Income Tax Appellate Tribunal - Mumbai
Set Satellite (Singapore) Pte Ltd, vs Assessee on 13 December, 2006
IN THE INCOME TAX APPELLATE TRIBUNAL
"L" Bench, Mumbai
Before Shri D.K. Agarwal, Judicial Member
and Shri B. Ramakotaiah, Accountant Member
ITA No. 3091/Mum/2007
(Assessment Year: 2003-04)
DDIT (Internatinal Taxation) 2(1) M/s. TTI Team Telecom International
Room No. 120, 1st Floor, Scindia Vs. Ltd., 2nd Floor, Ballard House
House, Ballard Estate, N.M. Road Adi Marzban Path, Ballard Pier,
Mumbai 400020 Fort, Mumbai 400001
PAN - AACCT 6300 M
Appellant Respondent
CO No. 64/Mum/2008
(Assessment Year: 2003-04)
M/s. TTI Team Telecom International DDIT (Internatinal Taxation) 2(1)
Ltd., 2nd Floor, Ballard House, Vs. Room No. 120, 1st Floor, Scindia
Adi Marzban , Path, Ballard Pier House, Ballard Estate, N.M. Road
Fort , Mumbai 400001 Mumbai 400020
PAN - AACCT 6300 M
Cross Objector Appellant in Appeal
Appellant by: Shri. Narender Singh
Respondent by: Shri P.J. Pardiwalla &
Mr. Jitendra Jain
ORDER
Per B. Ramakotaiah, A.M.
This appeal by the Revenue and cross objection by the assessee are against the order of the CIT(A) XXXI, Mumbai dated 13.12.2006.
2. Revenue has raised the following grounds: -
"(1) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that the Assessing Officer has wrongly held that the amount of Rs.15,75,78,477/- received by the assessee for supply of software is in the nature of 'royalty' which is liable for taxation in India.
(2) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) failed to appreciate that the payment for obtaining Computer Software is in the nature of 'royalty' and the same is 2 ITA No. 3091/M/07& CO No. 64/M/08 M/s. TTI Team Telecom International Ltd.
liable for taxation in India within the meaning of Article 12(3) of the DTAA."
3. Briefly stated, TTI Team Telecom International Ltd. is a company incorporated in Israel and is a tax resident of that country. The assessee had filed Tax Residence Certificate before the A.O. and claimed the benefit of Double Taxation Avoidance Agreement (DTAA) between India and Israel. The assessee had entered into a contract with Reliance Infocomm Ltd. (Reliance) dated 17.09.2002 for the supply and license of software for the wireless network of Reliance in India. The A.O. has mentioned that total consideration was US$ 322,50.180. The A.O. has examined the software license agreement which provides that the assessee had granted Reliance a perpetual, irrevocable, non-exclusive, royalty-free, worldwide license to install and operate the software and the documentation licensed under the agreement for implementation, operation, management and maintenance of Wireless Reliance Network within India. The assessee had claimed that the payment received for supply of software was business income and in the absence of PE in India such business profit was not taxable in India. The A.O. held that the payment made for the supply of software is royalty within the meaning of Article 12 of the DTAA and also section 9(1)(vi) of the I.T. Act. The A.O. held that the assessee had only granted a license to Reliance and had not sold the intellectual property. The A.O. referred to clause 2.1 of the agreement to discuss the license grant. The A.O. referred to clause 4.1 to highlight that the payment is for software license. The A.O. referred to clause 6 to highlight that the intellectual property rights remains with the assessee. The A.O. examined whether the computer software sold by the assessee amounted to transfer of any copyright or use of copyright. The A.O. also examined whether software can be held as patent or invention or a secret formula or process. The A.O. referred to the commentary of Dr. Klaus Vogel on Double Taxation Conventions. The A.O. held that the software can be held as process. The A.O. mentioned that the issue of software being goods has not been settled as Hon'ble Supreme Court had constituted a larger bench in the case of Tata Consultancy Services. The A.O. made a reference to the decision of Hon'ble AAR in the case of ABC Vs. RE (154 CTR 3 ITA No. 3091/M/07& CO No. 64/M/08 M/s. TTI Team Telecom International Ltd.
