Income Tax Appellate Tribunal - Bangalore
Samsung Electronics Company Limited ... vs Assessee on 9 March, 2012
Page 1 of 16 1 ITA No.303/Bang/2011
INCOME TAX APPELLATE TRIBUNAL
BANGALORE BENCHES 'A'
BEFORE SHRI N K SAINI, ACCOUNANT MEMBER AND
SHRI GEORGE GEORGE K, JUDICIAL MEMBER
ITA No.303/Bang/2011
(Asst. Year 2005-06)
M/s Samsung Electronics The Deputy Commissioner
Company Limited- India of Income Tax,
Software Operations, Block vs International Taxation,
B, Bagmane Lake View, Circle-11(1), Bangalore.
Bagmane Tech Park, C V
Raman Nagar, Bangalore-93.
PA No.AACC8960N
(Appellant) (Respondent)
Date of Hearing : 09.03.2012
Date of Pronouncement : .03.2012
Appellant by : Shri Anand R Bhat, C.A.
Respondent by : Shri Etwa Munda, CIT-III
ORDER
PER GEORGE GEORGE K :
This appeal instituted by the assessee is directed against the order of the Ld. CIT(A)-IV, Bangalore dated 30.12.2010. The relevant assessment year is 2005-06.
2. The grounds raised reads as under:-
i) That the order passed by the Commissioner of Income-
tax (Appeals)-IV under section 248 rws 254 of the Act is not based on the facts, contrary to the provisions of law and is liable to be quashed.
Page 2 of 16 2 ITA No.303/Bang/2011ii) That the learned CIT(A) erred in holding that the appellant is required to deduct tax at source and pay the same to the Government in respect of payment of USD 176,221 payable to Cadence Design Systems (Ireland), Ireland, for purchase of software namely Cadence NC- Verilog Simulator and Rs.31,694/- towards maintenance charges.
iii) That the learned CIT(A) erred in holding that the payment to Cadence Design Systems (Ireland), Ireland, towards purchase of software as well as maintenance charges are in the nature of royalty.
iv) That the appellant denies its liability to deduct tax at source and pay the same to the Government in respect of payment made to Cadence Design Systems (Ireland), Ireland, towards purchase of software and maintenance charges.
v) That the learned CIT(A) erred in not directing the respondents to grant refund of the tax deposited by the appellant.
3. Briefly stated the facts are as follows:-
The appellant is a branch of Samsung Electronics Co. Ltd., Korea. It is engaged in the business of development, manufacture and export of software for the use by the parent company. According to the appellant, during the financial year 2004-05 relevant to assessment year 2005-06, it had imported readymade software, namely Cadence NC-Verilog Simulator from Cadence Design Systems (Ireland), Ireland. At the time of remittance of consideration for import of software, the appellant had deducted tax at the rate of 10% on the basis of certificate issued by a Chartered Accountant. Subsequently, the appellant company filed an appeal before the CIT(A) denying the liability to deduct tax at source from the price paid for the purchase of software on the ground that the payment Page 3 of 16 3 ITA No.303/Bang/2011 made is not in the nature of royalty. The CIT(A) rejected the appeal for the reason that there was no order passed by the lower authority for consideration and hence, in the absence of appealable order, the appeal is not maintainable.
4. Aggrieved by the order passed by the CIT(A), the appellant filed appeal before the Income Tax Appellate Tribunal. The Tribunal held that in view of the provisions of section 248 of the Act, the appeal filed by the appellant before the CIT(A) is maintainable and issued direction to the first appellate authority to dispose off the appeal on merits.
5. Pursuant to the order of the Tribunal, the matter was disposed off by the CIT(A). The CIT(A) rejected the appeal of the appellant by holding that the payment made for the purchase of software from non-
residents are liable for tax deduction under section 195 of the Act.
6. Aggrieved by the dismissal of the appeal by the first appellate authority, the appellant is in appeal before us. The appellant has filed a paper book consisting of 26 pages inter alia containing certificate of the Chartered Accountant, tax deducted at source challan, remittance details of the payment made for the purchase of software, invoice etc. The learned AR has also filed a detailed written submission running into 16 pages.
6.1 The learned AR submitted that the issue in question is squarely covered by the judgement of the Hon'ble Delhi High Court in the case of Director of Income-tax v Ericsson, A.B., New Delhi (204 Taxman 192). He further submitted that various Benches of the Tribunal have decided the Page 4 of 16 4 ITA No.303/Bang/2011 issue in favour of the appellant. However, he fairly conceded that the Hon'ble jurisdictional High Court in assessee's own case (Judgement dated 15.10.2011) has decided the issue against the assessee and the assessee has preferred SLP before the Hon'ble Supreme Court.
