ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PRIVATE LIMITED vs. THE COMMISSIONER OF INCOME TAX

1 REPORTABLE

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURI ICTION CIVIL APPEAL NOS. 8733-8734 OF 2018

ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PRIVATE LIMITED

…APPELLANT

Versus

THE COMMISSIONER OF INCOME …RESPONDENTS TAX & ANR.

WITH CIVIL APPEAL NOS. 8735-8736 OF 2018 CIVIL APPEAL NOS. 8737-8941 OF 2018 CIVIL APPEAL NOS. 8942-8947 OF 2018 CIVIL APPEAL NOS. 8950-8953 OF 2018 CIVIL APPEAL NOS. 8948-8949 OF 2018 CIVIL APPEAL NO. 4419 OF 2012 CIVIL APPEAL NO. 4420 OF 2012 CIVIL APPEAL NO. 10114 OF 2013 CIVIL APPEAL NO. 10097 OF 2013 CIVIL APPEAL NOS. 10112-10113 OF 2013 CIVIL APPEAL NO. 10106 OF 2013 CIVIL APPEAL NOS. 8954-8955 OF 2018 Digitally signed by Jayant Kumar Arora Date: 2021.03.02 16:50:08 IST Reason: Signature Not Verified

2 CIVIL APPEAL NOS. 10115-10117 OF 2013 CIVIL APPEAL NO. 8956 OF 2018 CIVIL APPEAL NO. 8957 OF 2018 CIVIL APPEAL NO. 8990 OF 2018 CIVIL APPEAL NO. 10103 OF 2013 CIVIL APPEAL NO. 10104 OF 2013 CIVIL APPEAL NO. 8960 OF 2018 CIVIL APPEAL NO. 8966 OF 2018 CIVIL APPEAL NO. 8958 OF 2018 CIVIL APPEAL NO. 8959 OF 2018 CIVIL APPEAL NO. 8962 OF 2018 CIVIL APPEAL NO. 8961 OF 2018 CIVIL APPEAL NO. 8963 OF 2018 CIVIL APPEAL NO. 8964 OF 2018 CIVIL APPEAL NO. 8965 OF 2018 CIVIL APPEAL NO. 8969 OF 2018 CIVIL APPEAL NO. 8967 OF 2018 CIVIL APPEAL NO. 8968 OF 2018 CIVIL APPEAL NO. 8972 OF 2018 CIVIL APPEAL NO. 8971 OF 2018 CIVIL APPEAL NO. 8970 OF 2018

3 CIVIL APPEAL NO. 4629 OF 2014 CIVIL APPEAL NO. 8973 OF 2018 CIVIL APPEAL NO. 4631 OF 2014 CIVIL APPEAL NO. 4630 OF 2014 CIVIL APPEAL NOS. 8974-8975 OF 2018 CIVIL APPEAL NOS. 6386-6387 OF 2016 CIVIL APPEAL NO. 10105 OF 2013 CIVIL APPEAL NO. 7852 OF 2012 CIVIL APPEAL NOS. 1416-1418 OF 2013 CIVIL APPEAL NO. 1403 OF 2013 CIVIL APPEAL NO. 1405 OF 2013 CIVIL APPEAL NO. 1410 OF 2013 CIVIL APPEAL NO. 1421 OF 2013 CIVIL APPEAL NO. 1409 OF 2013 CIVIL APPEAL NO. 1415 OF 2013 CIVIL APPEAL NO. 1414 OF 2013 CIVIL APPEAL NO. 1412 OF 2013 CIVIL APPEAL NO. 1413 OF 2013 CIVIL APPEAL NO. 1419 OF 2013 CIVIL APPEAL NO. 1411 OF 2013 CIVIL APPEAL NO. 1420 OF 2013