246) and the decision of Hon'ble Calcutta High Court in the case of Leonhardt Andra Und Partner 249 ITR 418 to argue that payment received for supply of software amounts to royalty.
4. It was the submission of the assessee that they have placed orders for purchase of the product and has not acquired any copyright in the use of the product and relied on various case laws to support that software after being placed on a media is goods and not intellectual property. It is further contended that supply of software without transfer of copyright only amounts to business income and not royalty: -
i) Tata Consultancy Services Vs. State of Andhra Pradesh 271 ITR 401 (SC)
ii) Sonata Information Technology Limited (ITAT Mumbai) ITA No. 3702/Mum/2004 and 4789/Mum/2004
iii) M/s. Rolta India Limited (CIT(A)-V, Mumbai)
iv) Samsung Electronics Co. ltd. vs. ITO (Bang) 93 TTJ 658
v) Lucent Technologies Hindustan Ltd. vs. ITO I(Bang) 92 ITD 366
vi) Hewlett-Packard (India) (P) Ltd. vs. ITO 5 SOT 660 (Bang)
vii) Lotus Development (Asia Pacific) Pvt. Ltd. (ITAT Delhi)
viii) Sonata Information Technology Ltd. vs. Addl. CIT (ITAT, Bang)
5. The CIT(A) has examined the agreement between the assessee company and Reliance Infocomm Ltd. and noticed that there was only a grant of perpetual, irrevocable, non-exclusive, royalty-free, worldwide license to install, use and operate and copy the software and documentation licensed in the worldwide Reliance network. He also further found out that the agreement does not give any title to the software or to any trademark or copyright in them to the Reliance. The Reliance also cannot reverse engineer, decompile of disassemble or cannot remove, obscure or deface any property legend relating to the software. It was also further found that the software license cannot be sold, transferred, assigned, sublicensed or used by any outsourcee of Reliance without the consent of the assessee. In view of these findings following various case laws relied upon by the assessee and also examination of DTAA of Indo- Israel and Indo-US DTAA and provisions 4 ITA No. 3091/M/07& CO No. 64/M/08 M/s. TTI Team Telecom International Ltd.
of Article 12(3) and after analysing the provisions of Copyright Act the CIT(A) has finally concluded as under: -
"2.33 With the above discussion, it is held that Reliance under the Software Contract acquired only a copy of software programme and did not acquire any copyright over such software as envisaged by section-14 of the Copyright Act. Under these circumstances, payment made by the Reliance to the appellant cannot be said to be payment for the use of or right to use of copyright. Thus, payment amounted only for purchase of copyrighted article and does not amount to royalty within the meaning of Article-12(3) or the DTAA. Accordingly it is held that the AO has wrongly held the payment to be royalty. Addition made by the AO is therefore deleted. Accordingly appeal on grounds appeal no. 1 is allowed."
Revenue is aggrieved.
6. We have heard the learned D.R., who reiterated the arguments of the A.O. while the learned counsel referred to the paper book filed in this regard and various case laws relied upon by the assessee. It was the submission of the Revenue that use of software comes within the purview of royalty whereas the Assessee counsel submitted that it was business income and no part of it can be considered as royalty.
