERFORM A DESIGNATED TASK. THE COPYRIGH T IN THAT PROGRAMME MAY REMAIN WITH THE ORIGINATOR OF THE PRO GRAMME. BUT THE MOMENT COPIES ARE MADE AND MARKETED, IT BEC OMES GOODS, WHICH ARE SUSCEPTIBLE TO SALES TAX. EVEN INT ELLECTUAL PROPERTY, ONCE IT IS PUT ON TO A MEDIA, WHETHER IT BE IN THE FORM I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 39 OF BOOKS OR CANVAS (IN CASE OF PAINTING) OR COMPUTE R DISCS OR CASSETTES, AND MARKETED WOULD BECOME 'GOODS'. WE SE E NO DIFFERENCE BETWEEN A SALE OF A SOFTWARE PROGRAMME O N A CD/FLOPPY DISC FROM A SALE OF MUSIC ON A CASSETTE/C D OR A SALE OF A FILM ON A VIDEO CASSETTE/CD. IN ALL SUCH CASES , THE INTELLECTUAL PROPERTY HAS BEEN INCORPORATED ON A ME DIA FOR PURPOSES OF TRANSFER. SALE IS NOT JUST OF THE MEDIA WHICH BY ITSELF HAS VERY LITTLE VALUE. THE SOFTWARE AND THE MEDIA C ANNOT BE SPLIT UP. WHAT THE BUYER PURCHASES AND PAYS FOR IS NOT TH E DISC OR THE CD. AS IN THE CASE OF PAINTINGS OR BOOKS OR MUSIC O R FILMS THE BUYER IS PURCHASING THE INTELLECTUAL PROPERTY AND N OT THE MEDIA I.E. THE PAPER OR CASSETTE OR DISC OR CD. THUS A TR ANSACTION SALE OF COMPUTER SOFTWARE IS CLEARLY A SALE OF 'GOODS' W ITHIN THE MEANING OF 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, T RANSFERRED, DELIVERED, STORED, POSSESSED ETC. THE SOFTWARE PROG RAMMES HAVE ALL THESE ATTRIBUTES. 31. S.B. SINHA J. IN TATA CONSULTANCY CASE (SUP RA) CONCURRING WITH THE DECISION OF THE MAJORITY REFERRED TO THE J UDGMENT IN THE CASE OF SOUTH CENTRAL BELL TELEPHONE CO. V. SIDNEY J. BA RTHELEMNY, ET AL. [643 SO. 2D 1240 : 36 A.L.R. 5TH 689], THE SUPREME COURT OF LOUISIANA HELD AS UNDER: 26. THE COURT, HOWEVER, NOTICED THAT THE SHIFT IN T HE TREND WAS NOT UNIFORM. HAVING REGARD TO THE FACT THAT THE COM PUTER SOFTWARE BECAME THE KNOWLEDGE AND UNDERSTANDING AND UPON DISCUSSING THE CHARACTERISTICS OF COMPUTER SOFTWARE AND CLASSIFICATION THEREOF AS TANGIBLE OR INTANGIBLE UN DER LOUISIANA LAW, IT WAS HELD: 'THE SOFTWARE ITSELF, I.E. THE PHYSICAL COPY, IS NO T MERELY A RIGHT OR AN IDEA TO BE COMPREHENDED BY THE UNDERSTANDING. THE PURCHASER OF COMPUTER SOFTWARE NEITHER DESIRES NOR RECEIVES MERE KNOWLEDGE, BUT RA THER RECEIVES A CERTAIN ARRANGEMENT OF MATTER THAT WILL MAKE HIS OR HER COMPUTER PERFORM A DESIRED FUNCTION. THI S ARRANGEMENT OF MATTER, PHYSICALLY RECORDED ON SOME TANGIBLE MEDIUM, CONSTITUTES A CORPOREAL BODY. WE A GREE WITH BELL AND THE COURT OF APPEAL THAT THE FORM OF THE DELIVERY OF THE SOFTWARE-MAGNETIC TAPE OR ELECTRONI C TRANSFER VIA MODEM- IS OF NO RELEVANCE. HOWEVER, WE DISAGREE WITH BELL AND THE COURT OF APPEAL THAT THE ESSENCE OR REAL OBJECT OF THE TRANSACTION WAS INTAN GIBLE PROPERTY . THAT THE SOFTWARE CAN BE TRANSFERRED TO VARIOUS I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 40 MEDIA I.E. FROM TAPE TO DISC, OR TAPE TO HARD DRIVE , OR EVEN THAT IT CAN BE TRANSFERRED OVER THE TELEPHONE LINES , DOES NOT TAKE AWAY FROM THE FACT THAT THE SOFTWARE WAS ULTIMATELY RECORDED AND STORED IN PHYSICAL FORM UPO N A PHYSICAL OBJECT. SEE CROCKETT, SUPRA, AT 872-74; SH ONTZ, AT 168-70; COWDREY, SUPRA, AT 188-90. AS THE COURT OF APPEAL EXPLAINED, AND AS BELL READILY ADMITS, THE PROGRAMS CANNOT BE UTILIZED BY BELL UNTIL THEY HAVE BEEN RECORDED INTO THE MEMORY OF THE ELECTRONIC TELEPHON E SWITCH. 