7. The learned DR submitted that the issue has been considered elaborately by the recent judgement of the Hon'ble jurisdictional High Court in assessee's own case (ITA No.2808/2005 & other, Judgement dated 15.10.2011). The learned DR further submitted that the Hon'ble jurisdictional High Court distinguished the judgement of the Hon'ble Delhi High Court on which the learned AR had placed strong reliance.
8. We have heard the rival submissions and perused the materials on record. The Hon'ble jurisdictional High Court in appellant's own case cited supra had held that the payment made to NRI for the purchase of software is liable for tax deduction under section 195 of the Act. The relevant finding of the Hon'ble jurisdictional High Court from para 20 to 25 reads as follows:-
"20. Having regard to the above said definition of 'royalty', we have to consider the contents of software licence agreement entered into by non-resident with Samsung Electronics and also respondents in the case represented by Shri Ganesh, learned Senior Counsel and Sri Aravind Dattar, wherein it is a case of purchase, sale or distribution or otherwise of the off-the-shelf software. It is described as a 'software licence agreement', wherein it is averred that customer accepts an individual, non- transferable and non exclusive licence to use the licensed software program(s) (program(s) on the terms and Page 5 of 16 5 ITA No.303/Bang/2011 conditions enumerated in the agreement. It is further averred that the customer - Samsung Electronics shall protect confidential information and shall not remove any copyright, confidentiality or other proprietary rights provided by the non-resident. However, what is granted under the said licence is only a licence to use the software for internal business without having any right for making any alteration or reverse engineering or creating sub-licences. What is transferred under the said licence is the licence to use the software and copyright continue to be with the non-resident as per the agreement. Even as per the agreement entered into with the other distributors as also the end user licence agreement, it is clear that the distributor would get exclusive non transferable licence within the territory for which he is appointed and he has got right to distribute via resellers the Software, upon payment of the licenses set forth in Exhibit A to the agreement only to end users pursuant to a valid Actuate shrinkwrap or other Actuate license agreement and except as expressly set forth in the said agreement, distributor may not rent, lease, loan, sell or otherwise distribute the software the Documentation or any derivative works based upon the Software or Documentation in whole or in part. Distributor shall not reverse engineer, decompile or otherwise attempt to derive or modify the source code for the software. Distributor shall have no rights to the software other than the rights expressly set forth in the agreement. Distributor shall not modify or copy any part of the Software or Documentation. Distributor may not use subdistributors for further distribution of the software and documentation without the prior consent of Actuate. What is charged is the licence fee to be paid by the Distributor of the software as enumerated in Exhibit A to the agreement. Further, Clause 6.01 of the agreement dealing with title states that the distributor acknowledges that Actuate and its suppliers retain all right, title and interest in and to the Page 6 of 16 6 ITA No.303/Bang/2011 original, and any copies (by whomever produced), of the Software or Documentation and ownership of all patent, copyright, trademark, trade secret and other intellectual property rights pertaining thereto, shall be and remain the sole property of Actuate. Distributor shall not be an owner of any copies of, or any interest in, the Software, but rather, is licenced pursuant to the Agreement to use and distribute such copies. Actuate represents that it has the right to enter into the Agreement and grant the licences provided therein and confidentiality is protected. Therefore, on reading the contents of the respective agreement entered into by the respondent& with the Ron-resident, it is clear that under the agreement, what is transferred is only a licence to use the copyright belonging to the non-resident subject to the terms and conditions of the agreement as referred to above and the non-resident supplier continues to be the owner of the copyright and all other intellectual property rights. It is well settled that copyright Is a negative right. It Is an umbrella of many rights and licence is granted for making use of the copyright in respect of shrink wrapped software I off-the- shelf software under the respective agreement, which authorizes the end user i.e., the customer to make use of the copyright software contained in the said software, which is purchased off the shelf or Imported as shrink wrapped software and the same would amount to transfer of part of the copyright and transfer of right to use the copyright for internal business as per the terms and conditions of the agreement. Therefore, the contention of the learned senior counsel appearing for the respondent& that there is no transfer of copyright or any part thereof under the agreements entered into by the respondent with the nonresident supplier of software cannot be accepted.