7. We have considered the issue. As seen from the license granted in this regard as extracted by the CIT(A) in para 2.5 and findings of the CIT(A) in paras 2.6 & 2.7 the assessee has not transferred any copyright or any right over the software to Reliance except allowing the Reliance to use the software in the wireless network. It is, therefore, apparent that the Reliance has got only the right to use for its business and has not obtained any other rights. This right does not amount to royalty within the meaning of Article 12(3) of the DTAA and section 9(1)(vi) of the IT Act as held by the CIT(A) correctly. The CIT(A) considered the issued in detail and held as under: -
"2.8 The issue whether software is goods or intellectual property has been examined by Hon'ble Supreme Court in the case of Tata Consultancy Services Vs. State of Andhra Pradesh (2004) 271 ITR 401. It was argued on behalf of Andhra Pradesh Government that the computer software is an intellectual property and providing it to anybody for consideration results in royalty income being generated to the software developer. Hon'ble Supreme Court examined the issue in detail and it was held that software is an intellectual property so long as it remains with the software developer. As soon as a copy of the software is produced and is placed on a media it becomes goods. Software on media 5 ITA No. 3091/M/07& CO No. 64/M/08 M/s. TTI Team Telecom International Ltd.
is not different from any book or canvas (in case of painting) or compact discs or cassettes in respect of songs and pictures. Hon'ble Supreme Court held that the software and the media cannot be split up since the media has a little value. Hon'ble Supreme Court has observed as under:
"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 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 of sale of computer software is clearly a sale of "goods"
within the meaning of the term as defined in the said Act...." 2.9 It is therefore now established law that computer software after being put on to a media and sold has become goods like any other audio cassette or painting on canvas or a book. The AO was therefore not justified in holding that the computer software on a media continues to be intellectual property right. The issue of payment for acquisition of copy of software programme has been considered by the Hon'ble ITAT Bangalore Bench in the case of Lucent Technologies Hindustan Ltd. Vs. ITO (2005) 92 ITD 366. In this case the taxpayer had purchased from US company an integrated equipment which consisted of both hardware and software as one cannot function without help of other. The acquisition of software was inextricably linked to the acquisition of hardware and one could not function without the other. The assessee company which was engaged in the business of manufacturing and sale of electronic switching systems required for the telecommunication industry, did not deduct tax at source while making payment on the ground that acquisition of software was inextricably linked to the acquisition of hardware and as the transfer of software had taken place outside India, no profit accrued or arose or could be deemed to have accrued or arisen in India. The AO directed for deduction of tax at source u/s. 195. Hon'ble ITAT after appreciating the provisions of Article-12 of the Indo-US DTAA and the provisions of section 9(1)(vi) of the I.T. Act, has held that the assessee did not acquire any right in the software. The assessee had only acquired integrated equipment both of hardware and softw3are from Lucent, USA. The assessee did not acquire any right to duplicate the software in making use of same. The software supplied by Lucent, US is customer-specific and cannot be reused or duplicated in any other exchange where identical orders were placed by the DOT. It was held that the payment made for the purchase of software did not partake the character of royalty and as such there was no obligation to deduct at source. As per the Contract conditions mentioned in para-2 of 6 ITA No. 3091/M/07& CO No. 64/M/08 M/s. TTI Team Telecom International Ltd.
the agreement Reliance did not acquire any right of duplication of software except for use in its own system.
...
...
2.13 Appellant is a tax resident of Israel and therefore is entitled to the benefit of DTAA over the provisions of the Income-tax Act. Consequently if the payment of software is not covered by the definition of royalty in Article-12, it being covered by section 9(1)(vi) would be irrelevant. Definition of royalty in Article-12(3) is in following parts:
a) Consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work.
b) Consideration for the use of or right to use of any patent, trademark, design or model, plan, secret formula or process.
c) Consideration for the use of or right to use cinematograph film or work on film, tape or other means of reproduction of the use in connection with radio or television broadcasting.
d) Consideration for the information concerning industrial, commercial or scientific experience.
e) Including gains derived from the alienation of any such right or property which are contingent on the productivity, use or disposition thereof.
The computer software can only be covered in item (a) or (b) above. 2.14 Computer software as copyright Article-12(3) provides that the consideration for the use of any copyright or right to use of any copyright is royalty.