93-1072, AT P. 6, 631 SO.2D AT 1342. THE ES SENCE OF THE TRANSACTION WAS NOT MERELY TO OBTAIN THE INT ANGIBLE 'KNOWLEDGE' OR 'INFORMATION', BUT RATHER, WAS TO OB TAIN RECORDED KNOWLEDGE STORED IN SOME SORT OF PHYSICAL FORM THAT BELL'S COMPUTERS COULD USE. RECORDED AS SUCH, THE SOFTWARE IS NOT MERELY AN INCORPOREAL IDEA TO BE COMPREHENDED, AND WOULD BE OF NO USE IF IT WERE. RA THER, THE SOFTWARE IS GIVEN PHYSICAL EXISTENCE TO MAKE CE RTAIN DESIRED PHYSICAL THINGS HAPPEN. ONE CANNOT ESCAPE T HE FACT THAT SOFTWARE, RECORDED IN PHYSICAL FORM, BECO MES INEXTRICABLY INTERTWINED WITH, OR PART AND PARCEL O F THE CORPOREAL OBJECT UPON WHICH IT IS RECORDED , BE THA T A DISC, TAPE, HARD DRIVE, OR OTHER DEVICE. CROCKETT, SUPRA, AT 871072; COWDREY, SUPRE, AT 188-90. THAT THE INFORMA TION CAN BE TRANSFERRED AND THEN PHYSICALLY RECORDED ON ANOTHER MEDIUM IS OF NO MOMENT, AND DOES NOT MAKE COMPUTER SOFTWARE ANY DIFFERENT THAN ANY OTHER TYPE OF RECORDED INFORMATION THAT CAN BE TRANSFERRED TO ANO THER MEDIUM SUCH AS FILM, VIDEO TAPE, AUDIO TAPE, OR BOO KS. ' IT WAS FURTHER OPINED : 'IT IS NOW COMMON KNOWLEDGE THAT BOOKS, MUSIC, AND EVEN MOVIES OR OTHER AUDIO/VISUAL COMBINATIONS CAN BE CO PIED FROM ONE MEDIUM TO ANOTHER. THEY ARE ALSO ALL AVAIL ABLE ON COMPUTER IN SUCH FORMS AS FLOPPY DISC, TAPE, AND CD- ROM. SUCH MOVIES, BOOKS, MUSIC, ETC .CAN ALL BE DELIVERED BY AND/OR COPIED FROM ONE MEDIUM TO ANOTH ER, INCLUDING ELECTRICAL IMPULSES WITH THE USE OF A MOD EM. ASSUMING THERE IS SUFFICIENT MEMORY SPACE AVAILABLE IN THE COMPUTER HARD DISC DRIVE SUCH MOVIES, BOOKS, MU SIC, ETC .CAN ALSO BE RECORDED INTO THE PERMANENT MEMORY OF THE COMPUTER SUCH AS WAS DONE WITH THE SOFTWARE IN THIS CASE. 93-1072, AT P. 4, 5. 631 SO.2D AT 1346-47 (DISSENTING OPINION). SEE ALSO SHONTZ. SUPRA, AT 16 8-170; HARRIS, SUPRA, AT 187. THAT THE INFORMATION, KNOWLE DGE, STORY, OR IDEA, PHYSICALLY MANIFESTED IN RECORDED F ORM, CAN BE TRANSFERRED FROM ONE MEDIUM TO 15 ANOTHER DOES N OT AFFECT THE NATURE OF THAT PHYSICAL MANIFESTATION AS CORPOREAL, OR TANGIBLE. SHONTZ, SUPRA, AT 168-170. LIKEWISE, THAT THE SOFTWARE CAN BE TRANSFERRED FROM 1248 I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 41 ONE TYPE OF PHYSICAL RECORDATION, E.G., TAPE, TO AN OTHER TYPE, E.G., DISK OR HARD DRIVE, DOES NOT ALTER THE NATURE OF THE SOFTWARE, SHONTZ, SUPRA, AT 168-170; IT STILL H AS CORPOREAL QUALITIES AND IS INEXTRICABLY INTERTWINED WITH A CORPOREAL OBJECT. THE SOFTWARE MUST BE STORED IN PH YSICAL FORM ON SOME TANGIBLE OBJECT SOMEWHERE.......... 27. REVERSING THE FINDINGS OF THE COURT BELOW THAT THE COMPUTER SOFTWARE CONSTITUTES INTELLECTUAL PROPERTY, IT WAS OPINED : 'IN SUM, ONCE THE 'INFORMATION' OR 'KNOWLEDGE' IS TRANSFORMED INTO PHYSICAL EXISTENCE AND RECORDED IN PHYSICAL FORM, IT IS CORPOREAL PROPERTY. THE PHYSIC AL RECORDATION OF THIS SOFTWARE IS NOT AN INCORPOREAL RIGHT TO BE COMPREHENDED. THEREFORE WE HOLD THAT THE SWITCHI NG SYSTEM SOFTWARE AND THE DATA PROCESSING SOFTWARE INVOLVED HERE IS TANGIBLE PERSONAL PROPERTY AND THU S IS TAXABLE BY THE CITY OF NEW ORLEANS.' 32. THE SUPREME COURT IN TATA CONSULTANCY CASE (S UPRA) HAVE THUS LAID DOWN THAT COMPUTER PROGRAMS ARE THE PRODU CT OF AN INTELLECTUAL PROCESS, BUT ONCE IMPLANTED IN A MEDIU M THEY ARE WIDELY DISTRIBUTED TO COMPUTER OWNERS. THAT A COMPUTER PRO GRAM MAY BE COPYRIGHTABLE AS INTELLECTUAL PROPERTY DOES NOT ALT ER THE FACT THAT ONCE IN THE FORM OF A FLOPPY DISC OR OTHER MEDIUM, THE PROGRAM IS TANGIBLE, MOVEABLE AND AVAILABLE IN THE MARKETPLACE. 