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4.2 The Assessee had also entered into a similar agreement with M/s Intersystems India Pvt. Ltd., Gurgaon in terms of which the Assessee had paid a sum of Rs. 13,78,496/- without deducting any tax at source. This expenditure was disallowed by the AO under Section 40(a)(ia) of the Act. 4.3 Aggrieved by the assessment order, the Assessee preferred an appeal before the CIT(A). In the appellate proceedings the Assessee submitted that it was a Value Added Reseller (VAR) of software related to healthcare and hospitality. The said software was purchased from THPL under the 'VAR Agreement' and the same was resold to various end-users in India. During the financial year relevant to the AY 2008-09, the Assessee had purchased software worth Rs. 66,87,509/- from THPL. In addition, the Assessee had also purchased software from M/s Speed Miners, Malaysia for Rs. 9,35,987/- and M/s Data Innovation Asia Limited, Hong Kong for Rs. 5,03,894/-. The Assessee claimed that similar purchases made in the preceding years had been considered as purchases and allowed as a deduction in computing its taxable income. However, the AO had sought to treat such payments as royalty in the AY 2008-09. The Assessee contended that being a reseller of products, the payments made by the Assessee for acquiring the products could not be considered as royalty. The Assessee relied on the decision of this Court in CIT v. Dynamic Vertical Software India P. Ltd .: (2011) 332 ITR 222 (Del) and also sought to distinguish the Tribunal's earlier decision in M/s Microsoft Corporation and Ors. v. ADIT:

5. In the aforesaid background, the following question arises for consideration:

Whether in the facts and circumstances of the case, the Tribunal was justified in deleting the disallowance of Rs.72,23,496/- and Rs.13,78,496/- made by the Assessing Officer under section 40(a)(i) and 40(a)(ia) of the Act. respectively

6. Mr Rahul Chaudhary, Senior Standing Counsel appearing for the Revenue submitted a copy of the "VAR Agreement" and submitted that the payments made under the said Agreement were not for the purchase of software but were in the nature of royalty. He drew the attention of the Court to clause 4.2 (d) of the Terms and Conditions of the said Agreement which entitled the Assessee "to customise the Software for the purposes of End Users". On the strength of the aforesaid Clause, he contended that the Agreement entitled the Assessee to use the software and, therefore, the payments were royalty within the meaning of Explanation 2 to Section 9(1)(vi) of the Act. He next referred to Section 14 of the Indian Copyright Act, 1957 ('CR Act') and contended that the definition of 'Copyright' would mean an exclusive right to do or authorise any of the acts listed in clause (a) of Section 14 of the CR Act including the right to reproduce the work in any material form; storing of it in any medium by electronic means; and/or to make any adaptation of the work. He argued that by virtue of Section 14(b)(i) of the CR Act, all of the acts specified in Section 14(a) would also be applicable in the case of a computer programme. Mr. Chaudhary then referred to the decision of the Karnataka High Court in CIT v. Samsung Electronics Co. Ltd.: (2012) 345 ITR 494 (Kar.) in support of his contention that computer software is recognised as a copyright work and the payments made by an Assessee for import of the software would be payments for transfer of copyright and the same would fall within the definition of the term 'royalty'. He then referred to the decisions of Authority for Advance Ruling (AAR) in Citrix Systems Asia Pacific Pty Ltd., In Re: (2012) 343 ITR 1 (AAR) and Skillsoft Ireland Ltd., In Re:

8. Mr Jain also referred to paragraph 3 of Article 12 of the Double Taxation Avoidance Treaty between India and Australia and contended that the payments made to THPL did not fall within the definition of royalty under the said Treaty.

9. We have heard the learned counsel for the parties.

10. The Assessee had entered into a "VAR Agreement" with THPL. Paragraph 1.1 of the said agreement expressly indicates that THPL had appointed the Assessee (described as VAR) to "market and sell the products" in the Territory. Article 2 of the said Agreement provides for "VAR's Obligations". Clause (a) of paragraph 2.1 of Article 2 expressly provides that the Assessee "Shall promote, market and sell the Products in accordance with a business plan which shall be submitted to Trak within three (3) months of the effective date of the Agreement". Paragraph 4.2 entitles the Assessee to, inter alia, use the software and source codes for a limited purposes to sell and promote the software for use by third parties; demonstrate the software to third parties; and to customise the software for the purposes of End Users. The said agreement further contains a number of covenants to ensure that the Intellectual Property Rights in respect of the software, related material and source codes remains with THPL. A plain reading of the aforesaid agreement indicates that the Assessee has been appointed for the purposes of reselling THPL's software.

11. The CIT(A) found that the Assessee was engaged in the resale of software and the payments made by it to THPL and others were on account of purchases made by the Assessee. The ITAT concurred with the aforesaid finding. It is also not disputed that in the preceding years, the AO had accepted the transactions in question to be that of purchase of software. The limited issue to be addressed is whether in view of these findings the amount paid by the Assessee could be taxed as royalty.

12. In the cases where an Assessee acquires the right to use a software, the payment so made would amount to royalty. However in cases where the payments are made for purchase of software as a product, the consideration paid cannot be considered to be for use or the right to use the software. It is well settled that where software is sold as a product it would amount to sale of goods. In the case of Tata Consultancy Services v. State of Andhra Pradesh: (2004) 271 ITR 401 (SC), the Supreme Court examined the transactions relating to the purchase and sale of software recorded on a CD in the context of the Andhra Pradesh General Sales Tax Act. The court held the same to be goods within the meaning of Section 2(b) of the said Act and consequently exigible to sales tax under the said Act. Clearly, the consideration paid for purchase of goods cannot be considered as 'royalty'. Thus, it is necessary to make a distinction between the cases where consideration is paid to acquire the right to use a patent or a copyright and cases where payment is made to acquire patented or a copyrighted product/material. In cases where payments are made to acquire products which are patented or copyrighted, the consideration paid would have to be treated as a payment for purchase of the product rather than consideration for use of the patent or copyright.