Income Tax Appellate Tribunal - Bangalore
Samsung Electronics Company Ltd. vs Income Tax Officer on 18 February, 2005
Equivalent citations: [2005]94ITD91(BANG), [2005]276ITR1(BANG), (2005)93TTJ(BANG)658
ORDER
Gopal Chowdhury, J.M.
1. The assessee has filed the appeals against the common order passed by the CIT(A), for the asst. yrs. 1999-2000 to 2001-02, by which the learned CIT(A) has confirmed the orders passed under Section 201(1) of the Act and consequent levy of interest under Section 201(1A) of the Act.
2. The fact involved in the present case is that the assessee is a branch of Samsung Electronics Company Ltd., Korea, engaged in the development, manufacture and export of software for use by its parent company, i.e., Samsung Electronics Co. Ltd., Korea. The assessee develops various kinds of software for telecommunication system, for office appliances, for computer systems and for mobile devices, etc. The software developed by the assessee is for in-house use by the parent company. In the asst. yr. 1999-2000, the assessee imported software products of Rs. 2,28,960 from Tektronix inc., USA. Similarly, during the other two years, it imported software products from USA, France and Sweden. According to the assessee, the imported software product, namely, Telelogic Tau TTCN Suite, are readily available software in the market. Hence, payment made to the foreign companies cannot be treated as royalty, as per the provision of Section 9(1)(vi) r/w Double Taxation Avoidance Agreements (DTAA for short) between India and USA, India and France respectively. The contention of the assessee was not accepted by the ITO (TDS). It was held by the AO that the assessee was a defaulter by not deducting tax from the remittance made by the assessee for purchase of these softwares. The reply of the assessee was not accepted by the AO and it was held that as per the provision of Section 9(1)(vi) of the Act, the payment made by the assessee is royalty. Hence, the assessee was bound to deduct the tax. The ITO also placed reliance on the definition of the term 'Royalty', as mentioned in DTAA (supra). Accordingly, it was held by the ITO that the assessee was a defaulter within the meaning of Section 201(1) of the Act, for non-deduction of tax. Further, the interest under Section 201(1A) was also levied for the three years, as follows :
Asst years 201(1) 201(1A) 1999-2000 Rs. 25,440 Rs. 12,211 2000-01 Rs. 1,202 Rs. 216 2001-02 Rs. 16,87,270 Rs. 58,447 Total Rs. 17,13,912 Rs. 70,874
Against the said orders, the assessee moved appeals before the CIT(A). However, by the impugned common order dt. 29th Nov., 2001, the appeals were dismissed by the CIT(A). Against the said finding, the assessee is in appeal before the Tribunal.
Submission of assessee :
3. The learned counsel appearing on behalf of the assessee, has raised some technical objection with regard to the proceedings under Section 201(1) of the Act. It was submitted that the proceedings is without jurisdiction and bad in law because on the date of issue of summons under Section 131, no proceeding was pending in the case of the assessee. It was submitted that the power under Section 131 could be exercised if any proceeding is pending before the authorities concerned under the IT Act. In this regard, he placed reliance on the following decisions :
(i) Jamnadas Madhavji & Co. and Anr. v. J.B. Panchal, ITO and Anr. (1986) 162 ITR 331 (Bom);
(ii) ITO and Ors. v. James Joseph O'Gorman (1993) 204 ITR 454 (Cal);
(iii) Rina Sen v. CIT and Ors. (1999) 235 ITR 219 (Pat);
(iv) G.M. Breweries Ltd and Anr. v. Union of India and Ors.
Further objection was raised that the summons were issued to Mr. A.S. Rajendra, finance manager of the assessee-company. Under Section 282(2)(b) of the Act, wherever a notice is issued to a company, it should be issued to its principal officer and hence, the summon is invalid in the eyes of law. Reliance was placed on the decision of the Bangalore Bench of the Tribunal in the case of Indo Nissin Foods v. Jt. CIT (ITA Nos. 240 to 246/B/2002) [reported at (2004) 83 TTJ (Bang) 440--Ed.]. It was submitted that on account of the aforesaid defect, the entire proceedings were void ab initio, as held by the different High Courts in the following decisions :
(i) P.N. Sasikumar and Ors. v. CIT (1988) 170 ITR 80 (Ker);
(ii) V.V.S. Alloys Ltd. v. Asstt. CIT (2000) 68 TTJ (All) 516;
(iii) Dy. CIT v. Tollygunz Club (1995) 52 ITD 166 (Cal).
4. The learned counsel further submitted on merits of the case and also filed a written submission in this regard. We shall first deal with the matter on merit. It was submitted that the assessee had imported branded off-the-shelf software packages from different suppliers in the USA, Sweden and France. The relevant documents are placed at pp. 4 to 54 of the paper book. The AO held that the payments made by the assessee for the impart of software packages were in the nature of royalties being considerations for use of commercial/scientific/ industrial equipments as software was in the nature of equipment. Accordingly, the AO applied the provisions of Article 12(2)(b) of India-US, Article 12(2) of India-Sweden, and Article 13(2) of India-France treaties to the payment made to the respective suppliers.
5. It was submitted by the learned counsel for the assessee that internationally, as well as in India "software", which in legal parlance known as "computer programme" is covered under the broad category of literary, artistic or scientific work which is a copyright. The copyright laws of different countries also recognize a computer programme to be subject-matter of copyright. According to him, the AO held that the consideration paid by the assessee for import of software product was in the nature of royalty. According to him, Section 9(1)(vi) of the Act provided that the royalty receivable by a non-resident, inter alia, from a person in India is deemed to accrue or arise in India. Section 90(2) of the Act, provides that if the provisions of a tax treaty between India and the country of non-resident is more beneficial to such non-resident, then the provisions of the tax treaty shall override the provisions of the Act.
6. The learned counsel for the assessee drew our attention to the definition of the term "Royalty" under the relevant tax treaties, as under :
(i) India-USA Treaty : As per Article 12(3) of the Indo-US Tax Treaty [(1991) 187 ITR (St) 102], the term 'royalty' means payments of any kind received as consideration for the use of or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use or disposition thereof and also payments received as consideration for the use of or right to use any industrial, commercial or scientific equipment.
6(a) According to the learned counsel, from the above, it may be noted that royalty in respect of a subject-matter of a copyright includes only the payments for the use i.e., exploitation of the copyright of such literary/artistic or scientific work. Therefore, in order to consider an amount to be "royalty", the right of the person in possession of the subject-matter of a copyright should be to utilize such copyright in the manner which are otherwise protected by the respective copyright law in favour of the owner of the copyright. The use of copyright of a copyrighted work, is different from use of such work. The acquisition of a product, wherein the subject-matter of copyright is embedded, without right to exploit the copyright, does not amount to use or right to use the copyright of such literary/artistic/scientific i.e., copyrighted work.
