Income Tax Appellate Tribunal - Pune
Symantec Corporation,, Pune vs Deputy Commissioner Of Income Tax,, ... on 5 April, 2019
आयकर अपीऱीय अधिकरण पण
ु े न्यायपीठ "ए" पण
ु े में
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "A", PUNE
सुश्री सुषमा चावऱा, न्याययक सदस्य एवं श्री अयिऱ चतुवेदी, ऱेखा सदस्य के समक्ष
BEFORE MS. SUSHMA CHOWLA, JM AND SHRI ANIL CHATURVEDI, AM
आयकर अपीऱ सं. / ITA No.387/PUN/2017
यििाारण वषा / Assessment Year : 2013-14
Symantec Corporation,
C/o EON, Free Zone,
0-05 Floor, Wing 1,
Cluster B, Plot No.1,
Survey No.77, MIDC,
Knowledge Park, Kharadi,
Pune - 411014 .... अऩीऱाथी/Appellant
PAN: AAQCS1868P
Vs.
The Dy. Commissioner of Income Tax
(International Taxation), Circle 2, Pune .... प्रत्यथी / Respondent
Assessee by : S/Shri Nageshwar Rao and Nikhil Mutha
Revenue by : Shri S.B. Prasad, CIT
सन
ु वाई की तारीख / घोषणा की तारीख /
Date of Hearing : 26.03.2019 Date of Pronouncement: 05.04.2019
आदे श / ORDER
PER SUSHMA CHOWLA, JM:
The appeal filed by assessee is against the order of DCIT (International Taxation), Circle-2, Pune, dated 19.12.2016 relating to assessment year 2013- 14 passed under section 144C(13) r.w.s. 143(3) of the Income-tax Act, 1961 (in short 'the Act').
2. The assessee has raised the following grounds of appeal:-
ITA No.387/PUN/2017 2Symantec Corporation Ground 1 - Consideration from sale of software licenses of Rs.13,95,96,795 taxed as royalty i. On the facts and in the circumstances of the case and in law, the learned AO and Hon'ble DRP has erred in treating the consideration received for sale of software product taxable as 'Royalty' both under the provisions of the Act as well as Article 12 of the DTAA between India and USA.
ii. The learned AO and Hon'ble DRP failed to appreciate the Appellant's arguments and submissions explaining that the software licences sold by the Appellant are goods and not services.
iii. The learned AO and Hon'ble DRP erred in holding that the Appellant grants right in the copyright of the software licenses instead of treating the grant of software licenses as copyrighted article without any rights in the copyright.
iv. The learned AO and Hon'ble DRP erred in holding that the term 'use' or 'right to use' does not presuppose commercial exploitation of software Ground 2 - Initiation of penalty proceedings under section 271(1)(c) of the Act On the facts and in the circumstances of the case and in law, the learned AO erred in initiating penalty proceedings under section 271(1)(c) of the Act.
3. The learned Authorized Representative for the assessee at the outset pointed out that the only issue arising in the present appeal is the income from sale of software license, wherein the assessee was non-resident entity and had received consideration for sale of software products which were taxed as 'royalty' both under the provisions of the Act as well as under Article 12 of DTAA between India and USA. The learned Authorized Representative for the assessee pointed out that the assessee had sold standard software and not customised software and hence consideration received could not be held as 'royalty' under the provisions of the Act or under the DTAA. In this regard, he pointed out that the Hon'ble High Court of Delhi in the case of Infrasoft Ltd.
reported in 264 CTR 329 (Del) had adjudicated the issue in relation to purchase of standard software. He then, stressed that the issue raised in the present appeal is squarely covered by the order of Tribunal in the case of John Deere India Pvt. Ltd. Vs. DDIT (IT) in ITA Nos.905 to 908/PUN/2015, relating to ITA No.387/PUN/2017 3 Symantec Corporation assessment years 2007-08 & 2008-09, order dated 23.01.2019 and he placed special reliance on paras 45, 65, 68 and 90 of the said order. After referring to the factual aspects of the said case and arguments made by the learned Authorized Representative for the assessee and the learned Departmental Representative for the Revenue, he then invited our attention to the draft assessment order at para 2, wherein the revenue receipts of assessee are mentioned. He then, pointed out that the Assessing Officer had relied on the ratio laid down by the Delhi Bench of Tribunal in the case of Microsoft Corporation Vs. ADIT in ITA Nos.1331-1336/Del/2010, Millennium IT Software (AAR) 14 Taxmann.com 17) [2011], Mumbai Bench of Tribunal in DDIT Vs. Reliance Communications Infrastructure Ltd. in ITA No.5468/M/2008 and the Hon'ble High Court of Karnataka in CIT Vs. Synopsis International Old Ltd.