4 CIVIL APPEAL NO. 1404 OF 2013 CIVIL APPEAL NO. 1406 OF 2013 CIVIL APPEAL NO. 1408 OF 2013 CIVIL APPEAL NO. 1407 OF 2013 CIVIL APPEAL NO. 2304 OF 2013 CIVIL APPEAL NO. 2305 OF 2013 CIVIL APPEAL NO. 2306 OF 2013 CIVIL APPEAL NOS. 10098-10102 OF 2013 CIVIL APPEAL NOS. 2307-2308 OF 2013 CIVIL APPEAL NOS. 4666-4667 OF 2013 CIVIL APPEAL NO. 6764 OF 2013 CIVIL APPEAL NO. 4634 OF 2014 CIVIL APPEAL NO. 8976 OF 2018 CIVIL APPEAL NOS. 8977-8988 OF 2018 CIVIL APPEAL NO.781 OF 2021 (@ SLP(C) NO. 37580 OF 2016) CIVIL APPEAL NO.782 OF 2021 (@ SLP(C) NO. 28867 OF 2016) CIVIL APPEAL NO. 783 OF 2021 (@ SLP(C) NO. 28868 OF 2016) CIVIL APPEAL NO. 10673 OF 2016 CIVIL APPEAL NO. 784 OF 2021 (@ SLP(C) NO. 29571 OF 2016)

5 CIVIL APPEAL NO. 10674 OF 2016 CIVIL APPEAL NO. 785 OF 2021 (@ SLP(C) NO. 36782 OF 2016) CIVIL APPEAL NO. 3402 OF 2017 CIVIL APPEAL NO. 10758 OF 2017 CIVIL APPEAL NO. 9486 OF 2017 CIVIL APPEAL NO. 8711 OF 2018 CIVIL APPEAL NO. 8722 OF 2018 CIVIL APPEAL NO. 8724 OF 2018 CIVIL APPEAL NO. 8725 OF 2018 CIVIL APPEAL NO. 9551 OF 2018 CIVIL APPEAL NO. 786 OF 2021 (@ SLP(C) NO. 450 OF 2019) CIVIL APPEAL NO. 2006 OF 2019 CIVIL APPEAL NO. 790 OF 2021 (@ SLP(C) NO. 6736 OF 2020)

J U D G M E N T

R.F. Nariman, J.

6 assessees have succeeded in the question that was posed before the High Court of Delhi,1 the Revenue has succeeded insofar as the same question was posed before the High Court of Karnataka,2 and in the ruling by the Authority for Advance Rulings [“AAR”], impugned in C.A. No. 8990/2018. 1 This includes the judgments impugned in C.A No. 8990/2018, C.A Nos. 6386- 6387/2016, SLP(C) No. 37580/2016, SLP(C) No. 28867/2016, SLP(C) No. 28868/2016, C.A No. 10673/2016, SLP(C) No. 29571/2016, C.A No. 10674/2016, SLP(C) No. 36782/2016, C.A No. 10758/2017, C.A No. 9486/2017, C.A No. 8711/2018, C.A No. 8722/2018, C.A No. 8724/2018, C.A No. 8725/2018, C.A No. 9551/2018, SLP(C) NO. 450/2019, SLP(C) No. 6736/2020. 2 This includes the judgments impugned in C.A Nos. 8735-8736/2018, C.A Nos. 8737- 8941/2018, C.A Nos. 8942-8947/2018, C.A Nos. 8950-8953/2018, C.A Nos. 8948- 8949/2018, C.A No. 4419/2012, C.A No. 4420/2012, C.A No. 10114/2013, C.A No. 10097/2013, C.A Nos. 10112-10113/2013, C.A No. 10106/2013, C.A Nos. 8954- 8955/2018, C.A Nos. 10115-10117/2013, C.A No. 8956/2018, C.A No. 8957/2018, C.A No. 10103/2013, C.A No. 10104/2013, C.A No. 8960/2018, C.A No. 8966/2018, C.A No. 8958/2018, C.A No. 8959/2018, C.A No. 8962/2018, C.A No. 8961/2018, C.A No. 8963/2018, C.A No. 8964/2018, C.A No. 8965/2018, C.A No. 8969/2018, C.A No. 8967/2018, C.A No. 8968/2018, C.A No. 8972/2018, C.A No. 8971/2018, C.A No. 8970/2018, C.A No. 4629/2014, C.A No. 8973/2018, C.A No. 4631/2014, C.A No. 4630/2014, C.A Nos. 8974-8975/2018, C.A No. 10105/2013, C.A No. 7852/2012, C.A Nos. 1416-1418/2013, C.A No. 1403/2013, C.A No. 1405/2013, C.A No. 1410/2013, C.A No. 1421/2013, C.A No. 1409/2013, C.A No. 1415/2013, C.A No. 1414/2013, C.A No. 1412/2013, C.A No. 1413/2013, C.A No. 1419/2013, C.A No. 1411/2013, C.A No. 1420/2013, C.A No. 1404/2013, C.A No. 1406/2013, C.A No. 1408/2013, C.A No. 1407/2013, C.A No. 2304/2013, C.A No. 2305/2013, C.A No. 2306/2013, C.A Nos. 10098-10102/2013, C.A Nos. 2307-2308/2013, C.A Nos. 4666-4667/2013, C.A No. 6764/2013, C.A No. 4634/2014, C.A No. 8976/2018, C.A Nos. 8977-8988/2018, C.A No. 3402/2017, C.A No. 2006/2019. 7