6(b) In this connection, he drew our attention to the contents in Sections 101, 106, 117, 202 of the Copyright law of USA, the relevant extracts of which are placed at pp. 27 to 38 of the paper book, to the effect that the exclusive right enjoyed by the owner of copyright means the right to reproduce the copyrighted work or to prepare derivative works based upon the same or to distribute the copies of the copyrighted work to the public. Mere making of a copy of the computer programme which is a copyrighted work does not amount to use of the copyright provided such copy is necessary for utilization of the computer or is for archival purposes only. Also, transfer of such copies along with the originals without retaining any copies thereof does not amount to utilization of the copyright. He submitted that Section 202 of the US copyright law itself provides that transfer of ownership of any material object including the copy in which the work is first fixed, does not itself convey any rights in the copyrighted work embodied in the object as ownership of a copyright or of any of exclusive rights under a copyright is distinct from ownership of any material object in which the work is embodied.
(ii) Indo-Sweden Treaty : Article 12(3)(a) of the treaty between India and Sweden [(1998) 229 ITR (St) 11) define the term royalty to mean payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience.
6(c). From the above, according to the learned counsel, it can be understood that both the Indo-US and Indo-Sweden treaties include payments for use or right to use the copyright of literary, artistic or scientific work and in order to classify as royalty, the payment has to be for exploitation of the copyright of such copyrighted work. It may be further noted that the definition of "royalty" contained in India-Sweden treaty does not include payments for user of scientific/industrial/commercial equipment.
6(d) In this connection, the learned counsel for the assessee drew our attention to Article 1, Article 2. Article 26g, Article 26h and Article 27 of the Swedish Copyright law, as found in pp. 55 to 69 of the supplementary paper book, to plead that under the copyright law of Sweden also, mere transfer of a copy of a copyrighted work does not amount to transfer of copyright or exploitation of the copyright and mere making copies of computer programmes for their use or for backup also does not amount to exploitation of the copyright.
(iii) Indo-France Treaty : Article 13(3) of India-France tax treaty [(1994) 209 ITR (St) 130] defines the term "Royalties" to mean payment of any kind received as consideration for the use of or for the right to use, any copyrights of literary, artistic or scientific works, cinematographic films or tapes used for radio or television broadcasts, any patents, trademark, models, designs, plans, secret processes or formulae, or for information concerning industrial, commercial or scientific experience.
(iv) Article 13(5) of the same treaty defines the term "payments for use of equipments" to mean payment of any kind received as a consideration for use or right to use industrial, commercial or scientific equipment. 6(e) Based on the above, the learned counsel for the assessee submitted that under the Indo-France treaty also, income by way of royalty would arise in case of a copyrighted work only if the payer is allowed to commercially exploit such copyright in the copyrighted work.
6(f) In this connection, the learned counsel for the assessee drew our attention to Sections 14(b), 52(1)(aa) to (ad) of the Indian Copyright Act, 1957 (relevant extracts are found in pp.39 to 41 of the paper book). According to him, under the Indian copyright law also, unless the owner of the copyright of the computer programme authorizes any other person to do any of the acts mentioned in Section 14(b), it cannot be said that he has allowed the other person the use of or right to use the copyright of the computer programme. He submitted that universally a computer programme is categorized as a "copyrighted work" and transfer of a copy of such computer programme to another person does not amount to allowing the use of the copyright by such other person. He also submitted that the payment received for sale of such copyrighted article is not in the nature of royalty per se, as it does not amount to exploitation of the copyright by the buyer, but it amounts to sale of an article.
6(g) The learned counsel further invited out attention to the various products purchased from Tektronix Inc., USA, OSS Nokalva Inc, USA, INDINT, USA, European Telecon Standard Institute, France (ETSI), Telecon AB, Sweden to submit that the transaction in these cases were of purchase/sale of copyrighted articles and there was no grant of right to use the copyright in the software. He submitted that the vendor in these cases had transferred the ownership of a copy of the computer programmer to the appellant (without licensing any part of the copyright). He pointed out that Article 12 of Indo-Sweden Treaty does not contain payments for use of equipments within the definition of "royalty". The transaction is purely in the nature of a commercial transaction. He further submitted that the assessee had acquired readymade off-the-shelf computer programme for use in its business. The computer programme is not meant to be used for distribution to public or for being fitted into any other software to be provided to another person where such other person knows that the software received by him includes software obtained by the assessee from the above vendors. He submitted that the vendors have not granted to the assessee any right to commercially exploit/use the copyright in the computer programmes. The assessee has merely purchased a copy of the copyrighted article, namely, computer programmes.
6(h) The learned counsel further submitted that since none of the vendors have permanent establishment in India, the business profits are not chargeable to tax in India. In view of the provisions of Section 4(2) of the Act, the assessee had no obligation to deduct tax at source on such payments. According to him, the AO has treated the impugned payment to be consideration for right to use scientific, commercial and industrial equipment. Hence, he pleaded that the impugned order of the AO be quashed and the order of the CIT(A) be reversed.
6(i) The learned counsel drew our attention to the commentary on Article 12 of model treaties issued by OECD (found at pp. 136 to 145 of the paper book), in respect of payments made for computer programmes, as also the taxation laws of USA (found at pp. 81 to 135 of the supplementary paper book). He further submitted that the reliance placed by the assessee on OECD commentary (supra) was based on the principle enunciated by the decision of the Hon'ble Andhra Pradesh High Court in CIT v. Visakhapatnam Port Trust (1983) 144 ITR 146 (AP) which has been confirmed by the decision of the Supreme Court in Union of India and Anr. v. Azadi Bachao Andolan and Anr. (2003) 263 ITR 706 (SC).
6(j) The learned counsel, in support of his submissions, relied on the following decisions:
(i) Tata Consultancy Services v. State of Andhra Pradesh (2004) 271 ITR 401 (SC):
(ii) Associated Cement Companies Ltd. v. Commr. of Customs (2001) JT SC 141: (2001) (128) ELT 21 (SC):
(iii) R.S. Bhagwat v. Asstt. CIT (2003) 78 TTJ (Mum) 641:
(iv) B.K. Roy (P) Ltd. v. CIT (1995) 211 ITR 500 (Cal):
(v) CIT v. Anjum M.H. Ghaswala and Ors. (2001) 252 ITR 1 (SC):
(vi) Gestetner Duplicators (P) Ltd. v. CIT (1979) 117 ITR 1 (SC):
(vii) UCO Bank v. CIT (1999) 237 ITR 889 (SC);
(viii) State of Madhya Pradesh and Anr. v. G.S. Dall & Flour Mills (1991) 187 ITR 478 (SC)
7. To sum up the aforesaid submission of the assessee, we find that according to the assessee, the payment made by it does not come within the purview of royalty, as defined in DTAA, which overrides Section 9(1)(vi) of the Act.
8. The consideration was paid by the assessee for the acquisition of a copyrighted article. The assessee-company had not obtained the copyright of any software. The payments were made by the assessee for purchase of a produce that is most suitable for development of its software programmes. These are branded softwares readily available in the market. Such software can be placed within the meaning of "goods" or "articles".
Submission of Revenue :
9. On the other hand, the learned Departmental Representative supported the order passed by the AO. He drew our attention to various paragraphs of the impugned order, particularly, para 4.10 onwards. It was submitted that the assessee was given the right to use the software. Therefore, the payment made by the assessee-company has to be treated as royalty within the meaning of Section 9(1)(vi) of the Act. Regarding the decision of the Supreme Court in Tata Consultancy (supra), it was submitted that the issue was altogether different from the facts of the present case. In that case, the Hon'ble Supreme Court was concerned with the meaning of the word "goods" under the provisions of Andhra Pradesh General Sales-tax Act, 1957. In that context, it was held that the software in question was "goods". Therefore, that decision is of no help to the assessee in the present case. Whether, the payment is royalty or not was not decided by the Supreme Court because that was not the subject-matter in that case.
