Income Tax Appellate Tribunal - Bangalore
Mphasis Bfl Ltd. vs Income Tax Officer (Taxation) on 20 January, 2006
ORDER
N.L. Kalra, Accountant Member
1. The assessee has filed the appeals against consolidated order of learned Commissioner (Appeals) - IV, Bangalore dated 23-1-2004 for assessment years 2000-01 to 2002-03. Since the issues involved in all the three appeals are the same, therefore, these are being decided by a consolidated order.
2. The assessee-company is engaged in the business of development of computer software. The assessing officer during the course of survey found that the assessee-company has made payments for purchase of software to non-residents and has not deducted tax at source from such payments. In response to show-cause notice issued to explain the reasons for not deducting tax at source, the assessee submitted that rights in computer software are in the nature of copyright by virtue of Section 2 of the Copyright Act and the assessee has merely gained a right to use the computer software. The assessee does not enjoy any right to copyright. Transaction is that of the outright purchase of software which could be compared to the sale of a book or a C.D. wherein the customer gains a right only to use copyrighted article but not to reproduce and sell the same. It was submitted that the assessee was under no legal obligation to deduct tax in terms of Section 195 of the Income Tax Act.
3. The assessing officer referred to the definition of Royalty as given in Explanation to Section 9(1)(vi) of the Income Tax Act, according to which royalty is the consideration for transfer of all or any rights (including the granting of licence) in respect of copyright, patent, invention, design, secret formula or process. As per article 2 of the 'End user software licence agreement' the supplier company granted a perpetual, fee bearing, nonexclusive and non-transferable licence to use the software and documentation to the assessee-company. Such agreement further provided that, title, advertising rights and all intellectual property rights in and to the software shall remain sole and exclusive property of supplier-company.
3.1 As per assessing officer, the software is normally patented and the consideration paid for the use of a patented article is royalty. It not patented, software programme, being highly technical is an invention. Software programme can be considered as scientific work or can be classified as secret formula or process. The high powered committee set up by the Government of India was of the view that payments made for software or other digital products bought off the shelf conferring the right of transfer or copying should also be characterized as royalty. The learned assessing officer was of the view that holding of software as goodwill have no effect as Section 195 does not say that it will not be applicable in respect of import of goods. The assessing officer further held that source of income of the non-resident person is the activity which the assesseecompany is carrying in India and hence such income is originating in India. For this proposition, the assessing officer relied on the decision of Supreme Court in Performing Right Society Ltd. v. CIT in which it was held that source of income of broadcasting of musical works belonging to non-resident was the broadcasting of music, in India.
The assessing officer, therefore, held that payments are royalty and assessee was liable to deduct tax at source.
3.2 The learned Commissioner (Appeals) observed that granting of licence involves granting of right to use of copyright and consideration for use of copyright is covered in both Income Tax Act and DTAA. Copyright is a bundle of rights and the transferor may transfer all or any of the rights. The author of a book may give copyright to different persons for different territories but may exclude the right to make a film or audio cassette. This instance was given by Commissioner (Appeals) to demonstrate that copyright is a bundle of rights. Licence to use of copyright without becoming owner can be given by the owner of copyrights or his assignee. The most remunerative exploitation of copyright in literary work is by assigning of right to publish the book and sell. Explanation of copyright in software programme is by licensing of copies of software programme and to make copies, one need to have right to reproduce software programmes. Since right of reproduction is not insignificant, hence right to reproduce by way of storing the work in any medium by electronic means is also significant. If electronic storing is permitted without licence, it will facilitate large scale piracy of computer programming.
3.3 The learned Commissioner (Appeals) held that licence in the software programme transaction is the copyright and other intellectual property rights in the software along with physical software. Software is an essentially intellectual property and its licensing makes sense only with reference to intellectual property rights. The sanction by way of licence is for a consideration, which is royalty because it is for use of a copyright. However, the learned Commissioner (Appeals) held that licence to use software programme cannot be termed as use of patent, trademark or design. However, it was held that a process is used and hence consideration can be termed as royalty as royalty includes consideration for use of process. It was also held that the consideration is also for use of know-how.
3.4 The fact that software is good is not sufficient to exclude the consideration paid for software from the definition of royalty. A design on CD can be sold but still the consideration will be for design and covered under the definition of royalty. The learned Commissioner (Appeals) distinguished between the sale of book and software programme. Section 14(b)(ii) of the Copyright Act makes the right of selling or renting out a copy of the computer programme a copyright. Software as a product cannot be sold outright without transferring copyright contained in Section 14(b)(ii) of the Copyright Act.
4. Before us, the learned A.R. has filed a paper book containing 249 pages. Page Nos. 12 to 249 contains the copies of various judgments on which the appellant has relied. Submissions as contained in the paper book are summarised as under:
(i) Section 195 is applicable to those sums which are chargeable under sections 4 and 5 of the Income Tax Act.
(ii) Reliance is placed on the following decisions:
Hyderabad Industries Ltd. v. ITO .
Andrey Yule & Co. Ltd. v. CIT .
The learned authorised representative drew our attention to the following observations of the jurisdictional High Court in Hyderabad Industries Ltd.'s case (supra):
"It is not understandable as to why a benefit which will not be included in the total income of a person, should be considered as income for the purpose of deduction of tax at source at all. The purpose of deduction of tax at source is not to collect a sum which is not a tax levied under the Act, it is to facilitate the collection of the tax lawfully leviable under the Act. The interpretation put on those provisions by the respondents would result in collection of certain amounts by the State which is not a tax qualitatively. Such an interpretation of the taxing statute is impermissible."