3 This category includes C.A. Nos. 8733-8734/2018, C.A. No. 10114/2013, C.A. Nos. 10112-10113/2013, C.A. No. 10106/2013, C.A. No. 10103/2013, C.A. No. 10104/2013, C.A. Nos. 10098-10102/2013, C.A. Nos. 8735-8736/2018, C.A. Nos. 8948-8949/2018, C.A. No. 8956/2018, C.A. No. 8957/2018, C.A. No. 7852/2012, C.A. Nos. 8974-8975/2018, C.A. No. 2304/2013, C.A. No. 2305/2013, C.A. No. 2306/2013,

8 ii) The second category of cases deals with resident Indian companies that act as distributors or resellers, by purchasing computer software from foreign, non-resident suppliers or manufacturers and then reselling the same to resident Indian end-users.4 iii) The third category concerns cases wherein the distributor happens to be a foreign, non-resident vendor, who, after purchasing software from a foreign, non-resident seller, resells the same to resident Indian distributors or end-users.5 iv) The fourth category includes cases wherein computer software is affixed onto hardware and is sold as an integrated unit/equipment

C.A. Nos. 2307-2308/2013, C.A. No. 10097/2013, C.A. No. 8976/2018, C.A. No. 3402/2017, SLP(C) No. 450/2019, C.A. No. 2006/2019. 4 This category includes C.A Nos. 8737-8941/2018, C.A No. 8942-8947/2018, C.A No. 4420/2012, C.A No. 8959/2018, C.A No. 8963/2018, C.A No. 8962/2018, C.A No. 8958/2018, C.A No. 8961/2018, C.A No. 8960/2018, C.A Nos. 8950-8953/2018, C.A No. 8966/2018, C.A No. 8973/2018, C.A No. 8965/2018, C.A No. 8972/2018, C.A No. 8969/2018, C.A No. 8971/2018, C.A No. 8970/2018, C.A No. 8964/2018, C.A No. 8967/2018, C.A No. 8968/2018, C.A No. 1403/2013, C.A No. 1414/2013, C.A No. 1412/2013, C.A No. 1413/2013, C.A Nos. 1416-1418/2013, C.A No. 1405/2013, C.A No. 1410/2013, C.A No. 1421/2013, C.A No. 1409/2013, C.A No. 1415/2013, C.A No. 1419/2013, C.A No. 1411/2013, C.A No. 1420/2013, C.A No. 1404/2013, C.A No. 1406/2013, C.A No. 1408/2013, C.A No. 1407/2013, C.A Nos. 4666-4667/2013, C.A No. 6764/2013, C.A No. 4419/2012, C.A Nos. 8977-8988/2018, C.A No. 4629/2014, C.A No. 4631/2014, C.A No. 4630/2014, C.A No. 10105/2013. 5 This category includes C.A. No. 10758/2017, C.A. No. 8990/2018, C.A. No. 9486/2017, C.A. No. 8711/2018, C.A. No. 8722/2018, C.A. No. 8724/2018, C.A. No. 8725/2018, C.A. No. 9551/2018, SLP(C) No. 6736/2020, C.A. No. 4634/2014. 9 by foreign, non-resident suppliers to resident Indian distributors or end-users.6