10. The learned standing counsel has also filed a written submission as follows :
(2) The appellant-company is engaged in the business of software development and the nature of software developed by the appellant ranges from software meant for telecommunication system, for office appliances, for computer systems, for mobile devices, etc. It was noticed by the respondent ITO (TDS) (hereinafter referred to as 'ITO') that during the financial years of 1998-99, 1999-2000 and 2000-01, relevant for the asst. yrs. 1999-2000, 2000-01 and 2001-02, the appellant had paid amounts to the tune of Rs. 2,28,960, Rs. 10,825 and Rs. 151,85,430 respectively, for the import of software. These software were imported from non-resident companies of USA, France and Sweden. It was further noticed by the ITO that no tax was deducted at source in respect of such payments despite the position that it was incumbent on the part of the appellant to have deducted the tax at source in respect of such payments.
(2.1) Accordingly, the ITO had taken up the proceedings in the appellant's case for the latter's failure to deduct tax at source. In the said proceedings, the only contention put forth by the appellant in justification of the non-deduction of tax at source was to the effect that inasmuch as 'software imported by the company is a shrink-wrap product and the same not being customized, no tax amount were deducted'. As referred to in the order itself, the ITO had given one more opportunity to the appellant to furnish written explanation, if any. As there was no response, the ITO passed the order under Section 201 and 201(1A) of the IT Act holding that the consideration paid by the appellant for the import of the software partook the character of royalty in terms of the provisions of Section 9(1)(vi) of the Act and also in terms of provisions of the DTAA between India and US, India and France and India and Sweden, and consequently, the same was a sum chargeable to tax in India rendering the appellant liable to deduct tax at source in terms of the provisions of Section 195 of the IT Act. As there was failure to deduct such tax, the appellant was considered to be an assessee in default and consequently order under Section 201(1) and 201(1A) was passed by the ITO.
(2.2) Thereafter, being aggrieved by the order passed by the ITO under Section 201(1) and 201(1A) of the IT Act, as aforesaid, the appellant preferred an appeal before the CIT(A)-IV. Assailing the order passed by the ITO, the appellant contended before the CIT(A) that the order was passed by the ITO without affording proper opportunity and that at any rate, the ITO had erroneously treated the payments made by the appellant in respect of imported software as royalty so as to apply the provisions of Section 195 r/w Section 9(1)(vi) of the Act.
(2.3) The CIT(A), by order dt. 29th Nov., 2001, has confirmed the order passed by the ITO. On the contention raised by the appellant to the effect that the ITO has passed the order in question in violation of the principles of natural justice without affording adequate opportunity, the CIT(A) negatived the said plea by adverting to the admitted position that in the proceedings the appellant had taken up the position that, since the software imported by them being a non-customised shrink-wrap product, the question of deduction of tax did not arise and thereupon, the ITO had indeed given an opportunity to the appellant to furnish written explanation, if any, and that the appellant had not availed such opportunity. On such premise, the CIT(A) held that the plea of violation of principles of natural justice was untenable. As regards the other contention put forth by the appellant to the effect that the appellant was not obliged to make any deduction of tax at source in terms of the provision of Section 195 of the IT Act as the amount paid for import of software did not partake the character of 'royalty' under the provisions of Section 9(1)(vi) of the IT Act read with the related DTAA, the CIT(A) has also negatived this contention by examining the issue in depth with reference to the various salient features of the software imported by the appellant in the light of the related statutory provisions and has eventually held that the consideration paid by the appellant for the import of software was in the nature of a royalty payment and, therefore, constituted income chargeable under the IT Act in terms of Section 9(1)(vi) of the Act read with the related relevant articles of the DTAA and thereby the provisions of Section 195 of the IT Act is attracted in the appellant's case.
(2.4) The appellant, aggrieved by the appellate order of the CIT(A), has preferred the present appeals assailing the legality of the said order.
(3) The appellant has reiterated the two-fold contention to the effect that (i) the ITO has passed the order without affording opportunity to the appellant, and (ii) that the consideration paid by the appellant cannot be considered as royalty under the provisions of Section 9(1)(vi) of the Act so as to apply the provisions of Section 195 of the said Act to the appellant's case.
(4) It is submitted that, as elaborated hereafter, the two-fold grounds so urged by the appellant are untenable and unsustainable in law and that the appellate order is to be upheld as the same is in accordance with the related statutory provisions and the settled principles governing the applicability of the same.
(4.1) It is submitted that the contention put forth by the appellant regarding the violation of principles of natural justice is not tenable. In negativing this plea, the CIT(A) has rightly adverted to the position that in the proceedings before the ITO, the appellant had taken up the bold plea that the imported software being the non-customised shrink-wrap software, there was no necessity of deduction of tax at source and thereupon the ITO had afforded yet another opportunity to the appellant to explain and substantiate their case and however, such an opportunity was not availed of by the appellant. On such grounds, the CIT(A) has rightly negatived the contention of non-affording of adequate opportunity by the ITO.
(4.2) It is submitted that the CIT(A) has rightly held that the consideration paid by the appellant for the import of software was in the nature of royalty payment and constituting chargeable income under the IT Act in terms of Section 9(1)(vi) of the IT Act read with relevant articles of DTAA and thereby attracting the provisions of Section 195 of the Act. In reaching this conclusion, the CIT(A) has considered the meaning as well as the fundamentals of a 'computer software' in general the retention of intellectual property rights (IPR) in the software by the author/developer of the Softwares import of software in question by the appellant in the present case involving the transfer of right to use the software under the end user license agreement, the implications of the terms and conditions in the said license agreements and on an evaluation of all such related relevant factors in the light of the applicable statutory provisions, the CIT(A) has rightly upheld the order passed under Sections 201 and 201(1A) of the Act.
(4.3) It is submitted that assailing the appellate order on the issue of considering the consideration for software as royalty, the appellant contends for the position that such consideration paid by the appellant for the imported software cannot be considered as royalty. The appellant has acknowledged the position that internationally as well as in India, software, known in legal parlance as 'computer program' is covered under the broad category of 'literary, artistic or scientific work' which is copyrightable and that the copyright laws of different countries do recognize a computer programme to be subject-matter of copyright. However, it is urged that 'royalty' in respect of the subject-matter of copyright can only relate, to such payments for the use i.e., exploitation of the copyright of such literary/artistic or scientific work and that in order to be classified as royalty, the right of the person in possession of the subject-matter of a copyright should be to utilize such copyright in the manner which are otherwise protected by the respective copyright law in favour of the owner of the copyright in that the acquisition of a product, wherein the subject-matter of copyright is embedded without right to exploit the copyright does not entail use or right to use the copyright of such literary/artistic/scientific i.e., copyrighted work. On such premise, it is claimed that the consideration paid by the appellant towards the import of software does not partake the character of royalty so as to apply the related provisions of the IT Act. The appellant has also strongly relied upon the recent Supreme Court decision in the case of Tata Consultancy Services v. State of Andhra Pradesh (supra) (4.4) The plea so put forth by the appellant is patently untenable and unsustainable in law.
