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2.6 The assessed also submitted that its income from supply of software should not be taxed as "Royalty". The assessed had during the relevant financial year supplied software called, "Planet" to Indian telecommunications operators, in form of single-user site license for internal use. The assessed took a stand that since the supply of software by the assessed to its customers in India is in the nature of sale of software from overseas, for the same reasons outlined earlier while discussing the taxability of sale of hardware, income derived by the assessed from supply of software to Indian customers is not taxable in India either under the domestic law or based on the provisions of the India-UK tax treaty. The assessed also further submitted that notwithstanding our above contention, even where the supply of software is construed as licensing of software, the same should not qualify as "royalty" income both under the provisions of the Act as well as the India-UK tax treaty. It may be clarified here that if the income from supply of software is held to be in the nature of Royalty then notwithstanding the fact that there is no PE of the assessed in India, the same is taxable in India under the Indo-UK DTAA.

To reproduce the work in any material from including the storing of it in any medium by electronic means;

To issue copies of the work to the public, not being copies already in circulation;

To perform the work in the public, or communicate it to the public;

To make any translation/adaptation of the work;

To sell or give the software on hire.

2.9 It was contended by the assessed that a person can be said to have acquired a copyright or the right to use the copyright in a product, where he is authorized to do all or any of the above acts. Accordingly, where a payer does not acquire any of the above rights, including the right to further sell or give the software on hire, but is merely permitted to use the subject-matter of the copyright (software in the instant case), it cannot be said that the payer has acquired the copyright or the right to use the copyright of the software supplied, but has in fact merely acquired the right to use the subject-matter of the copyright (i.e., the product). The assessed pointed out that the software acquired by its customers does not give any right to the customers to reproduce and commercially distribute them. In other words, the customers have no right to exploit the underlying copyright but are merely permitted to use the subject-matter of the copyright. Accordingly, payments made by the Indian parties for acquisition of software from the assessed fall outside the scope of the definition of royalty as per clause (v) of Explanation 2 to section 99(l)(vi) of the Act. The assessed also, pointed out that Article 13(3) of the tax treaty between India and UK defines the term royalties to mean payments of any kind received as a consideration for the use of or the right to use

Form the above it is clear that the software has not been sold to the customer as per the Sales of Goods Act. The right to use the software has been granted which is covered under article 13 of the Indo-UK Treaty.

The assessed has given detailed submissions why the same should not be taxed as royalty and has submitted that since the software is not a customized software and is available off the self and the customer has not been granted right to use the copyright, the payment is not covered under royalty. However the assessed has no reply to the fact that the software is not sold but licensed. The license is granted for the use of the software. Further it can neither be sub-licensed nor can be altered or sold. Therefore, the payment on supply of software is covered under Royalty, but since the assessed has a permanent establishment in India, royalty will be taxed at the rate of 30 per cent.

8. The assessed was aggrieved by the order of the assessing officer and preferred appeal before the Commissioner (Appeals). Before the Commissioner (Appeals) firstly it was contended that no income accrued or arose in India and that there was no PE of the assessed in India as held by the assessing officer. Secondly, it was contended that the action of the assessing officer in concluding that the profit margin of the assessed on supply of hardware was 40 per cent was highly arbitrary. It was contended that the assessed as such is not in the business of manufacturing and supplying hardware. Equipment supplied by the assessed to its customer in India was sourced from other vendors, specializing in Hardware. In certain exceptional cases (an isolated case in India) where the assesseds customers systems were not configured to operate the assesseds software, the assessed procured and supplied the relevant hardware to its customers. That the assessed essentially acted as an intermediary, by procuring and supplying hardware to its customers. It was submitted that the profit margin of 40 per cent applied on hardware sales in order to compute the tax liability of the assessed for the subject assessment year, is extremely high and unsustainable. It was submitted that the net profit margins earned by assessed would be 12-14 per cent. Thirdly, it was contended that the income from supply of software is not taxable as royalty income as no rights in the copyright have been transferred to the purchaser of the software.