Definition of copyright is not provided in the DTAA and therefore definition of copyright provided in the Copyright Act, 1957 is relevant. Section-13 of the Copyright Act provides as under:
"13. Works in which copyright subsists. (1) Subject to the provisions of this section and the other provisions of this Act copyright shall subsist throughout India in the following classes of works, that is to say, -
(a) original literary, dramatic, musical and artistic works;
(b) cinematograph films; and
(c) sound recording.
(2) Copyright shall not subsist in any work specified in sub-section (1), other than a work to which the provisions of section 40 or section 41 apply, unless, -
(i) in the case of a published work, the work is first published in India, or where the work is first published outside India, the author is at the date of such publication, 7 ITA No. 3091/M/07& CO No. 64/M/08 M/s. TTI Team Telecom International Ltd.
or in a case where the author was dead at that date, was at the time of his death, a citizen of India;
(ii) in the case of an unpublished work other than a work of architecture, the author is at the date of the making or the work a citizen of India or domiciled in India; and
(iii) in the case of a work of architecture, the work is located in India.
Explanation. In the case of a work of joint authorship, the conditions conferring copyright specified in this sub-section shall be satisfied by all the authors of the work.
(3) Copyright shall not subsist-
(a) in any cinematograph film if a substantial part of the film is an infringement of the copyright in any other work;
(b) in any sound recording made in respect of a literary, dramatic or musical or musical work, if in making the sound recording, copyright in such work has been infringed.
(4) The copyright in a cinematograph film or a sound recording shall not affect the separate copyright in any work in respect of which or a substantial part of which, the film, or, as the case may be, the sound recording is made.
(5) In the case of a work or architecture, copyright shall subsist only in the artistic character and design and shall not extend to processes or methods of construction"
2.15 Section-13 therefore clearly provides that the copyright shall subsist only in respect of original literacy, dramatic, musical and artistic works, cinematograph films and sound recording. It is therefore clear that the copyright is different from the work. Copyright about work is not synonymous with that work. Copy right is an incorporeal property in a work (a copy property).
2.16 Section-14 of the Copyright Act provides the definition of copyright which reads as under:
"14. Meaning of copyright. For the purpose 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 and not being copies already in circulation;8 ITA No. 3091/M/07& CO No. 64/M/08
M/s. TTI Team Telecom International Ltd.
(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 any adaptation of the work, any of the acts specified in relation to the work in sub-clauses (i) to (vi);
(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." 2.17 The definition of copyright in section-14 is exhaustive definition since the words used are 'copyright means'. Copyright is a bundle of rights mentioned in section -14 above. This right consists of right to reproduce the work, issues of copies of the work in public, performance of the work in public, making translation, adaptation, etc. In respect of computer programme relevant for the issue under consideration, copyright mainly consists of following rights:
(a) to reproduce the work in any material form.
(b) to issue copies of the work to the public.
(c) to sell or give on commercial rental or for sale or for commercial rental any copy of computer programme.
2.18 Examination of the agreement of the appellant with Reliance reveals that para-2 of the agreement quoted earlier forbids the Reliance from transferring, assigning, sublicensing or using by outsourcing the software. The agreement also forbids the Reliance from decompiling, reverse engineering, disassembling or decoding the software. Para-2 also contemplates that all copies of the software provided by the appellant are the copyright of appellant. These copies shall be held secret and software shall not be disclosed to anybody else. Agreement provides that all copies of software shall be returned to Appellant upon termination or cancellation of the agreement. Agreement also provides that Reliance shall use the software only for the operation of wireless reliance network and shall not sublicense or modify the software. The perusal of para-2 of the agreement clearly reveals that Reliance has got a copy of software for being used in its telecom network. The Reliance has got no right as envisaged in section-14 of the Copyright Act to 9 ITA No. 3091/M/07& CO No. 64/M/08 M/s. TTI Team Telecom International Ltd.