21. It is further contended by the learned senior counsel appearing for the respondent & that In view of the Page 7 of 16 7 ITA No.303/Bang/2011 fad that what Is supplied by the non-resident to the respondent in India is only a shrink wrapped software / off the-shelf software, which is not customised to suit the needs of the respondent, the said software is to be treated as goods and there is sale of the software and copy of the software. Therefore, the question of paying any royalty would not arise. In support of the said contention, the learned senior counsel appearing for the respondents' has strongly relied upon the decision of the Hon'ble Supreme Court in TATA CONSULTA.NCY SERVICES Vs. STATE OF ANDHRA PRADESH (2004 ITR (Vol. 271) 401) (hereinafter referred to as the TCS's case), wherein the Hon'ble Supreme Court was considering the question as to whether the canned software sold by the appellants can be termed to be "goods" and as such assessable to sales tax under the Andhra Pradesh General Sales Tax Act, 1957. Having regard to the broad definition of 'good& under Section 2(h) of the said Act and also the provisions of Article 366(12) of the Constitution of India, the Hon Ne Supreme Court was pleased to answer the said question for determination by holding that Once the 'information' or 'knowledge' is &m1sfoned into physical existence and recorded in physical form, it is corporeal property. The physical recording of the software is not an incorporeal right to he Comprehended and accordingly, held that the software marketed by the appellants therein indisputably was canned software and thus, sale of the same would attract the provisions of the Andhra Pradesh General Sales Tax Act, 1957.
22. The question as to whether the payment made for import of software or supply of software by the nonresident Companies was royalty or not was not at all in Issue in its s case and the question was whether canned software sold by the appellants therein amounted to sale of goods under the Andhra Pradesh General Sales Tax Act.
Further, the issue of transfer of right to use the goods Page 8 of 16 8 ITA No.303/Bang/2011 as per the expanded definition of sale did not come up for consideration in that case. On the other hand, the issue in the present case is as to whether the payment would amount to royalty within the meaning of Income Tax Act and DTTA. In the said TCS's case, it has been held that copyright in computer program may remain with the originator of the program, but, the moment copies are made and marketed, it becomes goods, which are susceptible to tax, The contention of the assessee that the consideration received by the non resident supplier towards the software products would amount to 'royalty' within the meaning of DTAA with respective country was not at all considered in the said case. Therefore, the said decision in TCS's case is not helpful to the respondents' in the present cases. It is well settled that the intent of the legislature in Imposing. Sales Tax and Income Tax are entirely different as Income Tax is a direct tax and Sales Tax is an Indirect Tax and wherefore, mere finding that the computer software would be included within the term 'Sales Tax' would not preclude this Court from holding that the said payments made by the respondents to the non-resident Company in the present cases would amount to royalty unless the respondents are able to prove that the said payment is for the sale of computer software, wherein the income would be from the business and In the absence of any permanent establishment of the non-resident supplier, there is no obligation on the part of the payee to make deduction under Section 195(1) of the Act.
23. It Is well settled that in the absence of any definition of copyright In the Income Tax Act or DTAA with the respective Countries, in view of clause 3 of the DTAA, reference is to be made to the respective law regarding definition of Copy right, namely, Copyright Act, 1957, In India, wherein it is clearly stated that "literary work Includes computer programmes, tables and compilations Including computer [databases[ Section 16 of the Page 9 of 16 9 ITA No.303/Bang/2011 Copyright Act, 1957 states that no person shall be entitled to copyright or any similar right in any work, whether published or unpublished, otherwise than under and in accordance with the provisions of the said Act or of any other law for the time being in force, but nothing in this section shall be construed as abrogating any right or jurisdiction to restrain a breach of trust or confidence. Section 14 of the said Act dealing with meaning of Copyright reads as follows:
"14. Meaning of Copyright - For the purposes of this Act, 'copyright" means the exclusive right subject to the provisions of this Act, to do or authorise the doing of any of the following acts in respect of a work or any substantial part thereof, namely:
(a) in the case of a literary, dramatic or musical work, not being a computer programme,
(i) to reproduce the work in any material form including the storing of it in any medium by electronic means:
(ii) to issue copies of the work to the public not being copies already in circulation;
(iii) to perform the work in public, or communicate it to the public:
(iv) to make any cinematograph film or sound recording in respect of the work;
(v) to make any translation of the work;
(vi) to make any adaptation of the work;
(vii) to do, in relation to a translation or an adaptation of the work, any of the acts specified in relation to the work in sub-clauses (1) to (vi);Page 10 of 16 10 ITA No.303/Bang/2011
(b) in the case of a computer programme,
(i) to do any of the acts specified in clause (a);
(ii) to sell or give on commercial rental or offer
for sale or for commercial rental any copy of the computer programme:
Provided that such commercial rental does not apply In respect of computer programmes where the programme itself is not the essential object of the rental.