33. THE SUPREME COURT HAS FURTHER HELD THAT A SOFTW ARE PROGRAMME MAY CONSIST OF VARIOUS COMMANDS WHICH ENABLE THE CO MPUTER TO PERFORM A DESIGNATED TASK. THE COPYRIGHT IN THAT PR OGRAMME MAY REMAIN WITH THE ORIGINATOR OF THE PROGRAMME. BUT TH E MOMENT COPIES ARE MADE AND MARKETED, IT BECOMES GOODS, WHICH ARE SUSCEPTIBLE TO SALES TAX. EVEN INTELLECTUAL PROPERTY, ONCE IT IS P UT ON TO A MEDIA, WHETHER IT BE IN THE FORM OF BOOKS OR CANVAS (IN C ASE OF PAINTING) OR COMPUTER DISCS OR CASSETTES, AND MARKETED WOULD BEC OME 'GOODS'. THERE IS NO DIFFERENCE BETWEEN A SALE OF A SOFTWARE PROGRAMME ON A CD/FLOPPY DISC FROM A SALE OF MUSIC ON A CASSETTE/C D 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 PURPO SES OF TRANSFER. SALE IS NOT JUST OF THE MEDIA WHICH BY ITSELF HAS V ERY LITTLE VALUE. THE SOFTWARE AND THE MEDIA CANNOT BE SPLIT UP. WHAT THE BUYER PURCHASES I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 42 AND PAYS FOR IS NOT THE DISC OR THE CD. AS IN THE C ASE OF PAINTINGS OR BOOKS OR MUSIC OR FILMS THE BUYER IS PURCHASING THE INTELLECTUAL PROPERTY AND NOT THE MEDIA I.E. THE PAPER OR CASSET TE OR DISC OR CD. THE SOFTWARE ITSELF, I.E. THE PHYSICAL COPY, IS NOT MERELY A RIGHT OR AN IDEA TO BE COMPREHENDED BY THE UNDERSTANDING. 34. IT HAS BEEN FURTHER HELD THAT THE PURCHASER OF COMPUTER SOFTWARE NEITHER DESIRES NOR RECEIVES MERE KNOWLEDGE, BUT RA THER RECEIVES A CERTAIN ARRANGEMENT OF MATTER THAT WILL MAKE HIS OR HER COMPUTER PERFORM A DESIRED FUNCTION. THIS ARRANGEMENT OF MAT TER, PHYSICALLY RECORDED ON SOME TANGIBLE MEDIUM, CONSTITUTES A COR POREAL BODY. THE FORM OF THE DELIVERY OF THE SOFTWARE-MAGNETIC TAPE OR ELECTRONIC TRANSFER VIA MODEM- IS OF NO RELEVANCE. THAT THE SO FTWARE CAN BE TRANSFERRED TO VARIOUS MEDIA I.E., FROM TAPE TO DIS C, OR TAPE TO HARD DRIVE, OR EVEN THAT IT CAN BE TRANSFERRED OVER THE TELEPHONE LINES, DOES NOT TAKE AWAY FROM THE FACT THAT THE SOFTWARE WAS U LTIMATELY RECORDED AND STORED IN PHYSICAL FORM UPON A PHYSICAL OBJECT. RECORDED AS SUCH, THE SOFTWARE IS NOT MERELY AN INCORPOREAL IDEA TO B E COMPREHENDED, AND WOULD BE OF NO USE IF IT WERE. RATHER, THE SOFT WARE IS GIVEN PHYSICAL EXISTENCE TO MAKE CERTAIN DESIRED PHYSICAL THINGS HAPPEN. ONE CANNOT ESCAPE THE FACT THAT SOFTWARE, RECORDED IN PHYSICAL FORM, BECOMES INEXTRICABLY INTERTWINED WITH, OR PART AND PARCEL OF THE CORPOREAL OBJECT UPON WHICH IT IS RECORDED , BE THA T A DISC, TAPE, HARD DRIVE, OR OTHER DEVICE. THAT THE INFORMATION CAN BE TRANSFERRED AND THEN PHYSICALLY RECORDED ON ANOTHER MEDIUM IS OF NO MOMENT, AND DOES NOT MAKE COMPUTER SOFTWARE ANY DIFFERENT THAN ANY OTHER TYPE OF RECORDED INFORMATION THAT CAN BE TRANSFERRED TO ANO THER MEDIUM SUCH AS FILM, VIDEO TAPE, AUDIO TAPE, OR BOOKS. IT IS NO W COMMON KNOWLEDGE THAT BOOKS, MUSIC, AND EVEN MOVIES OR OTHER AUDIO/V ISUAL COMBINATIONS CAN BE COPIED FROM ONE MEDIUM TO ANOTH ER. THEY ARE ALSO ALL AVAILABLE ON COMPUTER INSUCH FORMS AS FLOP PY DISC, TAPE, AND CD-ROM. SUCH MOVIES, BOOKS, MUSIC, ETC. CAN ALL BE DELIVERED BY AND/OR COPIED FROM ONE MEDIUM TO ANOTHER, INCLUDING ELECTRICAL I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 43 IMPULSES WITH THE USE OF A MODEM. ASSUMING THERE IS SUFFICIENT MEMORY SPACE AVAILABLE IN THE COMPUTER HARD DISC DR IVE SUCH MOVIES, BOOKS, MUSIC, ETC. CAN ALSO BE RECORDED INTO THE PE RMANENT MEMORY OF THE COMPUTER. THAT THE INFORMATION, KNOWLEDGE, S TORY, OR IDEA, PHYSICALLY MANIFESTED IN RECORDED FORM, CAN BE TRAN SFERRED FROM ONE MEDIUM TO ANOTHER DOES NOT AFFECT THE NATURE OF THA T PHYSICAL MANIFESTATION AS CORPOREAL, OR TANGIBLE. LIKEWISE, THAT THE SOFTWARE CAN BE TRANSFERRED FROM ONE TYPE OF PHYSICAL RECORD ATION, E.G., TAPE, TO