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- payment of any kind received as a consideration for the use of or the right to use, any copyright of literary, artistic or scientific work.
IT(IT)A No.913/Bang/2019 It has been universally accepted that a literary work is entitled to copyright and, wherefore, a literary work is entitled to be registered as copyright. Under section 2(o ) of the Copyright Act, 1957, computer software has been recognized as copyright work in India also. [Para 19] In the instant case, in the software licence agreement, it is averred that customer accepts an individual, non-transferable and non- exclusive licence to use the licensed software program(s) program(s) on the terms and conditions enumerated in the agreement. It is further averred that the customer-assessee shall protect confidential information and shall not remove any copyright, confidentiality or other proprietary rights provided by the non-resident. However, what is granted under the said licence is only a licence to use the software for internal business without having any right for making any alteration or reverse engineering or creating sub-licences. What is transferred under the said licence is the licence to use the software and copyright continue to be with the non-resident as per the agreement, Even as per the agreement entered into with the other distributors as also the end- user licence agreement, it is clear that the distributor would get exclusive non-transferable licence within the territory for which he is appointed and he has got right to distribute via resellers the software, upon payment of the licenses set forth in the agreement only to end-users pursuant to a valid actuate shrink wrap or other actuate license agreement and except as expressly set forth in the said agreement, distributor may not rent, lease, loan, sell or otherwise distribute the software the documentation or any derivative works based upon the software or documentation in whole or in part. Distributor shall not reverse engineer, decompile, or otherwise attempt to derive or modify the source code for the software. Distributor shall have no rights to the software other than the rights expressly set forth in the agreement. Distributor shall not modify or copy any part of the software or documentation. Distributor may not use sub- distributors for further distribution of the software and documentation without the prior consent of actuate. What is charged is the licence fee to be paid by the distributor of the software as enumerated in the agreement. Further, clause 6.01 of the agreement dealing with title states that the distributor acknowledges that actuate and its suppliers retain all rights, title IT(IT)A No.913/Bang/2019 and interest in and to the original, and any copies (by whomever produced), of the software or documentation and ownership of all patent copyright, trademark, trade secret and other intellectual property rights pertaining thereto, shall be and remain the sole property of actuate. Distributor shall not be an owner of any copies of, or any interest in, the software, but rather is licenced pursuant to the agreement to use and distribute such copies. Actuate represents that it has the right to enter into the agreement and grant the licences provided therein and confidentiality is protected. Therefore, on reading the contents of the respective agreement entered into by the assessee with the non-resident, it is clear that under the agreement, what is transferred is only a licence to use the copyright belonging to the non-resident subject to the terms and conditions of the agreement as referred to above and the non-resident supplier continues to be the owner of the copyright and all other intellectual property rights. If is well- settled that copyright is a negative right. It is an umbrella of many rights and licence is granted for making use of the copyright in respect of shrink wrapped software/off-the-shelf software under the respective agreement, which authorizes the end user, i.e., the customer to make use of the copyright software contained in the said software, which is purchased off the shelf or imported as shrink wrapped software and the same would amount to transfer of part of the copyright and transfer of right to use the copyright for internal business as per the terms and conditions of the agreement. Therefore, the contention of the assessee that there is no transfer of copyright or any part thereof under the agreements entered into by it with the non-resident supplier of software cannot be accepted. [Para 20] It is well-settled that the intent of the Legislature in imposing sales tax and income-tax are entirely different as income tax is a direct tax and sales tax is an indirect tax and, wherefore, mere finding that the computer software would be included within the term 'sales tax" would not preclude the Court from holding that the said payments made by the assessee to the non-resident company in the instant case would amount to 'royalty' unless the assessee is able to prove that the said payment is for the sale of computer software, wherein the income would be from the business and in the absence of any permanent establishment of IT(IT)A No.913/Bang/2019 the non-resident supplier, there is no obligation on the part of the payee to make deduction under section 195(1). [Para 22] It is well-settled that in the absence of any definition of 'copyright' in the Income-tax Act or the DTAA with the respective Countries, in view of clause 3 of the DTAA, reference is to be made to the respective law regarding definition of 'Copyright', namely, Copyright Act, 1957, in India, wherein it is clearly stated that 'literary work' includes computer programmes, tables and compilations including computer [databases]. [Para 23] It is clear from the provisions of the Copyright Act that the right to copyright work would also constitute exclusive right of the