“8. Whether the Tribunal was correct in holding that since the assessee had purchased only a right to use the copyright i.e. the software and not the entire copyright itself, the payment cannot be treated as Royalty as per the Double Taxation Avoidance Agreement and Treaties, which [are] beneficial to the assessee and consequently section 9 of the Act should not take into consideration.

11

“24. In our view, Section 195(2) is based on the “principle of proportionality”. The said sub-section gets attracted only in cases where the payment made is a composite payment in which a certain proportion of payment has an element of “income” chargeable to tax in India. It is in this context that the Supreme Court stated: (Transmission Corpn. case [(1999) 7 SCC 266 : (1999) 239 ITR 587] , SCC p. 274, para 10)

“10. … If no such application is filed income tax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such ‘sum’ to deduct tax thereon before making

12 payment. He has to discharge the obligation [to TDS].” (emphasis supplied)

If one reads the observation of the Supreme Court, the words “such sum” clearly indicate that the observation refers to a case of composite payment where the payer has a doubt regarding the inclusion of an amount in such payment which is exigible to tax in India. In our view, the above observations of this Court in Transmission Corpn. case [(1999) 7 SCC 266 : (1999) 239 ITR 587] which is put in italics has been completely, with respect, misunderstood by the Karnataka High Court to mean that it is not open for the payer to contend that if the amount paid by him to the non-resident is not at all “chargeable to tax in India”, then no TAS is required to be deducted from such payment. This interpretation of the High Court completely loses sight of the plain words of Section 195(1) which in clear terms lays down that tax at source is deductible only from “sums chargeable” under the provisions of the IT Act i.e. chargeable under Sections 4, 5 and 9 of the IT Act.

13 straight to conclude that the moment there is remittance an obligation to deduct TAS arises, which view stands hereby overruled.

“whether, on facts and circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that the amount(s) paid by the appellant(s) to the foreign software suppliers was not “royalty” and that the same did not give rise to any “income” taxable in India and, therefore, the appellant(s) was not liable to deduct any tax at source?”” (page 498)

14

15 Indian end-user pays IBM India, and in turn, IBM India pays this amount to IBM Singapore after deducting a portion of profit. Importantly, under the Remarketer Agreement, IBM India does not own any right, title or interest in copyright and other intellectual property owned by IBM Singapore, and merely markets IBM Singapore’s software products in India.

7 Notification No. GSR 610(E), Dated 8-8-1994 As Amended by Notification No. SO 1022(E), Dated 18-7-2005; No. S.O. 2031(E), Dated 1-9-2011 and No. S.O. 935(E), Dated 23-3-2017. 16 of India v. Azadi Bachao Andolan, (2004) 10 SCC 1 [“Azadi Bachao Andolan”] to argue that by virtue of section 90(2) of the Income Tax Act, the DTAA would prevail over domestic law to the extent it is more beneficial to the deductor of tax under section 195 of the Income Tax Act. According to him, even assuming that under section 9(1)(vi) of the Income Tax Act IBM India’s transaction would entail parting with copyright and attract royalty, upon applying the more beneficial provisions of the India-Singapore DTAA, it would be made clear that the amounts payable were not in the nature of royalty, and no income in the hands of the foreign supplier would be deemed to accrue in India. Thus, no tax had to be deducted by the Indian importer under section 195(1) of the Income Tax Act. Equally, he submitted that the retrospective amendment to section 9(1)(vi) of the Income Tax Act brought in by the Finance Act 2012, which added explanation 4 to the provision and expanded its ambit with effect from 01.06.1976, could also not be applied to the DTAA in question.