(2013) 212 Taxman 454 (Kar). The learned Authorized Representative for the assessee pointed out that the Delhi Bench of Tribunal in later decision in ITA Nos.6089 to 6091/Del/2012 relating to assessment years 2007-08 to 2009-10, vide order dated 26.09.2016 itself has overruled its earlier decision in the case of Microsoft Corporation Vs. ADIT (supra). He also pointed out that new name of the said concern is MOL Corporation.
4. The learned Departmental Representative for the Revenue on the other hand, placed reliance on the order of Dispute Resolution Panel (DRP) and also referred to the decision of the Hon'ble High Court of Karnataka in CIT Vs. Samsung Electronics Co. Ltd. in ITA No.2808 of 2005, judgment dated 15.10.2011.
5. We have heard the rival contentions and perused the record. The issue which arises in the present appeal is with regard to non-resident entity which is ITA No.387/PUN/2017 4 Symantec Corporation a company incorporated under the laws of USA. The assessee in India was engaged in sale of software license relating to information securities and storage technology as well as provision of support and maintenance services with respect to the said software. During the year under consideration, the assessee had earned revenue from sale of software license in India including certification and software by authentication business. The case of assessee was taken up for scrutiny and he was asked to furnish the details of its activities in India. The assessee was also asked to submit details as to why receipts from sale of software license in India should not be taxed as royalty. The assessee in response furnished the reply that it was selling software licenses to the end user customers in India either directly or indirectly through authorized distributors, resellers, etc. It was further pointed out that no customization of Symantec software was done at the customers end except for integration of software with existing system. It was also explained that every end user of software had to accept and abide by the end user license agreement, as per which it was specifically prohibited to modify, copy, sub-license, rent, lease or transfer any portion of software; reverse engineer, decompile, disassemble, modify, translate, make any attempt to discover the source code of the software and create derivative work of the licensed software except permitted by the applicable laws. The assessee thus, stressed that receipts from sale of software license was not taxable as 'royalty'. The Assessing Officer was of the view that the argument of assessee was primarily based on the software sold by it did not fall within definition of 'copyright' on the following reasons given by assessee:-
a. There is neither transfer of copyright right or right to use the copyright but only the right to use the copyrighted article (software) b. Copies made by end user for the purpose of utilizing the software internally (including backup copies) does not tantamount to use of copyright in the software.ITA No.387/PUN/2017 5
Symantec Corporation
6. However, the Assessing Officer did not accept the said reasoning of the assessee in turn, relying on the ratio laid down by Delhi Bench of Tribunal in the case of Microsoft Corporation Vs. ADIT (supra), Millennium IT Software (AAR) (supra), Mumbai Bench of Tribunal in DDIT Vs. Reliance Communications Infrastructure Ltd. (supra) and the Hon'ble High Court of Karnataka in CIT Vs. Synopsis International Old Ltd. (supra) and held that receipts derived by assessee from sale of software license should be taxed as 'royalty' as per section 9(1)(vi) of the Act and as per Article 12 of DTAA between Indian and USA. Hence, total income in the hands of assessee was assessed at ₹ 13,95,96,795/-. This proposition was made in the draft assessment order, against which the assessee filed objections before the DRP, which rejected it and the Assessing Officer passed final assessment order in the case of assessee holding that income from royalty of ₹ 13.95 crores was to be taxed @ 10%.
7. The assessee is in appeal against order of DRP / Assessing Officer.
8. The assessee is non-resident entity and is recipient of consideration on sale of software products. The assessee claims that the said income is not taxable in its hands. On the other hand, the case of Revenue authorities is that receipts from sale of software license are to be taxed as 'royalty' both under the Income Tax Act and as per DTAA with USA. The assessee claims to have sold standard software to its customers, wherein end users were not allowed to modify, copy, sub-license, rent, lease or transfer any portion of said software.