ANOTHER TYPE, E.G., DISK OR HARD DRIVE, DOES NOT A LTER THE NATURE OF THE SOFTWARE, IT STILL HAS CORPOREAL QUALITIES AND IS I NEXTRICABLY INTERTWINED WITH A CORPOREAL OBJECT. THE SOFTWARE MUST BE STORE D IN PHYSICAL FORM ON SOME TANGIBLE OBJECT SOMEWHERE. IN SUM, ONCE THE 'INFORMATION' OR 'KNOWLEDGE' IS TRANSFORMED INTO PHYSICAL EXISTENCE AND RECORDED IN PHYSICAL FORM, IT IS CORPOREAL PROPERTY. THE PHYSIC AL RECORDATION OF THIS SOFTWARE IS NOT AN INCORPOREAL RIGHT TO BE COMPREHE NDED. 35. TO FURTHER ELUCIDATE THE NATURE OF THE TRANSACT ION IN THE CASE OF THE ASSESSEE IT IS NECESSARY TO EXAMINE SOME OF THE CLAUSES OF THE LICENSING SOFTWARE AGREEMENT ENTERED INTO BY THE AS SESSEE WITH ITS CUSTOMERS: 36. CLAUSE NO. 2 OF THE AGREEMENT FOR SALE AND ASSIGNMENT OF INTELLECTUAL PROPERTY TECHNOLOGY TRANSFER IS MENTIO NED BELOW: THE SELLER IRREVOCABLY SELLS AND TRANSFERS TO BUYE R ALL RIGHTS, TITLE AND INTEREST ( INCLUDING BUT NOT LIMI TED TO, ALL REGISTRATION RIGHTS, ALL RIGHTS TO PREPARE DERIVATI VE WORKS, ALL GOODWILL AND ALL OTHER RIGHTS ), IN AND TO THE INTE LLECTUAL PROPERTY AND ASSIGNS TO THE BUYER EXCLUSIVELY THROU GHOUT THE WORLD ALL RIGHT, TITLE AND INTEREST ( CHOATE OR INCHOATE) IN AND THE ASSESSEE HAS ENTERED INTO SEPARATE SUPPLEME NTARY AGREEMENTS FOR ACQUIRING THE INTELLECTUAL PROPERTY/ TECHNICAL TRANSFER OF RIGHTS, TITLE, AND INTEREST, IN AND TO THE INTELLECTUAL PROPERTY AND ASSIGNS TO THE BUYER THRO UGHOUT THE WORLD ALL RIGHT, TITLE AND INTEREST ( CHOATE OR INCHOATE) IN (I) SUBJECT MATTER REFERRED TO IN SCHEDULE A SPECIF ICATION ORIENTED OFF SHELF COMPUTER SOFTWARE PROGRAMME. I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 44 AS PER THE CLAUSE NO. 1 OF THE SUPPLEMENTARY ASSIGNMENT AGREEMENT WITH THE INTRA ASIA TRADING PTE. LTD. THE SALE AND ASSIGNMENT OF INTELLECTUAL PROPERTY/TECHNOLOGY TRANSFER: THE SELLER SELLS AND TRANSFERS TO BUYER ALL RIGHTS, TITLE, AND INTEREST, IN AND TO THE INTELLECTUAL PROPERTY AND A SSIGNS TO THE BUYER THROUGHOUT THE WORLD ALL RIGHT, TITLE AND INTEREST ( CHOATE OR INCHOATE ) IN THE SUBJECT MATTER REFERRED TO IN SCHEDULE A SPECIFICATION ORIENTED OFF SHELF COMPUTE R SOFTWARE PROGRAMME. AS PER THE CLAUSE 2 CONSIDERATION : IN CONSIDERATION FOR THE SALE OF RIGHTS AND SOURCE COD E ASSIGNMENT SET FOR THE IN ARTICLES 2, BUYER SHALL P AY SELLER USD 40,000 TOWARDS INTELLECTUAL PROPERTY RIGHT/RIGH TS AND SOURCE CODE WHICH INCLUDES IN TOTAL PURCHASE VALUE OF USD 1982454 AS PER CLAUSE NO. 3 THE FOLIO WINGS CLAUSES ARE MENTIONED REGARDING THE REPRESENTATIONS AND WARRANTIES WHICH STATES THAT ALL THE RIGHTS WILL BE SUBJECT TO TAXATION AS INTELLECTUAL PROPERTY. (A) SELLER HAS THE RIGHT, POWER AND AUTHORITY TO EN TER INTO THIS AGREEMENT; (B) SELLER IS THE EXCLUSIVE OWNERS OF ALL RIGHT, TITLE AND INTEREST IN THE TECHNOLOGY FREE OF ANY SECURITY INTEREST, CHARGE OR ENCUMBRANCE; (C) SELLER WARRANTS THAT ALL DOCUMENTS, COMPUTER RE CORDS, DISKS AND OTHER MATERIALS OF ANY NATURE OF KIND CON TAINING THE TECHNOLOGY OR ANY PORTION THEREOF HAVE BEEN TUR NED OVER TO BUYER, AND THAT SELLER WILL NOT RETAIN THE TECHNOLOGY, OR ANY PORTION THEREOF, IN ANY FORM WHA TSOEVER AFTER THE CLOSING OF THE WITHIN TRANSACTIONS EXCEPT AS SPECIFICALLY PERMITTED HEREUNDER; (D) THE INTELLECTUAL PROPERTY DOES NOT INFRINGE THE RIGHTS OF ANY PERSON OR ENTITY; (E) THERE ARE NOT CLAIMS, PENDING OR THREATENED, WI TH RESPECT OF SELLER'S RIGHT IN THE INTELLECTUAL PROPE RTY; (F) THIS AGREEMENT IS VALID, BINDING AND ENFORCEA BLE IN ACCORDANCE WITH ITS TERMS OF THIS AGREEMENT. 