17 matters. He emphasized that under the Remarketer Agreement, no copyright was given by IBM Singapore and that even the end-user in India only received a limited licence to use the product by itself, with no right to sub-license, lease, make copies etc. The licence to use such shrink-wrapped computer software was thus incidental to and essential to effectuate the use of the product. He strongly relied upon the Commentaries on the Articles of the Model Tax Convention on Income and on Capital [“OECD Commentary”] by the Organisation for Economic Co-operation and Development [“OECD”] which distinguishes between the sale of a copyrighted article and the sale of copyright itself. He further argued that the doctrine of first sale/principle of exhaustion was cemented in section 14(b)(ii) of the Copyright Act post the amendment brought in vide Act 49 of 1999, with effect from 15.01.2000 [“1999 Amendment”], thereby making it clear that the foreign supplier’s distribution right would not extend to the sale of copies of the work to other persons beyond the first sale. Importantly, he added that the importer, IBM India, being only a distributor, had no right to use the computer software, and merely purchased a sealed, shrink- wrapped product and resold it in the same, sealed condition, and thereby did not pay any consideration for any transfer of or interest in

18 copyright. He cited a number of judgments and other authorities to buttress his submissions.

19

20 appeals are concerned with, and therefore, the making of copies only in order to utilise the product to the extent permitted by the EULA, would not constitute an infringement of copyright, as expressly stated in this provision. Going by what the originator or creator holds by way of copyright, which he either passes on or retains, and what is mentioned in section 52(1)(aa) of the Copyright Act, he submitted that what was resold by his client in this case was not copyright, but merely a copyrighted article, which constituted goods in the hands of the end- user, without any right to transfer the same. He also cited several judgments to buttress his submissions.

8 Notification No. GSR 992(E), dated 20-12-1990. 21 that we are concerned with in all these cases are prior to 2012, and that the law cannot compel one to do the impossible, namely, to deduct tax at source on an expanded definition of royalty which did not exist at the time of the payment/deduction to be made under section 195 of the Income Tax Act. He cited various judgments and relied upon the proposition that where no assessment to tax can be made on a foreign, non-resident supplier, the appellants could not be held to be assessees in default for not deducting tax at source under section 195 of the Income Tax Act.

22

Analysis Centre of Excellence Pvt. Ltd. in C.A. Nos. 8733-8734/2018, and GE India Technology Centre Pvt. Ltd. in C.A. Nos. 8735- 8736/2018, also echoed these submissions and in particular, relied upon judgments which made it clear that a retrospective amendment to a statute cannot be applied to an assessment year in which, as a matter of fact, the expanded definition of royalty did not exist.

23 resident by way of royalty for the use of or the right to use any copyright. For this, he relied upon the language of explanation 2(v) and stressed that the words “in respect of” have to be given a wide meaning. He then relied upon CBDT Circular No. 152 dated 27.11.1974,9 together with the statement of the Finance Minister made before the Lok Sabha on 07.09.1990,10 and CBDT Notification No. 21/2012 dated 13.06.2012,11 to submit that explanation 4 to section 9(1)(vi) of the Income Tax Act is clarificatory of the position in law right from 01.06.1976 when section 9(1)(vi) of the Income Tax Act was first brought into force. He then argued that the provisions for TDS are distinct from and exist apart from provisions for assessment under the Income Tax Act. This being so, it is clear that the India-USA DTAA and other such DTAAs would not apply to the persons spoken of in section 195 of the Income Tax Act who are not assessees, since the provisions of the DTAAs, when read with section 90 of the Income Tax Act, applied only to persons who could be described as assessees. He also relied upon Article 30 of the India-USA DTAA which, for the USA, fixes different dates for the entry into force of 9 Circular No. 152 [F.No. 484/31/74-FTD-II], dated 27.11.1974. 10 As recorded in CBDT Circular No. 588 dated 02.01.1991. 11 Notification No. 21/2012 [F.No.142/10/2012-SO(TPL)] S.O. 1323(E), dated 13.06.2012. 24 the provisions concerning withholding taxes and other taxes, unlike the entry into force provision for India, which makes no such distinction. This, he argued, would make it clear that persons who have to make deductions under section 195 of the Income Tax Act do not fall within the subject matter of the India-USA DTAA and other such DTAAs. He then relied heavily upon AP Transco (supra) and other judgments which make it clear that a “payer” under section 195 and an “assessee” under section 2(7) of the Income Tax Act are distinct. He also relied heavily upon a recent judgment of this Court in PILCOM v. CIT, West Bengal- VII, 2020 SCC Online SC 426 [“PILCOM”], which dealt with section 194E of the Income Tax Act, for the proposition that tax has to be deducted at source irrespective of whether tax is otherwise payable by the non-resident assessee. He then relied upon CBDT Circular No. 588 dated 02.01.1991,12 which clarified that tax concessions were not available in relation to payments in respect of software imported separately or independently of computer hardware.