The said article sold by the assessee was a copyrighted article and the assessee claimed that it had not transferred copyright of the literary, artistic or scientific work to the end user.
ITA No.387/PUN/2017 6Symantec Corporation
9. The Hon'ble High Court of Delhi in the case of Infrasoft Ltd. (supra) had held that sale of standard software is not covered under the realm of 'royalty' as defined under the Income Tax Act or as per DTAA.
10. Further, Pune Bench of Tribunal in John Deere India Pvt. Ltd. Vs. DDIT (supra) while deciding the issue of tax deduction at source under section 201(1) of the Act on payment made for purchase of software has elaborated on the settled legal propositions from para 45 onwards and had observed as under:-
"65. The Hon‟ble High Court of Delhi in DIT Vs. Infrasoft Ltd. (supra) have noted that under the license agreement, license was non-exclusive, non- transferrable and the software had to be used in accordance with agreement; the licensee was permitted to make only one copy of software and associated support information and that also for backup purpose. All copies of software were the exclusive property of „Infrasoft‟ and it was stipulated that copy shall include „Infrasoft‟ copyright and all copies of software also; and without consent of the licensor, the software could not be loaned, rented, sold, sub-licensed or transferred to any third party. The Hon‟ble High Court further went on to hold that distinction had to be made between acquisition of copyright and copyrighted article; copyrighting was distinct from material object.
66. The Hon‟ble High Court in DIT Vs. Infrasoft Ltd. (supra) vide its decision dated 22.11.2013 was of the view that where the assessee was governed by Indo-US DTAA, the income of assessee would be chargeable to tax in terms of provisions of Indo-US DTAA and if the same was more advantageous or beneficial, then definition of the word „royalty‟ as defined in Explanation 2 to section 9(1)(vi) of the Act could not be applied. The Hon‟ble High Court vide paras 64 and 65 held as under:-
"64. To be taxable as royalty income covered by Article 12 of the DTAA the income of the Assessee should have been generated by the "use of or the right to use of" any copyright.
65. The issue whether consideration for software was royalty came up for consideration before the Special Bench of the Tribunal in Delhi in the case of MOTOROLA INC VS DEPUTY CIT (2005) 147 TAXMAN 39 (DELHI). The Tribunal has held as under:
155. It appears to us from a close examination of the 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 should be classified as royalty both under the Income-tax Act and under the DTAA and it would be taxable in the hands of the Assessee on that basis. If the payment is really for a copyrighted article, then it only represents the purchase price of the article and, therefore, cannot be considered as royalty either under the Act or under the DTAA. This issue really is the key to the entire controversy and we may now proceed to address this issue.ITA No.387/PUN/2017 7
Symantec Corporation
156. We must look into the meaning of the word "copyright" as given in the Copyright Act, 1957. Section 14 of this Act defines "Copyright" as "the exclusive right subject to the provisions of this Act, to do or authorize the doing of any of the following acts in respect of a work or any substantial part thereof, namely:
---------
It is clear from the above definition that a computer programme mentioned in Clause (b) of the section has all the rights mentioned in Clause (a) and in addition also the right to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer programme. This additional right was substituted w.e.f. 15.1.2000. The difference between the earlier provision and the present one is not of any relevance. What is to be noted is that the right mentioned in Sub -clause (ii) of Clause (b) of Section 14 is available only to the owner of the computer programme. It follows that if any of the cellular operators does not have any of the rights mentioned in Clauses
(a) and (b) of Section 14, it would mean that it does not have any right in a copyright. In that case, the payment made by the cellular operator cannot be characterized as royalty either under the Income-tax Act or under the 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 itself to find out what JTM, one of the cellular operators, can rightfully do with reference to the software. We may remind ourselves that JTM is taken as a representative of all the cellular operators and that it was common ground before us that all the contracts with the cellular operators are substantially the same. Clause 20.1 of the Agreement, under the title "License", says that JTM is granted a non - exclusive restricted license to use the software and documentation but only for its own operation and maintenance of the system and not otherwise. This clause appears 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 maintenance of the system. There is a clear bar on the software being used by JTM in the public domain or for the purpose of commercial exploitation.