(5) As mentioned earlier, the appellant is in the business of software development and during the related periods, the appellant had imported software from countries such as USA, France and Sweden. Section 9 of the IT Act provides that the income referred to therein is deemed to accrue or arise in India. At this stage, it is relevant to refer to the provisions of Section 9(1)(vi), Expln. 2 to Clause (vi) of Section 9(1), Expln. 3 to Clause (vi) of Section 9(1), second proviso to Section 9(1) of the IT Act, 1961 (which are extracted in the paper filed by the standing counsel).
On a perusal of the foregoing relevant provisions of Section 9(1) of the Act;, it can be noticed that any income by way of royalty payable by a resident is governed by Section 9(1)(vi) of the Act. The second proviso thereto specifically provides that nothing contained therein shall apply in relation to so much of the income by way of royalty as consisting of lumpsum payment made by a person, who is resident :
"for the transfer of all or any rights (including the granting of a license in respect of computer software supplied by a non-resident manufacturer along with a computer or computer based equipment under any scheme approved under the Policy on Computer Software Export, Software Development and Training, 1986 of Government of India"
It can be, therefore, noticed that the thrust of the aforesaid second proviso is to the effect that any lumpsum payment of royalty by a person for the transfer of all or any rights, including the granting of a license in respect of computer software would not be governed by Section 9(1)(vi) of the IT Act when such computer software is supplied by non-resident manufacturer along with a computer. As such, the provisions of Section 9(1)(vi) of the IT Act read with the proviso referred to above, presupposes the position that a lumpsum payment by the resident to a non-resident regarding supply of computer software alone would come within the ambit of Section 9(1) of the IT Act. In other words, when the said proviso to Section 9(1) of the Act distinctly provides that nothing contained in the said section shall apply to so much of the income by way of royalty consisting of lumpsum payment as made by the resident for transfer of all or any rights, including the granting of a license, in respect of computer software supplied by a non-resident manufacturer if such software is supplied along with the computer or computer based equipment under the approved scheme/policy there is a categorical legislative recognition of the position that when on the other hand, there is sale of computer software alone unaccompanied by sale of computer or computer based equipment, such sale of computer software involving transfer of all or any rights including the granting of license, would come within the ambit of the provisions of Section 9(1)(vi) of the Act. Thus, a transaction involving transfer of all or any right including granting of a license would come within the ambit of Section 9(1) of the Act.
(5.1) In the present case, admittedly the appellant has purchased the software and such purchase is not along with supply of any computer or 'computer based equipment. It is also extremely relevant to note that the supply of such software by the non-resident and the corresponding consideration paid by the appellant herein for such software is towards transfer of rights in the software as contemplated in the end user license agreement. The appellant's case is, therefore, governed by the provisions of Section 9(1)(vi) of the Act read with relevant article of the DTAA. The appellant is not correct in law in contending that their case is not covered by Section 9(1)(vi) of the Act.
(5.2) At this stage, it is relevant to advert to the meaning of the expression 'software'. At the outset, it is submitted that by virtue of its intrinsic and inherent qualities, a transaction relating to computer software involving transfer of rights thereto under the end user license agreement, cannot be treated on the same footing as that of traditional transaction of sale of goods.
(5.3) A software may be described as a program or series of programs containing instructions for a computer, required either for operational activities or the computer itself (operational software) or for the accomplishment of other tasks (application software). Thus, in essence, software is a series of commands arranged in a structure (or a language) which the machine will understand and translate into the actions that are required to produce a result that could be communicated to the operator. There are basically two levels of computer languages. The computer program whether written in assembly language or high level language is known as the source code. This is the language with which all modern computer programmers are comfortable with and that is the higher level languages such as Visual C + and other such programming languages in which the lines of code are formulated in commonly understood English words. Statements in this language are referred to as source code. When the source code is translated by an assembler or a compiler into machine language, it is known as the object code and this is essentially a series of commands strung together in a language which is understandable by the programmer or the operator on the one hand and which can be translated into a language understandable by the computer on the other. Once developed, software programs are to be integrated with some hardware. Say for instance, if the program developed is an application software program, it would have to be stored in the computer in such a manner so as to be integrated with the operating system. This result is formally achieved by actually recording all the components of the computer program onto a storage medium and which could be referred to by the computer, whenever a particular component is required. The program is then called upon by the operator by invoking a command or a series of commands. Once so called or invoked, the program will begin to issue all the instructions contained on the storage medium and process through the processing unit of the computer, all the various inputs and computation that are provided. Therefore, to summarise :
(i) A software program is essentially a series of commands issued to the hardware of the computer that enables the computer to perform in a particular manner.
(ii) The software program, to be effective, needs to be integrated with the hardware of the computer in such a manner so as to enable the series of commands to be initiated by the operator and in order that the computer can call upon any part of the series of commands at a given point of time.
(iii) To render the foregoing phenomena, the sequence of commands must be physically stored on a portion of the computer that can be readily accessed by the processing of the computer and as such the program should be reduced to a form to be capable of being stored and as such programs are, therefore, of a nature that they may be recorded on magnetic media such as a floppy drive or a hard drive.
(iv) When computer software, be it of any type, such as operation software, application software, etc., is procured, such type of software are recorded on CD ROM or floppy diskettes. In other words, the programs are recorded on these various types of media and then copied on to the hard disk of the computer, from where they can be accessed by the computer when called upon by the operator.
Although the floppy disc, the CD ROM and the hard disc are tangible commodity, they are worthless but for the software embedded therein, which is intangible and fall in the different category. Since the consideration paid for procuring the computer software is essentially the consideration for the intangible command routines contained in the CD ROM, etc., the utilization and use of such command routines and instructions embedded therein without the payment of adequate compensation to the original developer of the software, whatever be the type of software, would tantamount to profiting unfairly from the procurement of the software. Thus, it is clear that by virtue of its intrinsic qualities, software should not be treated on the same footing as traditional goods. It is submitted that inasmuch as the software program is essentially an intangible item, it appears logical to take cognizance of the legal position that the protection as granted to other types of intangibles are also afforded to software programs. Thus, the software developers, as regards their intellectual properties in the software are protected by law such as "Copyright laws'. It is pertinent to note herein that under the Copyright Act, 1957, the protection of copyright has been extended only to certain specified classes of work. These include
(i) Original literary dramatic, musical and artistic works
(ii) Cinematograph films, sound recordings.
It is significant to note that as per the present Copyright Act, 1957, the scope of the literary work would include 'computer programs, tables and compilation including computer databases'. As such, the Copyright Act, 1957, brings computer programs within the definition of a literary work and, therefore, the said Act provides copyright protection as available to literary work. (Section 14 of the Copyright Act which defines the expressions 'copyright' and 'computer program' are extracted in pp. 15 and 16 of the paper book filed by the standing counsel for the Revenue).
It can be, therefore, noticed that computer software, as an intangible item, has intellectual property right (IPR) embedded therein belonging to the developer/author of the software and the Indian Copyright law does recognize this position, as referred to above.