1. SELLER IS NOT SUBJECT TO ANY AGREEMENT, JUDGME NT OR ORDER INCONSISTENT WITH THE TERMS OF THIS AGREEMENT . 2. THE SELLER IS NOT RESTRAINED FROM SELLING AND/A SSIGNING THE INTELLECTUAL PROPERTY RIGHTS BY ANY STATUTORY A UTHORITY IN THE COUNTRY OF ITS INCORPORATION. I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 45 AS PER CLAUSE 4 OF THE SUPPLEMENTARY AGREEMENT FURTHER ASSURANCES, MORAL RIGHTS, COMPETITION, MARKETING: SELLER AGREES TO ASSIST THE BUYER IN EVERY LEGAL WA Y TO EVIDENCE, RECORD AND PERFECT THE SECTION 1 ASSIGNMENT AND TO APPLY FOR AND OBTAIN RECORDATION OF AND FROM TIM E TO TIME ENFORCE, MAINTAIN, AND DEFEND THE ASSIGNED RIGHTS. IF THE BUYER IS UNABLE FOR ANY REASON WHATSOEVER TO SECURE THE SELLER'S SIGNATURE TO ANY DOCUMENT IT IS ENTITLED T O UNDER THIS SECTION 3, SELLER HEREBY IRREVOCABLY DESIGNATES AND APPOINTS THE BUYER AND ITS DULY AUTHORIZED OFFICERS AND AGENTS, AS HIS AGENTS AND ATTORNEYS-IN-FACT WITH FU LL POWER OF SUBSTITUTION TO ACT FOR AND ON HIS BEHALF AND IN STEAD OF SELLER, TO EXECUTE AND FILE ANY SUCH DOCUMENT OR DO CUMENTS AND TO DO ALL OTHER LAWFULLY PERMITTED ACTS TO FURT HER THE PURPOSES OF THE FOREGOING WITH THE SAME LEGAL FORCE AND EFFECT AS IF EXECUTED BY SELLER. TO THE EXTENT ALLOWED BY LAW, SECTION 1 INCLUDES ALL RIGHTS OF PATERNITY, INTEGRITY, DISCLOSURE AND WITHDRAWAL AND ANY OTHER RIGHTS THAT MAY BE KNOWN AS OR REFERRED TO AS MORAL RIGHTS. ARTIST'S RIGHTS, DROIT MORAL' OR THE LIK E ( COLLECTIVELY MORAL RIGHT'). TO THE EXTENT SELLER RETAINS ANY S UCH MORAL RIGHTS UNDER APPLICABLE LAW. SELLER HEREBY RATIFIES AND CONSENTS TO, AND PROVIDES ALL NECESSARY RATIFICATIO N AND CONSENTS TO, ANY ACTION THAT MAY BE TAKEN WITH RESP ECT TO SUCH MORAL RIGHTS BY OR AUTHORIZED BY BUYER, SELLER AGREES NOT TO ASSERT ANY MORAL RIGHTS WITH RESPECT THERETO . SELLER WILL CONFIRM ANY SUCH RATIFICATIONS, CONSENTS AND AGREEMENTS FROM TIME TO TIME AS REQUESTED BY BUYER. AS PER THE CLAUSE NO. 7 ENTIRE AGREEMENT : THIS AGREEMENT, CONTAINS THE ENTIRE UNDERSTANDING AND AGREEMENT BETWEEN THE PARTIES HERETO WITH RESPECT T O ITS SUBJECT MATTER AND SUPERSEDES ANY PRIOR OR CONTEMPORANEOUS WRITTEN OR ORAL AGREEMENTS, REPRESENTATIONS OR WARRANTIES BETWEEN THEM RESPECTI NG THE SUBJECT MATTER THEREOF'. 37. FURTHER, THE LICENSING AGREEMENT SHOWS THAT THE LICENSE IS NON- EXCLUSIVE, NON-TRANSFERABLE AND THE SOFTWARE HAS TO BE USED IN ACCORDANCE WITH THE AGREEMENT. THE BUYER, BEING ASS ESSEE, PURCHASED ALL RIGHTS, TITLE AND INTEREST IN AND TO THE INTELLECTUAL PROPERTY AND SELLER ASSIGNED TO THE ASSESSEE THROUG HOUT THE WORLD ALL RIGHT, TITLE AND INTEREST IN RELATION TO THE SOURCE CODE FOR THE SMART CARD OPERATING SYSTEM MENTIONED IN THE SCHEDULE A O F THE AGREEMENT. I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 46 THE ASSESSEE ACQUIRED A READYMADE OF THE SHELF C OMPUTER PROGRAMME TO BE USED IN THEIR BUSINESS AND NO RIGHT WAS GRANTED TO THE ASSESSEE TO UTILIZE THE COPY RIGHT OF THE PROGR AMME. THE ASSESSEE HAS PURCHASED ONLY COPY OF THE COPYRIGHTED ARTICLE I.E., A COMPUTER PROGRAMME WHICH WAS CALLED SOFTWARE AND, THEREFORE, CONSIDERATION CANNOT BE TREATED AS ROYALTY. IN OTHER WORDS, ASSES SEE IS PERMITTED TO MAKE ONLY COPY OF THE SOFTWARE AND ASSOCIATED SUPP ORT INFORMATION AND THAT ALSO FOR BACKUP PURPOSES. IT IS ALSO STIPU LATED THAT THE COPY SO MADE SHALL INCLUDE COPYRIGHT AND OTHER PROPRIET ARY NOTICES. COPIES OF THE SOFTWARE ARE THE EXCLUSIVE PROPERTY OF INTRA ASIA