(c) in the case of an artistic work,
(i) to reproduce the work in any material form
including depiction in three dimensions of a two-dimensional work or in two dimensions of a three-dimensional work;
(ii) to communicate the work to the public;
(iii) to issue copies of the work to the public not being copies already In circulation;
(iv) to Include the work In any cinematograph film;
(v) to make any adaptation of the work;
(vi) to do in relation to an adaptation of the work
any of the acts specified in relation to the work In sub-clauses (i) to (iv);
(d) in the case of a cinematograph film,
(i) to make a copy of the film, including a photograph of any
Image forming part thereof;
Page 11 of 16 11 ITA No.303/Bang/2011
(ii) to sell or give on hire, or offer for sale or hire, any copy
of the film, regardless of whether such copy has been sold or given on hire on earlier occasions;
(iii) to communicate the film to the public;
(e) in the case of a sound recording,-
(i) to make any other sound recording embodying it;
(ii) to sell or give on hire, on offer for sale or hire, any copy
of the sound recording regardless of whether such copy has been sold or given on hire on earlier occasions:
(iii) to communicate the sound recording to the public.
Explanation. - For the purposes of this section. a copy which has been sold once shall be deemed to be a copy already in circulation.
It may also be noted that under Section 51 of the Act dealing with 'When Copyright infringed" states that Copyright in a work shall be deemed to be Infringed - when any person, without a licence granted by the owner of the Copyright or the Registrar of Copyrights under the Act or in contravention of the conditions of a licence so granted or of any condition Imposed by a competent authority under the Act does anything, the exclusive right to do which is by the Act conferred upon the owner of the Copyright. Section 52 of the Act dealing with Certain acts not to be Infringement of copyright states that the following acts shall not constitute an Infringement of copyright, namely "xxx (aa) the making of copies or adaptation of a computer programme by the lawful possessor of a copy of such computer programme, from such copy --
Page 12 of 16 12 ITA No.303/Bang/2011(i) in order to utilise the computer programme for the purpose for which It was supplied: or
(ii) to make back-up copies purely as a temporary protection against loss, destruction or damage In order only to utilise the computer programme for the purpose for which It was supplied."
24. It is clear from the above said provisions of the Copyright Act that the right to copyright work would also constitute exclusive right of the copyright holder and any violation of the said right would amount to infringement under Section 51 of the Act. However, if such copying of computer program is done by a lawful possessor of a copy of such computer programme, the same would not constitute Infringement of copyright and wherefore, but for the licence granted in these cases to the respondent to make copy of the software contained in shrink-wrapped/off-the-shelf software into the hard disk of the designated computer and to take a copy for backup purposes, the end user has no other right and the said taking backup would have constituted an Infringement, but, for the licence. Therefore, licence is granted for taking copy of the software and to store it in the hard disk and to take a back up copy and right to make a copy itself is a part of the copyright. Therefore, when licence to make use of the software by making copy of the same and to store it in the hard disk of the designated computer and to take back up copy of the software. It is clear that what is transferred is right to use the software, an exclusive right, which the owner of the copyright i.e., the respondent supplier owns and what is transferred is only right to use copy of the software for the internal business as per the terms and conditions of the agreement. The decision of the Delhi High Court in COMMISSIONER OF INCOME TAX DELHI-V Vs. M/s DYNAMIC VER1TCAL SOFTWARE INDIA PVT. LTD in ITA No.1692/2010 DATED 22.02.2011 relied upon by Sri Aravind Dattar, learned senior counsel appearing for the Page 13 of 16 13 ITA No.303/Bang/2011 respondents' in some of the cases in support of his contention that by no stretch of imagination. payment made by the respondents to the non-resident suppliers can be treated as royalty Is not helpful to the respondents In the present cases as In the said case, Delhi High Court was considering the provisions of Sct1ons 40(a)(1) of the Act and the order of the High Court reads as follows:
"What is found, as a matter of fact, is that the assessee has been purchasing the software from Microsoft and sold It further in Indian market. By no stretch of Imagination, it would be termed as royalty."