(iii) The appellant relied on the recent OECD commentary on article 12 concerning software payment, issued by the Directorate for Financial, Fiscal and Enterprise Affairs Committee on fiscal affairs.
The relevant extracts are reproduced as under:
"The character of payments received in transactions involving the transfer of computer software depends on. the nature of the rights that the transferee acquires under a particular arrangement regarding the use and exploitation of the programme.
Although the term 'computer software' is commonly used to describe both the programmes - in which the intellectual property rights (copyright) subsist - and the medium on which it is embodied, the copyright law of most OECD member countries recognises a distinction between the copyright in the programme and software which incorporates a copy of the copyrighted programme.
In other types of transactions, the rights acquired in relation to the copyright are limited to those necessary to enable the user to operate the programme, for example, where the transferee is granted limited rights to reproduce the programme... Therefore, rights in relation to these acts of copying, where they do no more than enable the effective operation o f the programme by the user, should be disregarded in an analyzing the character of the transaction for tax purposes. Payments in these types of transactions would be dealt with as commercial income in accordance with article 7 or 14."
In the instant case, the appellant has acquired the software for business use. The rights acquired in the software are limited to the extent to enable the appellant to operate the programme. The appellant has not acquired any copyright of the software but has only acquired a copyrighted programme. The appellant relied on the judgment of the Supreme Court in the case of Tata Consultancy Services v. State of Andhra Pradesh in which the Apex Court held that canned software are goods and liable to sales tax. The worthy Supreme Court further observed that intellectual property has been incorporated in the media for transfer and both cannot be split up.
(iv) The learned authorised representative relied on the following orders of the Bench and decision of Special Bench, Delhi:
(a) Samsung Electronics Co. Ltd. v. ITO (2005) 94 ITD 91 (Bang).
(b) Lucent Technologies Hindustan Ltd. v. ITO (2004) 82 TTJ (Bang) 163.
(c) Ericsson Radio System v. DCIT (Special Bench IT Appeal Nos. 815 and 1798 (Del) of 2001).
In the above referred decision, it has been held that the appellant has got a right to use the programme and not right to use copyright.
(v) It was further submitted that though the appellant carries on business in India, its source of income is characterised by its customers. The appellant's source of income is its customers, who in the instant case are situated outside India. Hence any payments made by it for the import of software would be payments made for the purpose of making or earning any income from a source outside India.
4.1 learned Departmental Representative drew our attention to the detailed order passed by the learned Commissioner (Appeals). It was argued that learned Commissioner (Appeals) has rightly held that the assessee was liable to deduct tax at source as the payment was royalty because sale of computer programme is covered under the definition of copyright as contained in Section 14(b)(ii) of the Copyright Act. The appellant has used a process embedded in software programme and hence is royalty as defined in Explanation to Section 9(1)(vi) of Income Tax Act.
5. We have heard both the parties. The issue under reference has been decided by this Bench in the case of Samsung Electronics Co. Ltd. (supra) and Lucent Technologies Hindustan Ltd. (supra). In the case of Samsung Electronics Co. Ltd. (supra), the assessee-company imported softwares. The facts in the instant case are similar to the facts of Samsung Electronics (P) Ltd.'s case (supra).
5.1 This Bench in the case of Samsung Electronics (P) Ltd. (supra) ruled that a readymade off the shelf computer programme does not grant any right to utilise the copyright of the computer programme and accordingly, the payments for its import would not constitute royalty income in India and no tax needs to be deducted under Section 195 of the Act. The Tribunal observed that the appellant had imported off the shelf software from different suppliers in USA, Sweden and France and after observing the agreement between the parties held that, what the appellant had acquired is only a copy of the copyrighted articles, i.e., software, whereas the copyright remains with the owner, ie., foreign parties. The incorporeal right to software, ie., copyright remained with the owner and the same was not transferred to the appellant. The right to use of copyright is totally different from right to use the programme embedded in cassette or CD or it may be software. The Tribunal also held that the appellant had acquired a readymade off the shelf computer programme for being used in business. No right was granted to the appellant to utilise the copyright of the computer programme. The appellant had merely purchased a copy of the copyrighted article, namely, a computer programme/software. In view of the above, it was held that the remittances made by the appellant for purchase of software does not give rise to any income in India and no tax needs to be deducted under Section 195 of the Act.
5.2 Similarly this Bench in the case of Lucent Technologies Hindustan Ltd. (supra) held that there was no liability to deduct tax in India on import of software which is a copyrighted product as distinguished from copyright.
5.3 The Special Bench also held that software supplied is goods. Though an information technology product is normally regarded as an intangible asset, once technology is put on a media, then it becomes goods liable to custom duty. Finally, the Special Bench held that the payments for hardware and software were lump-sum payments and no separate consideration should be attributed towards software as "royalty".
5.4 Keeping in view that there should be a consistent approach on an issue, it is held that payments made for import of software is not royalty and tax was not required to be deducted at source. Hence the demand raised under Section 201 for non-deduction of tax at source is cancelled.
In the result, the appeals are allowed.