(5.4) In the present case, it is submitted that, as mentioned earlier, it is an admitted fact that the appellant has imported software under end user license agreement' which is a legal agreement entered into between the appellant-importer and the exporter of the software. Such a software license agreement so entered into is the most common form of agreement entered into in respect of the software. Under such an agreement, the developer of the software licenses its intellectual property in the software in favour of the licensee. As a result of such agreement, the licensor-developer of the software retains ownership over the copyright in the software and licensee out certain rights for use of such software in favour of the licensee such as the appellant. The appellant has placed on record the software license agreement with M/s Telelogic end with M/s OSS Nokalva Inc. (The related and relevant terms of the agreement with M/s Telelogic are reproduced elsewhere).
It can be noticed on a perusal of the foregoing terms and conditions of the software license agreement entered into between the appellant and the exporter of the software that by virtue of such license agreement, the appellant acquires the right to use the copyrighted software, Indeed, the software are imported under end user license agreement constituting a binding agreement between the appellant and the developer of the copyrighted software whereby in terms of such agreement, the appellant has acquired the right to use the copyrighted article. At this stage, it is relevant to note the peculiarity of the computer software is that it is not sold in the ordinary sense like any traditional goods or article. By licensing the software and through the medium of the licensing agreement, the owner of the copyrighted software enables the licensee to use the software. In other words, through the end user license agreement, software developers take care to ensure that their intellectual creation does receive its due share of protection and as per the terms of such agreement the persons procuring such software are contractually bound to certain obligations as stipulated thereto. In the present case, the appellant is the recipient of the right to use the software. The end user licensing agreement undoubtedly enable the appellant to use the software. This being the factual position, it is not tenable for the appellant to contend that the acquisition of the software by them does not entail or involve the right to use the software in question. The CIT(A), while passing the order, has addressed to this pertinent issue and has recorded a positive and categorical finding on the basis of the end user license agreements to the effect that by virtue of there being a right conferred on the importer a right to use the software, the consideration paid by the appellant partakes the character of royalty. The finding recorded by the CIT(A) does not suffer from any infirmity at all.
(5.5) At this juncture, it is also necessary to advert to the meaning of royalty as contained in DTAA between India and USA and also between other countries from where the appellant has imported the software. As per Sub-article 3 (of) Article 12 of the DTAA between India and USA, the expression 'royalty' is defined thus :
"Payment of any kind received as consideration for the use of or the right to use, any copyright of a literary, artistic or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use or disposition hereof."
It may be noticed that even as per the DTAA with USA, royalties would mean payment of any kind received as consideration for the use of or the right to use any copyright of literary, artistic or scientific work, etc., and this is similar to the meaning of the expression royalty as contained in Expln. 2 to Section 9(1)(vi) of the Act. The meaning assigned to the expression "royalty" in the DTAA between India and France and India and Sweden, is akin to the meaning as envisaged in Section 9(1)(vi) of the Act.
(5.6) Thus, it can be noticed that looked from any angle, the consideration paid by the appellant acquires a character of royalty and, therefore, the appellant was bound to deduct the tax at source in terms of Section 195 of the Act. The CIT(A) has dealt with the issue with a reasoned thread-bare discussion and the conclusion reached by the CIT(A) is based upon valid data, material and on correct understanding of the related provisions.
(5.7) In this context, it is submitted that the appellant is strongly relying upon the recent decision of the Supreme Court in the case of Tata Consultancy Services v. State of Andhra Pradesh (2004) 57 KLJ 345 (SC) to contend that as per the said decision of the apex Court, computer software is held to be 'goods' and consequently the consideration paid by the appellant for the imported software in question cannot be considered as royalty.
(5.8) Adverting to the reliance so strongly placed by the appellant on the aforesaid decision of the Supreme Court in Tata Consultancy Services, it is submitted that the reliance placed upon the said decision is misconceived. At the outset, it is relevant to note that in the said case, the Supreme Court was considering the issue as to whether a computer software which does involve intellectual property embedded therein can be considered as 'goods' within the meaning of the definition of the. said expression in the related Sales-tax Act. It is significant to note that the definition of the expression 'goods' as defined in the sales-tax laws is comprehensive enough to include 'all materials, articles and commodities, both tangible and intangible/incorporeal property. In the light of such comprehensive definition of the expression 'goods', the Supreme Court has held that computer software falls within the meaning of the expression 'goods' as defined in the relevant Sales-tax Acts. At this stage, it may also be mentioned that even earlier to the decision in Tata Consultancy Services (supra), the Supreme Court has held that both tangible and intangible goods fall within the definition of the expression 'goods'. Indeed, in its judgment in the case of Tata Consultancy Services, the apex Court has made reference to the earlier decisions on the subject matter as under :
"18. This Court in the case of H. Anraj v. Govt. of Tamilnadu had in the context of Bengal Finance (Sales-tax) Act, 1941, occasion to consider whether lottery tickets were goods. It has been submitted that the lottery tickets were an actionable claim as the essence of a lottery was a chance for a prize for a price. This Court noted that definition of 'goods' and held that the term 'movable property' for the purposes of sales-tax could not be taken in a narrow sense. It was held that incorporeal rights, like copyright or an intangible thing like electric energy, were regarded as goods exigible to sales-tax and, therefore, entitlement to a right to participate in a draw, which was beneficial interest in movable property, would fall within the definition of 'goods'.
19. The question whether electricity can be termed as 'goods' again arose before a Constitution Bench of this Court in State of Andhra Pradesh v. National Thermal Power Corporation Ltd. and Ors. This Court, noticing the earlier authorities, held that the definition of 'goods' in Article 366(12) of the Constitution of India was very wide and included all kinds of movable properties. It was held that the term 'movable property' when considered with reference to 'goods' as defined for the purposes of sales-tax, cannot be taken in a narrow sense. It was held that merely because electric energy was not tangible or would not be mover or touched like, for instance, a piece of wood or a book, it would not cease to be movable property when it had all the attributes of such property. It was held that electricity was capable of abstraction, consumption and use which, if done dishonestly, was punishable under Section 39 of the Indian Electricity Act, 1910. It was held that electric energy could be transmitted, transferred, delivered, stored and possessed in the same way as any other movable property. It was held that electricity was thus 'goods' within the meaning of the Sales-tax Act."
Thus, on noticing the earlier rulings holding that the definition of goods, as defined in the sales-tax laws cannot be taken in narrow sense and that even the intangible and incorporeal rights fall under the category of goods as defined in the Sales-tax Act. On noticing this legal position as established in the earlier decisions, the Supreme Court has held thus in Tata Consultancy Services (supra) :
"25. Thus, a transaction sale of computer software is clearly a sale of "goods", within 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, transferred, delivered, stored, possessed, etc. The software programmes have all these attributes.