Therefore, the contention of the learned senior counsel appearing for the respondents that there is no transfer of any part of copyright or copyright under the impugned agreements or licenses cannot •be accepted. Accordingly, we hold that right to make a copy of the software and use it for internal business by making copy of the same and storing the same In the hard disk of the designated computer and taking back up copy would itself amount to copyright work under Section 14 (1) of the Act and licence is granted to use the software by making copies, which work, but for the licence granted would have constituted Infringement of copyright and licencee is in possession of the legal copy of the software under the licence. Therefore, the contention of the learned senior counsel appearing for the respondents that there is no transfer of any part of copyright or copyright and transaction only involves sale of copy of the copyright software cannot be accepted. It is also to be noted that what is supplied is the copy of the software of which the respondent -- supplier continues to be the owner of the copyright and what is granted under the licence is only right to copy the software as per the terms of the agreement, which, but for the licence would amount to infringement of copyright and in view of the licence Page 14 of 16 14 ITA No.303/Bang/2011 granted, the same would not amount to infringement under Section 52 of the Copyright Act as referred to above. Therefore, the amount paid to the non-resident supplier towards supply of shrink wrapped software or off-the-shelf software is not the price of the C.D. alone nor software alone nor the price of licence granted. This is a combination of all and in substance, unless licence is granted permitting the end user to copy and download the software, the dumb CD. containing the software would not in any way be helpful to the end user as software would become operative only if it is downloaded to the hardware of the designated computer as per the terms and conditions of the agreement and that makes the difference between the computer software and copyright in respect of books or prerecorded music, software as book and prerecorded music C.D. can be used once they are purchased, but so far as software stored in dumb C.D. is concerned. the transfer of dumb CD. by itself would not confer any right upon the end user and the purpose of the CD. Is only to enable the end user to take a copy of the software and to store it in the hard disk of the designated computer if licence is granted in that behalf and In the absence of licence, the same would amount to Infringement of copyright, which Is exclusively owned by non-resident suppliers, who would continue to be the proprietor of copyright. Therefore, there is no similarity between the transaction of purchase of the book or prerecorded music CD. or the CD. containing software and in view of the same. the Legislature In Its wisdom, has treated the literary work like books and other articles separately from computer software within the meaning of the Copyright as referred to above under Section 14 of the Copyright Act.
25. It is also clear from the above said analysis of the DTAA Income Tax Act, Copyright Act that the payment would constitute 'royalty' within the meaning of Article 12(3) of the DTAA and even as per the provisions of 9(1)(vi) of Page 15 of 16 15 ITA No.303/Bang/2011 the Act as the definition of 'royalty' under clause 9(1)(vi) of the Act is broader than the definition of 'royalty' under the DTAA as the right that is transferred in the present case is the transfer of copyright including the right to make copy of software for internal business, and payment made in that regard would constitute 'royalty' for imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill as per clause (iv) of explanation 2 to section 9(1)(vi) of the Act. In any view of the matter, in view of the provisions of section 90 of the Act, agreements with foreign countries DTAA would override the provisions of the Act. Once it is held that payment made by the respondents to the non-resident companies would amount to 'royalty' within the meaning of Article 12 of the DTAA with the respective country. It is clear that the payment made by the respondents to the non-resident supplier would amount to royalty. In view of the said finding, it is clear that there is obligation on the part of the respondents to deduct tax at source under section 195 of the Act and consequences would follow as held by the Hon'ble Supreme Court while remanding these appeals to this Court. Accordingly, we answer the substantial question of law in favour of the revenue and against the assessee by holding that on facts and circumstances of the case, the ITAT was not justified in holding that the amount(s) paid by the respondent(s) to the foreign software Suppliers was not 'royalty' and that the same did not give rise to any 'income' taxable in India and wherefore, the respondent(s) were not liable to deduct any tax at source and pass the following order:-
All the appeals are allowed. The order passed by the Income Tax Appellate Tribunal, Bangalore Bench 'A' impugned in these appeals is set aside and the order passed by the Commissioner of Income Tax (Appeals) confirming the order passed by the Assessing Officer (TDS) is restored".Page 16 of 16 16 ITA No.303/Bang/2011
8.1 Since the facts in the instant case are identical to the facts considered by the Hon'ble jurisdictional High Court, respectfully following the dictum laid down by the Hon'ble jurisdictional High Court, we hold that the CIT(A) is justified in his conclusion that the payment made for the purchase of software from the non resident is liable for deduction of tax under section 195 of the Act. Therefore, we are of the view that the CIT(A)'s order is correct and in accordance with law and no interference is called for. It is ordered accordingly.
9. In the result, the appeal filed by the appellant is dismissed.
Order pronounced in the open court on 27th day of March, 2012 Sd/- Sd/-
(N K SAINI) (GEORGE GEORGE K)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Copy to:-
1. The Revenue 2. The Assessee 3. The CIT concerned 4. The CIT(A)
concerned 5. The DR 6. GF
MSP/- By Order
Asst. Registrar, ITAT, Bangalore.