TRADING (P) LTD. THE SOFTWARE INCLUDES A LICENCE AUTHORISATION DEVICE, WHICH RESTRICTS THE USE OF THE SOFTWARE. THE SOFTWARE IS TO BE USED ONLY FOR LICENSEE S OWN BUSINESS AS DEFINED WITHIN THE INTRA ASIA TRA DING (P) LTD. WITHOUT THE CONSENT OF THE SELLER THE SOFTWARE CANNOT BE LOANED, RENTED, SOLD, SUBLICENSED OR TRANSFERRED TO ANY THI RD PARTY OR USED BY ANY PARENT, SUBSIDIARY OR AFFILIATED ENTITY OF LICE NSEE. THE LICENSEE IS FURTHER RESTRICTED FROM MAKING COPIES, DECOMPILE, D ISASSEMBLE OR REVERSE-ENGINEER THE SOFTWARE WITHOUT INTRA ASIA TR ADING (P) LTD.S WRITTEN CONSENT. THE SOFTWARE CONTAINS A MECHANISM WHICH INTRA ASIA TRADING (P) LTD. 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 COPY RIGHTS AND INTELLECTUAL PROPERTY RIGHTS IN AND TO THE SOFTWARE , AND COPIES MADE BY LICENSEE, ARE OWNED BY OR DULY LICENSED TO INTRA AS IA TRADING (P) LTD.. 38. THE AGREEMENTS SHOW THAT THE LICENSE IS NON-EXC LUSIVE, NON- TRANSFERABLE AND THE SOFTWARE HAS TO BE USED IN ACC ORDANCE WITH THE AGREEMENT. IT IS ALSO STIPULATED THAT THE COPY SO M ADE SHALL INCLUDE INTRA ASIA TRADING (P) LTDS COPYRIGHT AND OTHER PR OPRIETARY NOTICES. ALL COPIES OF THE SOFTWARE ARE THE EXCLUSIVE PROPER TY OF INTRA ASIA TRADING (P) LTD.. THE SOFTWARE INCLUDES A LICENCE A UTHORISATION DEVICE, WHICH RESTRICTS THE USE OF THE SOFTWARE. TH E SOFTWARE IS TO BE USED ONLY FOR LICENSEE S OWN BUSINESS AS DEFINED WITHIN THE INTRA ASIA TRADING (P) LTD. LICENCE SCHEDULE. I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 47 39. IN ORDER TO QUALIFY AS ROYALTY PAYMENT, IT IS N ECESSARY TO ESTABLISH THAT THERE IS TRANSFER OF ALL OR ANY RIGH TS (INCLUDING THE GRANTING OF ANY LICENCE) IN RESPECT OF COPYRIGHT O F A LITERARY, ARTISTIC OR SCIENTIFIC WORK. IN ORDER TO TREAT THE CONSIDERATIO N PAID BY THE LICENSEE AS ROYALTY, IT IS TO BE ESTABLISHED THAT T HE LICENSEE, BY MAKING SUCH PAYMENT, OBTAINS ALL OR ANY OF THE COPY RIGHT RIGHTS OF SUCH LITERARY WORK. DISTINCTION HAS TO BE MADE BETW EEN THE ACQUISITION OF A 'COPYRIGHT RIGHT' AND A 'COPYRIGHTED ARTICLE'. COPYRIGHT IS DISTINCT FROM THE MATERIAL OBJECT, COPYRIGHTED. COPYRIGHT IS AN INTANGIBLE INCORPOREAL RIGHT IN THE NATURE OF A PRIVILEGE, QUI TE INDEPENDENT OF ANY MATERIAL SUBSTANCE, SUCH AS A MANUSCRIPT. JUST BECA USE ONE HAS THE COPYRIGHTED ARTICLE, IT DOES NOT FOLLOW THAT ONE HA S ALSO THE COPYRIGHT IN IT. IT DOES NOT AMOUNT TO TRANSFER OF ALL OR AN Y RIGHT INCLUDING LICENCE IN RESPECT OF COPYRIGHT. COPYRIGHT OR EVEN RIGHT TO USE COPYRIGHT IS DISTINGUISHABLE FROM SALE CONSIDERATIO N PAID FOR COPYRIGHTED ARTICLE. THIS SALE CONSIDERATION IS F OR PURCHASE OF GOODS AND IS NOT ROYALTY. 40. THE LICENSE GRANTED BY THE ASSESSEE IS LIMITED TO THOSE NECESSARY TO ENABLE THE LICENSEE TO OPERATE THE PRO GRAM. THE RIGHTS TRANSFERRED ARE SPECIFIC TO THE NATURE OF COMPUTER PROGRAMS. COPYING THE PROGRAM ONTO THE COMPUTER'S HARD DRIVE OR RANDO M ACCESS MEMORY OR MAKING AN ARCHIVAL COPY IS AN ESSENTIAL STEP IN UTILIZING THE PROGRAM. THEREFORE, RIGHTS IN RELATION TO THESE ACT S OF COPYING, WHERE THEY DO NO MORE THAN ENABLE THE EFFECTIVE OPERATION OF THE PROGRAM BY THE USER, SHOULD BE DISREGARDED IN ANALYZING THE CH ARACTER OF THE TRANSACTION FOR TAX PURPOSES. PAYMENTS IN THESE TYP ES OF TRANSACTIONS WOULD BE DEALT WITH AS BUSINESS INCOME IN ACCORDANC E WITH ARTICLE 7. 