duplicate the software, to issue copies of software in public or to give copies of software in rent or even to reverse engineer, decompile or modify the software. The sum total of the conditions mentioned in the para-2 is that appellant has given no part of copyright as envisaged in section-14 of the copyright to the appellant. Thus, sale of software by the appellant to Reliance cannot be said to be the transfer of the copyright to Reliance either in part or in whole. Thus, consideration paid by the Reliance to Appellant for acquiring copy of software is not for the use of copyright or transfer of right to use of copyright. As mentioned above, copyright is different from the work in respect of which copyright subsist. Reliance has only got a copy of software without any part of the copyright of the software. Thus, payment by the Reliance for acquiring copy of software does not amount to royalty within the definition of Article-12(3) of the DTAA.
Thus, he gave a factual finding about purchase of software.
8. The CIT(A) also considered the issue on legal principles as well.
2.19 Similar issue of whether the supply of a copy of software programme without transfer of any part of copyright amounts to royalty or not has been considered by various benches of ITAT recently. Hon'ble ITAT, BangaloreBench in the case of Samsung Electronics Co. Ltd. Vs. ITO 93 TTJ 658, 276 ITR (AT) 1 has had an occasion to consider the similar case. It was held in the case that the definition of royalty u/s. 9(1)(vi) is wider than the definition of royalty in various DTAA. Since the provisions in the DTAA have to be followed, if they are more beneficial to the taxpayer then the definition of royalty in DTAA has to be considered. Hon'ble ITAT had observed that as per the agreement between the parties in this case the taxpayer had acquired only a copy of the software or the copyrighted article whereas the copyright remained with the owner i.e. foreign party. It was held that upon the sale of copyrighted article incorporeal right to software i.e. copyright was not transferred to the assessee. It was held that right to use of a copyright is totally different from right to use the programme embedded in the cassette or CD or it may be a software. It was held that the sale of copy or copyrighted article called software did not amount to royalty within the definition of Article-12(3) of the Indo-US DTAA. Reliance was placed on the decision of Hon'ble Supreme Court in the case of Tata Consultancy Services 271 ITR 401.
2.20 Hon'ble Special Bench ITAT Delhi had again an occasion to consider the similar issue in the case of Motorola Inc. (2005) 270 ITR(AT) 62, 96 TTJ 01. In this case the Hon'ble ITAT had discussed the provisions of the Copyright Act. They examined the conditions in the non- exclusive restricted license of the software and found that the supplier of software had only transferred a copy of the software or copyrighted article but had not transferred any of the copyright. Under these 10 ITA No. 3091/M/07& CO No. 64/M/08 M/s. TTI Team Telecom International Ltd.
circumstances, consideration received for the sale of copyrighted article, namely, software was held not to be royalty. It was also held that copyright is different from the copyrighted article. In this case the issue of software provided to the cellular operator for setting up the cellular telephone network was covered. It was held that the software which is provided by the supplier for the use in the cellular network does not involve transfer of any part of copyright of the software but only amounts to sale of a copyrighted article, namely, the copy of computer programme. Copyright continue to remain with the supplier of the computer programme.
2.21 The Hon'ble Delhi Bench of ITAT in the case of Lotus Asia Specific ITA No. 564 to 566/Del/05 order dated 28.04.2006 have also examined the same issue and have held that in the case of a sale of shrink-wrap software being a copyrighted article, consideration received does not amount to royalty as there is no transfer of any part of copyright in the computed programme which continues to remain with the software supplier.
