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4. That the Worthy CIT(Appeals), Chandigarh has not considered the fact that sale of Computer Software is mostly restricted to sale of right to use the software or application and it is never absolute transfer of ownership rights.

4. After hearing both the parties we find that during assessment proceedings the Assessing Officer noticed that assessee has received a sum of Rs. 17,27,808/- from Vietnam Ocean Shipping Company (here-in-after referred to as VOSCO). From the License Sale Agreement between the assessee and VOSCO it was noticed that VOSCO has agreed to pay onl y license fee for the software owned by the assessee for VOSCO's own use. It was also noticed that agreement further provides that VOSCO shall seize using the software after termination of the Agreement. Similarl y, there was an agreement with M/s Devco Ltd (here-in-after called as DEVCO) from whom the assessee had received Rs.36,04,240/-. In this agreement also, it was clearly mentioned that software is the propert y of the assessee developer and the patent and copyright belongs to the Developer. The assessee was asked to explain that why agreements with VOSCO and DEVCO which were onl y License Sale Agreements and which were granted non-exclusive and non transferable licenses should be treated as sale for the purpose of claiming deduction u/s 10B. The assessee gave detailed replies on various dates. In these replies it was explained that normall y ownership right in the software generall y remains with the Developer e.g. in the case of Tall y Accounting S ystem what a customer gets is onl y right to use and not the ownership right. It was also explained that for example in case of Window M.S. Office, normal customer would have to click 'yes' for acceptance of License Agreement onl y even if the such customer has purchased the software for its use. It was also explained that if the right of ownership with source code was provided to the customer, then assessee cannot sell / develop such software to any other customer because from the source code the customer can create copies of the software and sell the same to further customers. The Assessing Officer after examining the submissions did not find force in these submissions because there was no provision in the Income Tax Act to treat a license to use as mentioned in the Agreement as 'Sale', therefore, the company cannot claim grant of license as sale. In this background the Assessing Officer concluded that assessee is not conducting sales and, therefore, was not entitled to deduction u/s 10B.

7. Before us, Ld. Counsel for the assessee reiterated the submissions made before the Assessing Officer and CIT(A). He further contended that in case of software, the ownership is retained through 'source code' and if the 'source code' is also provided to the customer then such customer can make any number of copies and shall start selling the same to any number of customers i.e why software is always sold through a license. He gave another example of a book i.e. when a book is sold, the reader can read the book, retain the book, use it in any manner and at the same time such reader customer does not get copyright to the book and he cannot copy the book and start selling such books. He gave another example of legal reports which is now available in the form of CDs. Such reports are given to a particular customer and a key number is provided though which the report can be used but it cannot be copied.

10. After considering the rival submissions, we find force in the submissions of the Ld. Counsel for the assessee. The software is generally developed by the Software Company and then the same is sold to various customers. The normal procedure for such sale is through a License agreement by which the customer get to use the software. But the source code is normall y not provided because that will enable the customer to make any number of copies and the developer would loose the premium which it can receive by selling it to various customers. We are of the opinion that example of selling of a book would clarify the situation. Whenever a person buys a book, he gets the right to read but he does not get the copyright to produce the copies or any content of such books which does not mean that the books seller has not sold the books or customers has not purchased the books. Similarl y it can be said about the usage of Law Journals which are being sold or purchased on license basis. The Hon'ble Supreme Court in the case of Tata Consultancy Services v State of Andhra Pradesh (supra), wherein the question arose whether sale of intellectual propert y in case of software through a license would amount to sale of goods or not. In this connection, the Hon'ble Supreme Court observed as under:-