copyright holder and any violation of the said right would amount to infringement under section 51 of the said Act. However, if such copying of computer programme is done by a lawful possessor of a copy of such computer programme, the same would not constitute infringement of copyright and wherefore, but for the licence granted in these cases to the assessee to make copy of the software contained in shrink-wrapped/off-the-shelf software into the hard disk of the designated computer and to take a copy for back-up purposes, the end user has no other right and the said taking back-up would have constituted an infringement, but for the licence. Therefore, licence is granted for taking copy of the software and to store it in the hard disk and to take a back- up copy and right to make a copy itself is a part of the copyright. Therefore, when licence is granted to make use of the software by making copy of the same and to store it in the hard disk of the designated computer and to take back-up copy of the software, it is clear that what is transferred is right to use the software, an exclusive right, which the owner of the copyright, i.e., the supplier owns and what is transferred is only right to use copy of the software for the internal business as per the terms and conditions of the agreement. [Para 24] Therefore, the contention of the assessee that there is no transfer of any part of copyright or copyright under the impugned agreements or licenses cannot be accepted. Accordingly, right to make a copy of the software and use it for internal business by making copy of the same and storing the same in the hard disk of the designated computer and taking back-up copy would itself IT(IT)A No.913/Bang/2019 amount to copyright work under section 14(1) of the said Act and licence is granted to use the software by making copies, which work, but for the licence granted would have constituted infringement of copyright and licencee is in possession of the legal copy of the software under the licence. Therefore, the contention of the assessee, that there is no transfer of any part of copyright or copyright and transaction only involves sale of copy of the copyright software, cannot be accepted. What is supplied is the copy of the software of which the supplier continues to be the owner of the copyright and what is granted under the licence is only right to copy the software as per the terms of the agreement, which, but for the licence would amount to infringement of copyright and in view of the licence granted, the same would not amount to infringement under section 52 of the Copyright Act. Therefore, the amount paid to the non-resident supplier towards supply of shrink-wrapped software, or off-the-shelf software is not the price of the C.D. alone nor software alone nor the price of licence granted. This is a combination of all and, in substance, unless licence is granted permitting the end user to copy and download the software, the dumb C.D. containing the software would not in any way be helpful to the end user as software would become operative only if it is downloaded to the hardware of the designated computer as per the terms and conditions of the agreement and that makes the difference between the computer software and copyright in respect of books or pre-recorded music software as book and pre-recorded music C.D. can be used once they are purchased, but so far as software stored in dumb C.D. is concerned, the transfer of dumb C.D., by itself, would not confer any right upon the end user and the purpose of the C.D. is only to enable the end user to take a copy of the software and to store it in the hard disk of the designated computer if licence is granted in that behalf and in the absence of licence, the same would amount to infringement of copyright, which is exclusively owned by non-resident suppliers, who would continue to be the proprietor of copyright. Therefore, there is no similarity between the transaction of purchase of the book or pre-recorded music C.D. or the C.D. containing software and in view of the same, the Legislature, in its wisdom, has treated the literary work like books and other articles separately from 'computer' software within the meaning of the 'Copyright' as referred to above under section 14 of the Copyright Act. [Para 24] IT(IT)A No.913/Bang/2019 It is also clear from the abovesaid analysis of the DTAA, Income- tax Act, Copyright Act that the payment would constitute 'royalty' within the meaning of article 12(3) of the DTAA and even as per the provisions of section 9(1)(vi) as the definition of 'royalty' under section 9(1)(vi) is broader than the definition of 'royalty' under the DTAA as the right that is transferred in the instant case is the transfer of copyright including the right to make copy of software for internal business, and payment made in that regard would constitute 'royalty' for imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill as per clause (iv) of Explanation 2 to section 9(1)(vi). In any view of the matter, in view of the provisions of section 90, agreements with foreign countries (DTAA) would override the provisions of the Act. Once it is held that payment made by the assessee to the non-resident companies would amount to 'royalty' within the meaning of article 12 of the DTAA with the respective country, it is clear that the payment made by the assessee to the non-resident supplier would amount to royalty. In view of the said finding, it is clear that there is obligation on the part of the assessee to deduct tax at source under section 195 and consequences would follow. On facts and circumstances of the case, the Tribunal was not justified in holding that the amount(s) paid by the assessee to the foreign software suppliers was not 'royalty' and that the same did not give rise to any 'income' taxable in India and, wherefore, the assessee was not liable to deduct any tax at source. [Para 25]".