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17. Thereafter, reference was made by Shri Syali to the case of Sonata Information Technology Limited v. Addl. CIT 103 ITD 324 where the Tribunal drew a distinction between acquisition of a copyright and purchase of copyrighted article. Accordingly to the learned Counsel for the assessee, the acquisition of a license to use a computer program is akin to acquisition of a copyright article in contrast to a acquisition of a copyright. Shri Syali submitted that there are different types of computer software. He then referred to the changes made in the Income-tax Rules w.e.f. 1.4.2003. He referred to Appendix I part A-III(5) to the Income-tax Rules as applicable for Assessment Year 200304 to 2005-06 whereby computers including computer software have been specifically classified as an item of asset falling within the block of asset, machinery and plant entitled to depreciation at the rate of 60%. It was submitted by him that merely because an item is listed as a capital asset in the Appendix under the Income-tax Rules, it cannot automatically follow that software is a capital asset. Shri Syali argued that before applying Appendix to the Rues, a finding has to be recorded in terms of Section 32(I)(ii) that software acquired by the assessee is a capital asset entitled only to depreciation. He then explained that aforesaid item of expenditure will only be applicable to tailor- made software for which source code exists or to software which are acquired and treated as part and parcel of computer hardware and a capital asset. However, software acquired under a license on terms and conditions whereby ownership is retained by the licensor and where such software only adds to the efficient running of day to day operation of business, cannot be held to be expenditure of capital nature as they were only copyrighted articles. Reliance was also placed on the decision of Special Bench of Kolkata Tribunal in the case of Peerless Securities Ltd. v. JCIT 94 ITD 89 (SB)(Kol).

24. Shri Ajay Vohra then drew our attention to U.S. Regulations on the classification of transactions involving computer programs which are to the following effect:-

The U.S. Regs. Envisage four alternatives for the characterisation of software and payments derived therefrom. Transfers of software are characterised by the rights transferred. Depending on the rights transferred, a transfer of software will fall into one of the following categories:

(i) A transfer of a copyright right in the computer program:

(ii) A transfer of a copy of the computer program (a copyrighted article);

(iii) The provision of services for the development or the modification of the computer program; or

(iv) The provision of know-how relating to computer programming techniques.

Transactions involving the transfer of a computer program (alternatives (i) and (ii) may be distinguished as follows:

Transfers of a copyrighted article are transactions in which no copyright right is transferred; in such a case, the transfer is regarded as:

(a) The right to make copies of the computer program for the purposes of distribution to the public by sale or other transfer of ownership, or by rental, lease or lending;

(b) The right to prepare derivative computer programs based on the copyrighted computer program;

(c) The right to make a public performance of the computer program; or

(d) The right to publicly display the computer program.

25. Shri Vohra highlighted the fact that even the U.S. Regulations recognize the distinction between a transfer of a copyrighted article and transfer of a copyright. He submitted that in the present case, there was a transfer of only a copyrighted article going by the aforesaid Regulation. He highlighted the fact that even the U.S. Regulations recognize granting of a shrink-wrap license as falling within transfer of a copyrighted article and not transfer of a copyright as such. Our attention was also drawn to the Instructions of Taiwanese Authority on taxation of software sales and their treatment for the purpose of taxation. The gist of the Guidance Notes issued in this regard a given on page 187 of his paper book is extracted below:-