2.22 The Hon'ble ITAT Bangalore Bench in the case of Sonata Information Technologies Ltd. ITA No. 1561 to 1580/Bang/2004 dated 31.01.2006 have considered the issue of payment received on sale of computer software without transfer of any copyright. Hon'ble ITAT had examined the issue of royalty within the meaning of section 9(1)(vi) and as provided in the DTAA. Hon'ble ITAT had examined in detail the issue of royalty in respect of sale of shrink-wrap software. They also examined the copyright n respect of computer programme being the right to sell or given a commercial rental any copy of software programmes. The ITAT examined the genesis of additional copyright given in respect of computer programme in section 14(b)(ii) or the Copyright Act. The Hon'ble ITAT referred to Berne convention, Rome convention, WIPO copy right treaty, TRIPS. It was held that the copyright in the software is different from any right in the physical manifestation of the software contained in a CD, floppy or on a hard Disc in which the software is downloaded. It was held that when a distributor of Microsoft acquires the copies of software, he does not acquires the distributor right which is a copyright within the meaning of section-14(a)(ii) or the right to sell or to give on commercial rental, a right under section 14(b)(ii). The distributor merely obtained the right to distribute the copyrighted material which is a property different from the property in the copyright in the software. The property contained in copyrighted material and the property contained in the copyright to software are two different rights and when a person acts as a distributor for the copyrighted material he has not acquired the distribution rights within the meaning of section-14(a)(ii) r.w.s. 14(b)(ii). 2.24 The Hon'ble ITAT, Bangalore Bench in the case of Hewlett Packard India (P) Ltd. (2006), 5 SOT 660 (Bang), has also considered a similar case. In this case Indian company was engaged in the business of providing network solution to it customers. This activity includes sale of software packages to customers. For this purpose the Indian company had imported readymade software packages from Hewlett Packard USA.
11 ITA No. 3091/M/07& CO No. 64/M/08M/s. TTI Team Telecom International Ltd.
The Indian company sold these software packages to its customers in the packed conditions. Hon'ble ITAT held that the consideration received by the foreign company for the sale of software packages to the Indian company did not amount to royalty within the meaning of Article-12(3) of the Indo-US DTAA. It was held that the sale of copyrighted article is different from the transfer of the copyright in the computer software. 2.25 It is therefore very apparent from several decisions of the Hon'ble ITAT that the case of sale of copyrighted article, namely, a copy of computer programme, payment received is not royalty if there is no transfer of copyright partly or wholly. Facts obtaining in the case of appellant clearly point that no part of the copyright as envisaged by section-14 of the Copyright Act has been transferred by the appellant to Reliance. Therefore the payment for purpose of software cannot amount to royalty within the meaning of Article-12(3)."
9. As can be seen from the above discussion of the CIT(A) the factual position as per the agreements and the legal position with reference to the supply of software for use was analysed in detail. Various coordinate benches have already analysed and noted the difference between the purchase of copyrighted article and transfer of copy rights. We are in agreement with the findings of the CIT(A), who has correctly came to the conclusion that the supply of software to Reliance does not amount to any transfer of copyright and payment can be only for purchase of copyrighted article and does not amount to royalty within the meaning of Article 12(3) of the DTAA. Consequently the order of the CIT(A) is upheld. Revenue appeal is dismissed.
10. Assessee has filed CO No. 64/Mum/2008 in support of the CIT(A)'s order. Since the Revenue appeal is dismissed the Cross Objection becomes academic in nature. Accordingly CO is also dismissed.
11. In the result, both the appeal and cross objection are dismissed.
Order pronounced in the open court on 13th April 2010.
Sd. Sd.
(D.K. Agarwal) (B. Ramakotaiah)
Judicial Member Accountant Member
Mumbai, Dated: 13th April 2010
12 ITA No. 3091/M/07& CO No. 64/M/08
M/s. TTI Team Telecom International Ltd.
Copy to:
1. The Appellant
2. The Respondent
3. The CIT(A) - XXXI, Mumbai
4. The DIT (International Taxation), Mumbai
5. The DR, "L" Bench, ITAT, Mumbai
By Order
//True Copy//
Assistant Registrar
ITAT, Mumbai Benches, Mumbai
n.p.
13 ITA No. 3091/M/07& CO No. 64/M/08
M/s. TTI Team Telecom International Ltd.