158. Secondly, under the definition of "copyright" in Section 14 of the Copyright Act, the emphasis is that it is an exclusive right granted to the holder thereof. This condition is not satisfied in the case of JTM because the license granted to it by the Assessee is expressly stated in Clause 20.1 as a "non exclusive restricted license". This means that the supplier of the software, namely, the Assessee, can supply similar software to any number of cellular operators to which JTM can have no objection and further all the cellular operators can use the software only for the purpose of their own operation and maintenance of the system and not for any other purpose. The user of the software by the cellular operators in the 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 far as the use of software is ITA No.387/PUN/2017 8 Symantec Corporation concerned. It needs no repetition to clarify that JTM has not been given any of the seven rights mentioned in Clause (a) of Section 14 or the additional right mentioned in Sub-clause (ii) of Clause (b) of the section which relates to a computer programme 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 MOBI LES shall:
(a) not provide or make the Software or Documentation or any portions or aspects thereof (including any methods or concepts utilized or expressed therein) available to any person except to its employees on a "need to know" basis;
(b) not make any copies of Software or Documentation or parts thereof, except for archival backup purposes;
(c) when making permitted copies as aforesaid transfer to the copy/copies any copyright or other marking on the Software or Documentation.
(d) Not use the Software or Documentation for any other 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 Documentation outside India without the written consent of the Contractor and after having received necessary export or re -export permits from relevant authorities.
This clause places stringent restrictions on the cellular operator so far as the use of software is concerned. It first says that the cellular operator cannot make the software or portions thereof available to any person except to its employees and even with regard to employees it has to be only on a "need to know basis"
which means that even the employees are not to be told in all its aspects. What the Assessee can do is only to tell the particular employee what he has to know about the software for operational purposes. The cellular operator has been denied the right to make copies of the software or parts thereof except for archival backup purposes. This means that the cellular operator cannot make copies of the software for commercial purposes. This condition is plainly contrary to Section 14(a)(i) of the Copyright Act which permits the copyright holder to reproduce the work in any material form including the storing of it in any medium by electronic means. We may also notice Section 52(1)(aa) of the Copyright Act which lists out certain acts which cannot be considered as infringement of copyright. The particular clause permits the making of copies or adaptation of a computer programme by the lawful possessor of the copy and the computer programme in order to utilize the public programme for the purpose for which it was supplied or to make backup copies purely as a temporary protection against loss, destruction or damage. Therefore, merely because the cellular operator has been permitted to take ITA No.387/PUN/2017 9 Symantec Corporation 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 cellular operator, while making copies of the software for backup purposes, to also mark the copied software with copyright or other marking to show that the rights of the Assessee are reserved. This is one more indication that what the cellular operator acquired is not a copyright.
161. Clause 20.4(d) says that the cellular operator cannot use the software for any other purpose than what is permitted and shall not also license or sell or in any manner alienate or part with its possession. This has to be read with Clause 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 part of the hardware and it has no use or value independent of it. This restriction placed on the cellular operator (not to license or sell the software) runs counter to Section 14(b)(ii) of the Copyright Act which permits a 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 operator acquired a copyright in the software.
162. A conjoint reading of the terms of the supply contract and the provisions of the Copyright Act, 1957 clearly shows that the cellular operator cannot exploit the computer software commercially which is the very essence of a copyright. In other words a holder of a copyright is permitted to exploit the copyright commercially and if he is not permitted to do so then what he has acquired cannot be considered as a copyright. In that case, it can 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 recorded a vocalist has acquired the copyright in the music rendered and is, therefore, permitted to exploit the recording commercially. In this case the music recording company has not merely acquired a copyrighted article in the form of a recording, but has actually acquired a copyright to reproduce the music and exploit the same commercially. In the present case what JTM or any other cellular operator has acquired under the supply contract is only the copyrighted software, which is an article by itself and not any copyright therein.
163. We may now briefly deal with the objections of Mr. G.C. Sharma, the learned senior counsel for the Department. He contended that if a person owns a copyrighted article then he automatically has a right over the copyright also. With respect, this objection does not appear to us to be correct. Mr. Dastur filed an extract from Iyengar's Copyright Act (3rd Edition) edited by R.G. Chaturvedi. The following observations of the author are on the point:
"(h) Copyright is distinct from the material object, copyrighted:ITA No.387/PUN/2017 10
Symantec Corporation It is an intangible incorporeal right in the nature of a privilege, quite independent of any material substance, such as a manuscript. The copyright owner may dispose of it on such terms as he may see fit. He has an individual right of exclusive enjoyment. The transfer of the manuscript does not, of itself, serve to transfer the copyright therein. The transfer of the ownership of a physical thing in which copyright exists gives to the purchaser the right to do with it (the physical thing) whatever he pleases, except the right to make copies and issue them to the public" (underline is ours).