41. THERE IS A CLEAR DISTINCTION BETWEEN ROYALTY P AID 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 TRANSFERRI NG OR ASSIGNING RIGHTS I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 48 IN RELATION TO THE COPYRIGHT. THE ENJOYMENT OF SOME OR ALL THE RIGHTS WHICH THE COPYRIGHT OWNER HAS, IS NECESSARY TO INVO KE THE ROYALTY DEFINITION. VIEWED FROM THIS ANGLE, A NON-EXCLUSIVE AND NON- TRANSFERABLE LICENCE ENABLING THE USE OF A COPYRIGH TED PRODUCT CANNOT BE CONSTRUED AS AN AUTHORITY TO ENJOY ANY OR ALL O F THE ENUMERATED RIGHTS INGRAINED IN ARTICLE 12 OF DTAA. WHERE THE P URPOSE OF THE LICENCE OR THE TRANSACTION IS ONLY 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 TREATY. 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 RIGHTS IN RELATION TO COPYRIGHT OR CONFERMENT OF THE RIGHT OF USING TH E COPYRIGHT. THE TRANSFER OF RIGHTS IN OR OVER COPYRIGHT OR THE CONF ERMENT OF THE RIGHT OF USE OF COPYRIGHT IMPLIES THAT THE TRANSFEREE/LICENS EE SHOULD ACQUIRE RIGHTS EITHER IN ENTIRETY OR PARTIALLY CO-EXTENSIVE WITH THE OWNER/ TRANSFEROR WHO DIVESTS HIMSELF OF THE RIGHTS HE POS SESSES IN HIS FAVOUR. 42. THE LICENSE GRANTED TO THE LICENSEE PERMITTING HIM TO USE THE PROGRAMME FOR ITS BUSINESS PURPOSE IS ONLY INCIDENT AL TO THE FACILITY EXTENDED TO THE LICENSEE TO MAKE USE OF THE COPYRIG HTED PRODUCT FOR ITS INTERNAL BUSINESS PURPOSE. THE SAID PROCESS IS NECESSARY TO MAKE THE PROGRAMME FUNCTIONAL AND TO HAVE ACCESS TO IT A ND IS QUALITATIVELY DIFFERENT FROM THE RIGHT CONTEMPLATED BY THE SAID P ARAGRAPH BECAUSE IT IS ONLY INTEGRAL TO THE USE OF COPYRIGHTED PRODUCT. APART FROM SUCH INCIDENTAL FACILITY, THE LICENSEE HAS NO RIGHT TO D EAL WITH THE PRODUCT JUST AS THE OWNER WOULD BE IN A POSITION TO DO. 43. THERE IS NO TRANSFER OF ANY RIGHT IN RESPECT O F COPYRIGHT BY THE ASSESSEE AND IT IS A CASE OF MERE TRANSFER OF A COP YRIGHTED ARTICLE. I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 49 THE PAYMENT IS FOR A COPYRIGHTED ARTICLE AND REPRES ENTS THE PURCHASE PRICE OF AN ARTICLE AND CANNOT BE CONSIDERED AS ROY ALTY EITHER UNDER THE INCOME TAX ACT OR UNDER THE DTAA. 44. THE LICENSEES ARE NOT ALLOWED TO EXPLOIT THE CO MPUTER SOFTWARE COMMERCIALLY, THEY HAVE ACQUIRED UNDER LICENCE AGRE EMENT, ONLY THE COPY RIGHTED SOFTWARE WHICH BY ITSELF IS AN ARTICLE AND THEY HAVE NOT ACQUIRED ANY COPYRIGHT IN THE SOFTWARE. IN THE CASE OF THE ASSESSEE COMPANY, THE LICENSEE TO WHOM THE ASSESSEE COMPANY HAS SOLD/LICENSED THE SOFTWARE WERE ALLOWED TO MAKE ONL Y ONE COPY OF THE SOFTWARE AND ASSOCIATED SUPPORT INFORMATION FOR BAC KUP PURPOSES WITH A CONDITION THAT SUCH COPYRIGHT SHALL INCLUDE INTRA ASIA TRADING (P) LTD. COPYRIGHT AND ALL COPIES OF THE SOFTWARE SHALL BE EXCLUSIVE PROPERTIES OF INTRA ASIA TRADING (P) LTD. LICENSEE WAS ALLOWED TO USE THE SOFTWARE ONLY FOR ITS OWN BUSINESS AS SPECIFICA LLY IDENTIFIED AND WAS NOT PERMITTED TO LOAN/RENT/SALE/SUB-LICENCE OR TRANSFER THE COPY OF SOFTWARE TO ANY THIRD PARTY WITHOUT THE CONSENT OF INTRA ASIA TRADING (P) LTD. 45. THE LICENSEE HAS BEEN PROHIBITED FROM COPYING, DE-COMPILING, DE-ASSEMBLING, OR REVERSE ENGINEERING THE SOFTWARE WITHOUT THE WRITTEN CONSENT OF INTRA ASIA TRADING (P) LTD. THE LICENCE AGREEMENT BETWEEN THE ASSESSEE COMPANY AND ITS CUSTOMERS STIP ULATES THAT ALL COPYRIGHTS AND INTELLECTUAL PROPERTY RIGHTS IN THE SOFTWARE AND COPIES MADE BY THE LICENSEE WERE OWNED BY INTRA ASIA TRADI NG (P) LTD. AND ONLY INTRA ASIA TRADING (P) LTD. HAS THE POWER TO G RANT LICENCE RIGHTS FOR USE OF THE SOFTWARE. THE LICENCE AGREEMENT STIP ULATES THAT UPON TERMINATION OF THE AGREEMENT FOR ANY REASON, THE LI CENCEE SHALL RETURN THE SOFTWARE INCLUDING SUPPORTING INFORMATION AND L ICENCE AUTHORIZATION DEVICE TO INTRA ASIA TRADING (P) LTD. . 