It may, therefore, be noticed that in the case of Tata Consultancy Services (supra), the Supreme Court was considering the issue as to whether computer software would fall within the definition of 'goods' as defined in the Sales-tax Act. The issue and subject-matter of consideration by the Supreme Court in the said case was, therefore, not identical to the one which arises for consideration in the present appeal. It may not be out of place herein to refer to a decision of the Supreme Court in the case of PSI Data Systems Ltd v. CCE (1997) 2 SCC 78 wherein while dealing with the issue of assessable value of the computer for the purpose of excise duty, it is held by the Supreme Court that a computer and its software are distinct and separate both as a matter of commercial parlance and also upon the material on record. The position is analysed thus ;"
"13. Secondly, that a computer and its software are distinct and separate is clear, both as a matter of commercial parlance as also upon the material on record. A computer may not be capable of effective functioning unless loaded with software such as discs, floppies and CD ROMs. But that is not to say that these are a part of the computer or to hold that, if they are sold along with the computer, their value must form part of the assessable value of the computer for the purposes of excise duty. To give, an example, a cassette-recorder will not function unless a cassette is inserted in it; but the two are well-known and recognized to be different and distinct articles. The value of the cassette, if sold along with the cassette-recorder, cannot be included in the assessable value of the cassette-recorder. Just so, the value of software, if sold along with the computer, cannot be included in the assessable value of the computer for the purposes of excise duty."
Again, in the case of Sprint RPG India Ltd. v. Commr. of Customs, the Supreme Court was considering the issue as to whether customs duty on imported computer software loaded on a hard disk drive should be valued on the basis of hard disk simpliciter at 25 per cent under head 84.71 of the Customs Tariff Act, 1975, or on the basis of computer software at 10 per cent under Heading 85.24. It was held by the Supreme Court that hard disk is a refined form of floppy and serves the same purpose of recording material in a more efficient way and that the moot difference between the hard disk and the software is that a hard disk is a hardware whereas software is a representation of any type of data and which can be stored on the hard disk. Admittedly, a floppy on which software is stored would be taxable under Tariff Heading 85.24 and instead of storing the software on the floppy, if it is stored on a hard disk drive, it would not cease to be a software. The Supreme Court has explained this position thus :
"7. In the present case, what is imported by the appellant is hard disk drive loaded with software material. Heading 84.71 apparently covers automatic data-processing machines and units thereof and magnetic or optical readers not elsewhere specified or included. It is to be stated that Heading 85.23 deals with prepared unrecorded media for sound recording or similar recording of other phenomena, which includes magnetic tapes. As against this, Heading 85.24 covers records, tapes and other recorded media for sound or other similarly recorded phenomena which covers gramophone records or magnetic tapes for reproducing phenomena. That software material is admittedly classifiable under Tariff Heading 85.24, which provides for taxing records, tapes and other recorded media for sound or other similarly recorded phenomena. The difference between the hard disk drives and magnetic storage devices or floppy disks is only with regard to the use of rigid, hard, aluminium or glass as the base for recording medium. What is covered by the said heading is recorded tapes, magnetic tapes or other similar recorded phenomena. As per the literature supplied by the Department, hard disk drive is used to store data and programs permanently inside the computer. The difference between hard disk drive and common magnetic storage device or floppy disk is the base for recording medium. It also provides faster access and larger storage capacity: its function is to store the data instructions, sound images, etc., and it is like phonograph records. Floppy disk uses flexible plastic like carrier for magnetic recording medium. Information is stored in the hard disk drive using the magnetic recording method which is used to store songs on an audio tape or movies on a video tape. Therefore, hard disk is a refined form of floppy and serves the same purpose of recording material in a more efficient way. The moot difference between the hard disk and the software is that a hard disk is a hardware whereas software is a representation of any type of data and which , can be stored in the hard disk. There is no dispute that a floppy on which software is stored would be taxable under Tariff Heading 85.24. Instead of storing the software on the floppy if it is stored on a hard disk drive, it would not cease to be a software. As stated above, it is an information stored in the hard disk drive using the magnetic recording method.
11. Testing it from the aforesaid rules of interpretation, it would be clear that the disk or the floppy on which computer data is recorded, would be covered by Heading 85.24. Rule 3(a), inter alia, provides that when two or more headings each refer to part only of the materials or composite goods, those headings are to be regarded as equally specific in relation to those goods, even if one of them (sic-them) gives a more complete or precise description of the goods. Further, considering imported goods to be a mixture of two substances namely "hard disk drive" and "software" as per Rule 3(b), they can be classified under the heading which gives them their essential character. In the present case, considering its price factor, it would be computer software. The price of the imported consignment was approximately Rs. 68 lakhs. As against this, the value of the seven hard disk drives would be roughly Rs. 60,000 that is to say the value of the computer software is hundred times more than its container's hard disk. Hence, the essential character of the imported goods is computer software."
(6) It is submitted that having regard to the various factual and legal aspects relating to the procurement of the software by the appellant and keeping in view the related statutory provisions of the IT Act as well as the related provisions of DTAA, the CIT(A), has rightly held that the consideration paid by the appellant for the import of software is in the nature of royalty payment in terms of the Section 9(1)(vi) of the IT Act as well as in terms of the relevant articles of the DTAA and is thus, a sum chargeable in terms of the provisions of Section 195 of the Act. The CIT (A) has rightly confirmed the order passed in the appellant's case under Section 201(1) and 201(1A) of the Act as the appellant was duty bound to deduct tax at source relating to the remittance made.
Finding :
11. We have heard both sides and also perused the materials brought on record. According to the assessee, it had imported branded off-the-shelf software from different suppliers in USA, Sweden and France. This fact has not been disputed by the Revenue. According to the ITO (TDS), the payment made by the assessee company to the foreign companies for purchase of softwares is to be treated as royalty under Section 9(1)(vi) of the IT Act read with DTAA of relevant countries.
12. On the other hand, it is the case of the assessee that under the DTAA of different countries, when the right to copyright is transferred that will come within the purview of royalties. Although the definition of Section 9(1)(vi) of the IT Act is wider, however, in view of Section 90(2), the provisions of DTAA has to be followed. Reliance can be placed on the decision of the Supreme Court in Union of India and Anr. v. Azadi Bachao Andolan and Anr. (supra) and the decision of Andhra Pradesh High Court in the case of CIT v. Vishakapatnam Port Trust (supra). According to the assessee, it had purchased copyrighted articles or goods. Right to use any copyright was not transferred in its favour. From the reply filed by the learned standing counsel on behalf of the Department, we find that this aspect has been accepted by the Revenue that the assessee had received a copyrighted article and through the license it has acquired the right to use such article Reference can be made to page Nos. 23 and 24 of the reply at para 5 of the written submission filed by the Revenue. For better appreciation of the circumstances of the case, let us see the relevant provisions of Section 9(1)(vi) of the Act for the purpose of the definition of 'Royalty', which has already been extracted in the reply filed by the Revenue at p. 6. The definition of the term 'Royalty' as we find in different treaties is almost same. The aforesaid definition has been quoted in the written submission filed by the assessee and the Revenue at pp. 6 and 25, respectively. The common definition of the term 'Royalty' as per DTAA is quoted below for ready reference :
"Payment of any kind received as consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connect/on with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use or disposition hereof."