The above observations of the author show that one cannot have the copyright right without the copyrighted article but at the same time just because one has the copyrighted article, it 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 the alternative argument of Mr. Dastur, namely, that even assuming that the Department is right in saying that if you have the copyrighted article, you also have the copyright right therein, still it would mean that the copyright rights are transferred (acquired by JTM) and it would not be a case of merely giving the right to 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 his clause ropes in "transfer of all or any rights"
and is not restricted to "use" or "right to use", the copyright. However, he added that since the basic proposition of the Department has been demonstrated to be wrong, Clause (v) of Explanation 2 below Section 9(1) is not an impediment to accepting the assessee's contention.
165. We may also usefully refer to the Commentary on the OECD Model Convention (dated 28.1.2003) which is of persuasive value and which throws considerable light on the character of the transaction and the treatment to be given to the payments for tax purposes. Paragraph 14 of the Commentary, a copy of which was filed in Paper book No. V is relevant:
COMMENTARY ON ARTICLE 12 - PAPER BOOK V "14. In other types of transactions, the rights acquired in relation to the copyright are limited to those necessary to enable the user to operate the program, for example, where the transferee is granted limited rights to reproduce the program. This would be the common situation in transactions for the acquisition of a program copy. The rights transferred in these cases are specific to the nature of computer programs. They allow the user to copy the program, for example onto the user's computer hard drive or for archival purposes. In this context, it is important to note that the protection afforded in relation to computer programs under copyright law may differ from country to country. In some countries the act of copying the program onto the hard drive or random ITA No.387/PUN/2017 11 Symantec Corporation access memory of a computer would, without a license, constitute a breach of copyright. However, the copyright laws of many countries automatically grant this right to the owner of software which incorporates a computer program. Regardless of whether this right is granted under law or under a license agreement with the copyright holder, copying the program onto the computer's hard drive or random access memory or making an archival copy is an essential step in utilizing the program. Therefore, rights in relation to these acts of copying, where they do no more than enable the effective operation of the program by the user, should be disregarded in analyzing the character of the transaction for tax purposes. Payments in these types of transactions would be dealt with as commercial income in accordance with Article 7."
166. We may also usefully refer to the proposed amendments to the regulations of the Internal Revenue Service (IRS) in the USA.
Again these regulations may not be binding on us but they have a persuasive value and throw light on the question before us, namely the difference between a copyright right an d a copyrighted article. These regulations have been placed at pages 136 to 157 of Paper book No. II. The actual regulations as well as the explanatory Note explaining the object and the purpose of the 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 transaction involving a computer programme may be treated as being one of the four possible categories. Two such categories are the 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 articles based on the type of rights transferred to the transferee. Briefly stated, if the transferee acquires 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 article. Paragraph 3 of the Explanatory Note says that if a transfer of a computer programme results in the transferee acquiring any one or more of the listed rights, it is a transfer of a copyright right.
167. Paragraph 4 says that if a person acquires a 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.
168. The actual regulations bring out the distinction very clearly between the copyright right and a copyrighted article. They also specify the four rights which, if acquired by the transferee, constitute him the owner of a copyright right. They are:
(a) The right to make copies of the computer programme for purposes of distribution to the public by sale or other transfer of ownership, or by rental, lease, or lending.ITA No.387/PUN/2017 12
Symantec Corporation
(ii) The right to prepare derivative computer programmes 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 programme.
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, reproduced or otherwise communicated either directly or with the 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 article must be determined taking into account all the facts and circumstances of the case and the benefits and burden of ownership which have been transferred. Several examples have been given below these regulations to find out whether a particular transfer is a transfer of a copyright right or a transfer of a copyrighted article.
