Indian Kanoon - Search engine for Indian Law

18. On the basis of the findings/observations recorded by him, the CIT(A) held the income earned by the Assessee company from software licence is in the nature of royalty both under the domestic law and the DTAA and thus upheld the order of the AO holding the Income from software licence chargeable to tax in India as royalty under Section 9(1)(vi) of the Income Tax Act, 1961 read with Article 13 (Sic Article 12) of the DTAA.

19. Aggrieved by the order of the AO as confirmed by the CIT(A), the Assessee Company filed an appeal before the Income Tax Appellate Tribunal (ITAT for Short). ======================================================================= The ITAT noted that the amount received by the Assessee company had been treated as royalty income by the AO and the CIT(A) on the basis of Explanation 2 to Section 9(1)(vi) of the Act holding that there was transfer of some rights (including the granting of a licence) in respect of the copyright. The ITAT noted the stand of the Assessee company that there was no transfer of any right in respect of copyright by the Assessee and it was a case of mere transfer of a copyrighted article. The ITAT noted that if the payment received by the Assessee Company was for a copyright then it would classify as royalty both under the Income Tax Act, 1961 and under the DTAA. However, if the payment was for a copyrighted article then it would represent the purchase price of an article and could not be considered as royalty either under the Act or under the DTAA. The Tribunal noted the decision of a Special Bench of ITAT in the case of MOTOROLA INC., ERICSON R ADIO SYSTEM AB AND NOKIA ======================================================================= NETWORKS OY VS . DEPUTY CIT (2005) 147 TAXMAN 39 (DEL.). The Tribunal noted that the Special Bench of ITAT referring to the definition of "copyright", as given in Section 14 of the Copyright Act, 1957, had noted that the right mentioned in sub-clause (ii) of clause (b) of Section 14 was available only to a computer programme and if the licensees did not have any of such rights, as mentioned in clauses (a) and (b) of Section 14, it would mean that they did not have any right in the copyright and in such cases, the payments made to them could not be characterized as royalty under the Act for DTAA. The ITAT noted that the Special Bench of the Tribunal in the case of MOTOROLA INC. ( SUPRA), had held that since the licensees were not allowed to exploit the computer software commercially, they had acquired under licence agreement, only the copy righted software which by itself was an article and not any copyright therein. The ITAT relying on the judgment in the case ======================================================================= of MOTOROLA INC. (SUPRA), noted that in the case of the Assessee company, the licensee to whom the Assessee company had sold/licensed to the software was allowed to make only one copy of the software and associated support information for backup purposes with a condition that such copyright shall include Infrasoft copyright and all copies of the software shall be exclusive properties of Infrasoft. Licensees was allowed to use the software only for its own business as specifically identified and was not permitted to loan/rent/sale/sub-licence or transfer the copy of software to any third party without the consent of Infrasoft. The licensee had been prohibited from copying, de-compiling, de-assembling, or reverse engineering the software without the written consent of Infrasoft. The ITAT further noted that the licence agreement between the Assessee Company and its customers stipulated that all copyrights and intellectual property rights in the software and copies made by the ======================================================================= licensee were owned by Infrasoft and only Infrasoft had the power to grant licence rights for use of the software. The ITAT further noted that the licence agreement stipulated that upon termination of the agreement for any reason, the licencee shall return the software including supporting information and licence authorization device to Infrasoft.

22. The ITAT noted that the CIT(A) had distinguished the case of SAMSUNG ELECTRONICS (SUPRA) on the basis that the software licenced by the Assessee in the case of SAMSUNG ELECTRONICS (SUPRA ) was off the shelf software whereas the software in the case of the Assessee Company required to be customized to meet the needs of an Indian customer. The ITAT held that the customization of the concerned software or the professional services rendered by the Assessee company for such customization had not resulted in any material change in the terms and conditions of the licence agreement or in the relationship between the Assessee as an owner of the software and a licensee to whom the right to use the said software was given by the Assessee company. The ITAT noted that the ======================================================================= software provided by the Assessee Company was basically a standard software and the customization so done to the limited extent as per the specific requirements of the customers did not bring about any change in the nature of the software or the licence granted to the customers.

24. Aggrieved by the decision of the ITAT dated 19.12.2008, the Revenue has filed the present appeal.

25. Learned counsel for the appellant/revenue has submitted that the Assessee Company had received amounts under the software licence agreement and the said amounts were in the nature of royalty and were chargeable to tax in terms of Section 9(1)(vi) of the Act. He further contended that the right to use of software under the software licence agreement resulted in earning of royalty income and was thus chargeable to tax in the hands of the Assessee company as royalty income under Article 12 of the relevant DTAA. He further contended that in the present case, there was no sale of the software but it was mere licence to use the software and as such, the receipt from such a sale was receipt towards royalty. Learned counsel for the appellant/Revenue further contended that royalty was defined in Explanation 2 to Section 9(i)(vi) to include consideration for transfer of ======================================================================= either one or more intellectual property rights mentioned therein and as such, there was no scope for an argument that computer software was not fully covered within the meaning of royalty. He further contended that computer software was one of the intellectual property referred to in the Explanation 2 and transfer of rights therein by the licensor would give right to royalty income.

(iii) the buyer's final copy on a memory device. It has been noticed that the program is developed in the seller's computer then the seller duplicates the program copy on software and transports the duplicates to the buyer's computer. The duplicate is read into the buyer's computer and copied on a memory device. It has been held that the software is not merely knowledge, but rather is knowledge recorded in a physical form having a physical existence, taking up space on a tape, disc or hard drive, making physical things happen and can be perceived by the senses. It has been held that the purchaser does not receive mere knowledge but receives an arrangement of matter which makes his or her computer perform a desired function. It has been held that this arrangement of matter recorded on tangible medium constitutes a corporeal body. It has been held that a software recorded in ======================================================================= physical form becomes inextricably intertwined with, or part and parcel of the corporeal object upon which it is recorded, be that a disk, tape, hard drive, or other device. It has been held that the fact that the information can be transferred and then physically recorded on another medium does not make computer software any different from any other type of recorded information that can be transferred to another medium such as film, video tape, audio tape or books. It has been held that by sale of the software programme the incorporeal right to the software is not transferred. It is held that the incorporeal right to software is the copyright which remains with the originator. What is sold is a copy of the software. It is held that the original copyright version is not the one which operates the computer of the customer but the physical copy of that software which has been transferred to the buyer. It has been held that when one buys a copy of a copyrighted novel in a bookstore or recording of a copyrighted song in a record store, one only acquires ownership ======================================================================= of that particular copy of the novel or song but not the intellectual property in the novel or song.