From a perusal of the aforesaid two definitions, we find that under DTAA, consideration paid for use of or right to use a copy right of a literary, artistic or scientific work, etc., is to be treated as Royalty. Therefore, under the treaty, consideration paid for use of or tight to use any copyright of a literary, artistic or scientific work is must. Whereas, under Section 9(1)(vi) of the IT Act, the definition of 'Royalty' is wider. The provisions of Section 90(2) of the Act, is quoted below :
"Section 90(2) : Where the Central Government has entered into an agreement with the Government of any country outside India under Sub-section (1) for granting relief of tax or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee."
On perusal of the aforesaid provision, we find that the provisions of IT Act will be applicable to the extent they are more beneficial to the assessee. Otherwise, the provisions in the DTAA have to be followed. Therefore, in our considered view, the provisions of DTAA have to be followed for the purpose of deciding the issue whether the payments made by the assessee is royalty or not. The learned standing counsel on behalf of the Revenue supported the order passed by the ITO (TDS) that the payment is covered by Section 9(1)(vi) read with the definition of the word 'Royalty' as provided in the treaties. However, in view of the provisions of Section 90(2) of the Act, we have to give preference to the definition 'as provided in the treaties. Apart from the provisions of the treaties, we have to consider the license agreement entered, into by the assessee with foreign companies which has been quoted at p. 17 of the paper book filed by the Revenue. It has been submitted by the Revenue that under such an agreement, the developer of the software licenses its intellectual property in the software in favour of the licensee. As a result of such agreement, the licensor of the software retains ownership over the copyright in the software and protects such copyright in the license. The provisions of one of such license agreement is quoted below :
"This is a legal agreement between you, the end user, and Telelogic AB of Makno, Sweden. If the terms of this agreement have not been previously accepted by you through order acknowledgement or otherwise the following applied : By opening this sealed disk package, you are agreeing to be bound by these terms and conditions. If you do not agree to the Telelogic general terms and conditions, promptly return the unopened disk package and the accompanying items (including written materials and binder or other containers) to the Telelogic office or distributor from which you obtained them for a full refund."
"The term "Program" means the enclosed Telelogic software program, all whole or partial copies of it (including portions merged into other programs) and all subsequent updates to the software program legally received by you".
"These general terms and conditions apply to each program licensed by Telelogic AB as well as maintenance and other services provided by Telelogic AB".
1. Giant of license Telelogic grants you the right to use the program on one computer or in one local computer network during the term of this license. Under this License you may :
(i) Copy of program for backup; and
(ii) Merge the program into another program; and
(iii) Transfer the program and accompanying written materials on a permanent basis provided you retain no copies and the recipient agrees to the terms of this license; and
(iv) To the extent the program is specified to include source code, modify such source code for the purpose of adapting to your environment.
2. Restrictions The program is owned by Telelogic and is protected by national copyright laws and international copyright treaties. This license does not convey to you an interest in or to the program, but only a limited right of use in accordance with the terms of this license. You must reproduce and include any copyright and trademark notices on all copies of the program and maintain an accurate record of the location of all copies at all time. You may not ;
(i) Use, copy, merge, modify or transfer the program except as provided in this license;
(ii) Reverse, assemble, decompile or otherwise translate the program except as specifically permitted by law without the possibility of contractual waiver;
(iii) Sub-lease, rent or lease the program; or
(iv) Copy the written materials accompanying the program.
................................
5. Confidentiality Program is confidential and proprietary information of Telelogic. You agree to take adequate steps to protect the program from unauthorized disclosure or use.
Also, the relevant terms and conditions of the software license agreement between the appellant and M/s OSS Noklava Inc., are reproduced below :
Software License Agreement License No. 7903 OSS Nokalva, Inc. (OSS), One Executive Drive, Somerset, New Jersey 08873, grants to :
Samsung Electronics Level 7. Prestige Meridian II.
30, M.G. Road.
Bangalore 560001, India (Customer) and customer accepts an individual, non-transferable and nonexclusive license to use the licensed software program(s) [program(s)] on the following terms and conditions. Licensed program(s) shall include any error corrections, enhancements, or documentation updates related thereto that they be furnished by OSS to customer hereunder or under any Maintenance Agreement that OSS and Customer may enter into from time to time with respect to any Program(s) ('Revisions') License Customer may (a) If the program(s) include the ASN. 1 Compilor, use solely for customer's internal business purpose on the single designated CPU at the designated site by no more than the maximum number of users (maximum users) the OSS ASN, 1C-Compilor [currently labelled A5N1CPP.EXE); (b) use, copy and distribute for use by customer the OSS runtime libraries [currently labeled *.DLL and *.LIB: (c)] distribute and sublicense the OSS runtime dynamic link libraries (currently labeled *.DLL) as part of the customer's complete application where the application adds significant function to the runtime libraries and is a final produce which the end user would use without relinking, rebuilding, or modification and (d) link the BER, PER and DER runtime static libraries (currently labeled *.LIB) into customer's complete application where the application adds significant function to the runtime libraries and is a final product which the end user would use without relinking, rebuilding or modification. All right, title and interest in and to the program(s) and all related material are and shall at all times remain the sole property of OSS. Neither the program(s) nor this agreement may be assigned, sublicensed or otherwise transferred by customer without prior written consent from OSS.
Term This agreement shall be effective on the date it is accepted by OSS at Somerset. New Jersey, and shall remain in force unless terminated in accordance with the provisions set forth to this agreement. OSS may terminate this agreement if customer fails to comply with any of the terms and conditions of the agreement. This agreement shall automatically terminate upon filing of any petition under the bankruptcy code by or against customer, upon any assignment for the benefit of creditors of customer, or upon dissolution of customer.
Protection of confidential information
1. "Confidential Information" is non-public information that the customer receives or learns in connection with this agreement, and knows (or should know) that OSS regards as confidential. Confidential Information (a) does not include any information that is or becomes widely publicly known through no wrongful act of the customer or that the customer acquires from a third party having no obligation of confidence to OSS; (b) does (without limitation) include ideas, know-how algorithms and other proprietary information within program(s) received under this agreement (whether in source or object code form), and within any code generated by program(s).
2. Customer will not use confidential information [except as on incident of ordinary use of program(s)]
3. Customer will not disclose confidential information and will maintain its confidentiality using at least the same care as its uses to maintain the Confidentiality of its own confidential information. Customer agrees in any event to compile all and any source code generated by the program(s) into object code prior to any permitted external distribution.
4. Customer shall not remove any copyright, confidentiality, or other proprietary rights notice provided by OSS in connection with confidential information and any copies thereof which customer may make. Customer shall ensure that, in distributing an application, it does not disclose the application programme interface (API) to the OSS runtime libraries. Customer shall not (to the extent such actions may be prohibited by law) de-compile, disassemble or otherwise reverse-engineer the program(s) or any portion thereof, and shall include a similar prohibition in all permitted external distribution."