171. The Commentary of "Charl P. du TOIT" on this question has been placed at pages 202 to 204 of Paper book No. II. The Commentary is titled "Beneficial ownership of royalties in Bilateral Tax Treaties." He has opined that articles such as Books and Records are copyrighted articles and if they are sold, the user does not obtain the right to use any significant rights in the underlying copyright itself, which is what should determine the characterization of the revenue as sale proceeds rather than royalties. He has further opined that consideration relating to sale of software can amount to royalty only in limited circumstances.
172. For the above reasons, we are of the view that the payment by the cellular operator is not for any copyright in the software but is only for the software as such as a copy righted article. It follows that the payment cannot be considered as royalty within the meaning of Explanation 2 below Section 9(1) of the Income- tax Act or Article Article of the DTAA with Sweden.
--------
184. In view of the foregoing discussion, we hold that 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."
67. The Hon‟ble High Court while referring to the decision of Tribunal in Motorola Inc Vs. DCIT (supra) in the said case noted that the Tribunal had held and rightly so, that the question whether there was a transfer of a copyright right or only of a copyrighted article must be determined taking into account all the facts and circumstances of the case and the benefits and burden of ownership which have been transferred."
ITA No.387/PUN/2017 13Symantec Corporation
11. The Tribunal in final analysis held as under:-
"90. In conclusion, we hold that purchase of software by the assessee being copyrighted article is not covered by the term „royalty‟ under section 9(1)(vi) of the Act. Where the assessee did not acquire any copyright in the software, is not covered under Explanation 2 to section 9(1)(vi) of the Act. We further hold that amended definition of „royalty‟ under the domestic law cannot be extended to the definition of „royalty‟ under DTAA, where the term „royalty‟ originally defined has not been amended. As per definition of „royalty‟ under DTAA, it is payment received in consideration for use or right to use any copyright of literary, artistic or scientific work, etc.; thus, purchase of copyrighted article does not fall in realm of „royalty‟. We also hold that since the provisions of DTAA overrides the provisions of Income Tax Act and are more beneficial and the definition of „royalty‟ having not undergone any amendment in DTAA, the assessee was not liable to deduct tax for payments made for purchase of software. In such scenario, the assessee cannot be held to be in default and the demand created under section 201(1) and interest charged under section 201(1A) of the Act is thus, cancelled."
12. The Tribunal thus, in the hands of recipient had held that where the purchase of software was copyrighted article, then the same was not covered by the term 'royalty' under section 9(1)(vi) of the Act and it was further held that the amended definition of 'royalty' under the domestic law could not be extended to the definition of 'royalty' under DTAA, where the term originally defined had not been amended. Applying the said ratio to the facts of the present case, we hold that in the hands of assessee, the consideration received on sale of software is not 'royalty' under Explanation 2 to section 9(1)(vi) of the Act and is also not covered by the definition of 'royalty' under DTAA between India and USA. Accordingly, the assessee is not exigible to tax on the said consideration received in its hands. We reverse the orders of authorities below in this regard.
13. Before parting, we may also refer to the reliance placed upon by the Assessing Officer on the decision of Delhi Bench of Tribunal. The Delhi Bench of Tribunal with lead order in ITA Nos.6089 to 6091/Del/2012 relating to assessment years 2007-08 to 2009-10, vide order dated 26.09.2016 has held ITA No.387/PUN/2017 14 Symantec Corporation that in the case of shrink wrapped software is not in the nature of 'royalty'.
Accordingly, the grounds of appeal raised by assessee are allowed.
14. In the result, the appeal of assessee is allowed.
Order pronounced on this 5th day of April, 2019.
Sd/- Sd/-
(ANIL CHATURVEDI) (SUSHMA CHOWLA)
ऱेखा सदस्य / ACCOUNTANT MEMBER न्याययक सदस्य / JUDICIAL MEMBER
ऩुणे / Pune; ददनाांक Dated : 5th April, 2019.
GCVSR
आदे श की प्रयतलऱपप अग्रेपषत/Copy of the Order is forwarded to :
1. The Appellant;
2. The Respondent;
3. The DRP-3 (WZ), Mumbai;
4. The concerned CIT, Pune;
5. The DR 'A', ITAT, Pune;
6. Guard file.
ु ार/ BY ORDER, आदे शािस सत्यापऩत प्रतत //True Copy// वररष्ठ तनजी सचिव / Sr. Private Secretary आयकर अऩीऱीय अचधकरण ,ऩुणे / ITAT, Pune