46. THE INCORPOREAL RIGHT TO THE SOFTWARE I.E. COPY RIGHT REMAINS WITH THE OWNER AND THE SAME WAS NOT TRANSFERRED BY THE A SSESSEE. THE RIGHT TO USE A COPYRIGHT IN A PROGRAMME IS TOTALLY DIFFERENT FROM THE I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 50 RIGHT TO USE A PROGRAMME EMBEDDED IN A SOFTWARE 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 BRIN G IT WITHIN THE DEFINITION OF ROYALTY AS GIVEN IN THE DTAA. WHAT TH E LICENSEE HAS ACQUIRED IS ONLY A COPY OF THE COPYRIGHT ARTICLE WH EREAS THE COPYRIGHT REMAINS WITH THE OWNER AND THE LICENSEES HAVE ACQUI RED A COMPUTER PROGRAMME FOR BEING USED IN THEIR BUSINESS AND NO R IGHT IS GRANTED TO THEM TO UTILIZE THE COPYRIGHT OF A COMPUTER PROGRAM ME AND THUS THE PAYMENT FOR THE SAME IS NOT IN THE NATURE OF ROYAL TY. 47. WE HAVE NOT EXAMINED THE EFFECT OF THE SUBSEQUE NT AMENDMENT TO SECTION 9 (1)(VI) OF THE ACT AND ALSO WHETHER TH E AMOUNT RECEIVED FOR USE OF SOFTWARE WOULD BE ROYALTY IN TERMS THERE OF FOR THE REASON THAT THE ASSESSEE IS COVERED BY THE DTAA, THE PROVI SIONS OF WHICH ARE MORE BENEFICIAL. THE AMOUNT RECEIVED BY THE ASS ESSEE UNDER THE LICENCE AGREEMENT FOR ALLOWING THE USE OF THE SOFTW ARE IS NOT ROYALTY UNDER THE DTAA. 48. 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 WH ICH IS CLEARLY DISTINCT FROM THE RIGHTS IN A COPYRIGHT. THE RIGHT THAT IS T RANSFERRED IS NOT A RIGHT TO USE THE COPYRIGHT BUT IS ONLY LIMITED TO T HE RIGHT TO USE THE COPYRIGHTED MATERIAL AND THE SAME DOES NOT GIVE RIS E TO ANY ROYALTY INCOME AND WOULD BE BUSINESS INCOME. 49. IN VIEW OF ELABORATE DISCUSSION AND IN THE LIG HT OF THE JUDGMENT OF THE HONBLE DELHI HIGH COURT IN THE CASE OF DIT VS. INFRASOFT LTD. (SUPRA), ON WHICH RELIANCE PLACED BY THE LEARNED AR , IN THE PRESENT CASE, THE ASSESSEE HAS ACQUIRED A READYMADE OFF T HE SHELF COMPUTER PROGRAMME TO BE USED IN THEIR BUSINESS AND NO RIGHT WAS GRANTED TO THE ASSESSEE TO UTILIZE THE COPY RIGHT O F THE PROGRAMME AND, THEREFORE, CONSIDERATION CANNOT BE TREATED AS ROYALTY. AS HELD BY I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 51 THE CIT(A), THE PAYMENTS MADE BY THE ASSESSEE COMPA NY CANNOT BE HELD AS ROYALTIES COMING INTO THE AMBIT OF ARTICL E 12 OF DTAA OR FEE FOR TECHNICAL SERVICES U/S 9(1)(VII) OF THE IT ACT AND ACCORDINGLY NO TAX NEED TO BE DEDUCTED U/S 195 OF THE IT ACT. WE, THER EFORE, UPHOLD THE ORDER OF THE CIT(A) ON THIS COUNT AND DISMISS THE G ROUNDS RAISED BY THE REVENUE IN THIS REGARD. 50. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISS ED. PRONOUNCED IN THE OPEN COURT ON 27/01/2014. SD/- (ASHA VIJAYARAGHAVAN) JUDICIAL MEMBER SD/- (CHANDRA POOJARI) ACCOUNTANT MEMBER HYDERABAD, DATED 27/01/2014. KV COPY FORWARDED TO: 1. ADIT (IT), UNIT-I, 6 TH FLOOR, C BLOCK, IT TOWERS, AC GUARDS, HYDERABAD. 2. M/S BARTRONICS INDIA LTD., 8-2-120/77/48, BESIDE S TDP OFFICE, ROAD NO. 2, BANJARA HILLS, HYDERABAD. 3. CIT(A)-VI, HYDERABAD 4. DIT(E), HYDERABAD 5 . THE DR, ITAT, HYDERABAD I.T.A. NO.918/HYD/2010 M/S BARTRONICS INDIA LTD. 52 S.NO. DESCRIPTION DATE INTLS 1. DRAFT DICTATED ON SR.P.S./P.S 2. DRAFT PLACED BEFORE AUTHOR SR.P.S/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5 APPROVED DRAFT COMES TO THE SR.P.S./PS SR.P.S./P.S 6. KEPT FOR PRONOUNCEMENT ON SR. P.S./P.S. 7. FILE SENT TO THE BENCH CLERK SR.P.S./P.S 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER
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