13. It appears that the argument of the learned counsel appearing on behalf of the assessee that by acquiring the software, the assessee had only received a copy of the copyrighted article and this argument has been accepted by the Revenue in its submission which is quoted below :
"It can be noticed on a perusal of the foregoing terms and conditions of the software license agreement entered into between the appellant and the exporter of the software that by virtue of such license agreement, the appellant acquires the right to use the copyrighted software. Indeed, the software are imported under end user license agreement constituting a binding agreement between the appellant and the developer of the copyrighted software, whereby, in terms of such agreement, the appellant has acquired the right to use the copyrighted article. At this stage, it is relevant to note the peculiarity of the computer software in that it is not sold in the ordinary sense like any traditional goods or article. By licensing the software and through the medium of the licensing agreement, the owner of the copyrighted software enables the licensee to use the software. In other words through the end user license agreement software developers take care to ensure that their intellectual creation does receive its due share of protection and as per the terms of such agreement the persons procuring such software are contractually bound to certain obligations as stipulated thereto. In the present case, the appellant is the recipient of the right to use the software. The end user licensing agreement undoubtedly enables the appellant to use the software. This being the factual position, it is not tenable for the appellant to contend that the acquisition of the software by them does not entail or involve the right to use the software in question. The CIT(A), while passing the order has addressed to this pertinent issue and has recorded a positive and categorical finding on the basis of the end user license agreements to the effect that by virtue of there being a right conferred on the importer a right to use the software, the consideration paid by the appellant partakes the character of royalty. The finding recorded by the CIT(A) does not suffer from any infirmity at all."
From the aforesaid submission, it appears that according to the Revenue, although a limited right to use of the software (which is a copyrighted article) was transferred in favour of the assessee, but still it comes within the definition of 'Royalty'.
14. The learned counsel for the assessee heavily relied upon the decision of the Supreme Court in the case of Tata Consultancy Services v. State of Andhra Pradesh (supra). On behalf of the Revenue, it was submitted that the Hon'ble Supreme Court has decided the issue in that case as to whether the software is "goods" for the purpose of Andhra Pradesh General Sales-tax Act. Therefore, the context in which the Hon'ble Supreme Court has decided that software is 'goods', is different.
15. We have gone through the decision of the Supreme Court in Tata Consultancy Services (supra). It has been clearly laid down in that decision that the software is different from the computer and it is to be treated as goods. In this regard, we find that the Hon'ble Supreme Court has not only considered the issue from the angle that whether it is goods for the purpose of Andhra Pradesh Sales-tax Act, but the Court has also considered that computer software is 'goods' under Article 366(12) of the Constitution of India, holding as follows :
"In our view, the term "goods" as used in Article 366(12) of the Constitution of India and as defined under the said Act, are very wide and include all types of movable properties, 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 software programme may consist of various commands, which enable the computer to perform a designated task. The copyright in that programme may remain with the originator of the programme. But the moment copies are made and marketed, it becomes goods, which are susceptible to sales-tax. Even intellectual property, once it is put on to a media, whether it be in the form of books or canvas (in case of painting) or computer discs or cassettes, and marketed, would become "goods". We see no difference between a sale of a software programme on a CD/floppy disc from a sale of music on a cassette/CD 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 purposes of transfer. Sale is not just of the media, which by itself has very little value. The software and the media cannot be split up. What the buyer purchases and pays for is not the disc or the CD. As in the case of paintings or books or music or films, the buyer is purchasing the intellectual property and not the media i.e., the paper or cassette or disc or CD. Thus a transaction sale of computer software is clearly a sale of "goods", within 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, transferred, delivered, stored, possessed, etc., The software programmes have all these attributes."
For the purpose of deciding the issue, the Hon'ble Supreme Court has taken into consideration decisions of different High Courts of India and abroad and held as follows :
"It has been fairly brought to the attention of the Court that many other American Courts have taken a different view. Some of those cases are South Central Bell Telephone Co. v. Sidney J. Barthelemy reported in 643 S0.2d 1240 : Comptroller of the Treasury v. Equitable Trust Company reported in 464 A. 2d 248: Chittenden Trust Co. v. Commr. of Taxes reported in 465 A. 2d 1100; University Computing Co., v. Commr. of Revenue for the State of Tennessee reported in 677 S. W. 2d 445 and Hasbro Industries INC v. John H. Norberg, Tax Administrator, reported in 487 A. 2d 124. In these 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 elections, by use of an electric current, to create either a magnetized 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 duplicate, 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 then the seller duplicates the program copy on software and transports the duplicates to the buyer's computer. The duplicate is read into the buyer's computer and copied on a memory device. It has been held that the software is not merely knowledge, but rather is knowledge recorded in a physical form having a physical existence, taking up space on a tape, disc or hard drive, making physical things happen and can be perceived by the senses. It has been held that the purchaser does not receive mere knowledge but receives an arrangement of matter, which makes his or her computer perform a desired function. It has been held that this arrangement of matter recorded on tangible medium constitutes a corporeal body. It has been held that a software recorded in physical form becomes inextricably intertwined with, or part and parcel of the corporeal object upon which it is recorded, be that a disk, tape, hard drive, or other device. It has been held that the fact that the information 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 transferred to another medium such as film, video tape, audio tape or books. It has been held that by sale of the software programme, the incorporeal right to the software is not transferred. 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 physical copy of that software which has been transferred to the buyer. It has been held that when one buys a copy of copyright novel in a bookstore or recording of a copyright song in a record store, one only acquires ownership of that particular copy of the novel or song but not the intellectual property in the novel or song."
16. In the said decision, the Hon'ble Court has also noted the earlier decision of the apex Court in the case of Associated Cement Company Ltd. v. Commr. of Customs (2001) 4 SCC 593 and held that once a computer programme is embedded in a medium, it takes the character of goods even in the narrower definition of Customs Act. The Court has further held that the software programme, which is put in a medium like a disk or floppy, takes the character of goods.
17. In para 14 of the judgment, the Hon'ble Court has held that by sale of the software programme, the incorporeal right to the software is not transferred. 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 and when one buys a copy of software, which is akin to the instance of one buying a copy of a novel from a bookstore or a recorded song in a cassette or videotape.
18. On perusal of the agreement between the parties, we are of the view that in the present case also what the assessee had acquired is only a copy of the copyrighted articles i.e., software, whereas the copyright remains with the owner, i.e., foreign parties. The decisions relied upon by the learned Departmental Representative are distinguishable on facts of the case.
19. From the aforesaid discussion, we find that the incorporeal right to software i.e., copyright remained with the owner and the same was not transferred to the assessee. We have also noticed the definition of 'royalty' in the DTAA, which has been quoted above. The primary condition for bringing within the definition of 'royalty' in DTAA is that the payments of any kind received as consideration for the use of or right to use any copyright of a literary, artistic or scientific work, etc. Right to use of a copyright is totally- different from right to use the programme embedded in a cassette or CD or it may be a software.
20. In this case, the assessee had acquired a readymade off the shelf computer programme for being used in its business. No right was granted to the assessee to utilize the copyright of the computer programme. The assessee had merely purchased a copy of the copyrighted article, namely, a computer programme which is called 'software'. Looking to the circumstances of the case and considering the fact that the definition of 'royalty' as provided in the treaties does not apply to the facts of the case. We are of the view that the finding recorded by the authorities below cannot be sustained. Accordingly, we hold that the remittance made by the appellant for purchase of software is not an income in India, hence, no tax is to be deducted in India under Section 195 of the IT Act, 1961. Since we have decided the issue on merits, therefore, we are not going into the technical objections reused on behalf of the assessee.
21. In the result, the appeals are allowed.