12 187 ITR (St.) 0063. 25 before us, since adaptation of software could be made, albeit for installation and use on a particular computer, copyright is parted with by the original owner. He added that section 51(b) of the Copyright Act makes it clear that when any person makes for sale or hire, or sells or lets for hire, or distributes, either for the purpose of trade or to such an extent as to affect prejudicially the owner of the copyright, or imports into India, any infringing copies of the work, such importation into India without a licence would amount to infringement of copyright. Further, section 58 of the Copyright Act regards infringing copies of any work as the property of the owner of the copyright, who accordingly may take proceedings for the recovery of possession thereof or in respect of the conversion thereof. From section 52(1)(ad) of the Copyright Act, the learned Additional Solicitor General sought to argue that only the making of copies or the adaptation of a computer programme from a legally obtained copy for non-commercial, personal use would not amount to infringement, and therefore in the appeals before us, where such copies were made for commercial use, the converse would be true. He relied strongly upon the AAR’s ruling in Citrix Systems Asia Pacific Ptyl. Ltd., In Re., (2012) 343 ITR 1 (AAR), arguing that it approached the subject correctly and that the findings made therein are different and preferable to the findings made by the AAR in Dassault Systems, K.K.,

26 In Re., (2010) 322 ITR 125 (AAR) and Geoquest Systems B.V. Gevers Deynootweg, In Re., (2010) 327 ITR 1 (AAR), and the other judgments of the High Court of Delhi.

13 F. No 500/ 122/ 99 dated December 16, 1999. 27 concluded his arguments by stating that the judgments which deal with computer software under sales tax law and excise law have no relevance to income tax law, as the laws relating to indirect taxes are fundamentally different from the laws relating to direct taxes, since they must follow the drill of the chargeability under the Income Tax Act, which is different from chargeability under sales tax law or excise law. THE INCOME TAX ACT, 1961

“2. Definitions. In this Act, unless the context otherwise requires,— xxx xxx xxx (7) "assessee" means a person by whom any tax or any other sum of money is payable under this Act, and includes— (a) every person in respect of whom any proceeding under this Act has been taken for the assessment of his income or assessment of fringe benefits or of the income of any other person in respect of which he is assessable, or of the loss sustained by him or by such other person, or of the amount of refund due to him or to such other person ; (b) every person who is deemed to be an assessee under any provision of this Act ;

28 (c) every person who is deemed to be an assessee in default under any provision of this Act ; xxx xxx xxx 14(37A) “rate or rates in force” or “rates in force”, in relation to an assessment year or financial year, means— xxx xxx xxx (iii) for the purposes of deduction of tax under section 194LBA or section 194LBB or section 194LBC or section 195, the rate or rates of income-tax specified in this behalf in the Finance Act of the relevant year or the rate or rates of income-tax specified in an agreement entered into by the Central Government under section 90, or an agreement notified by the Central Government under section 90A, whichever is applicable by virtue of the provisions of section 90, or section 90A, as the case may be;” “4. Charge of income-tax. (1) Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions (including provisions for the levy of additional income-tax) of, this Act in respect of the total income of the previous year of every person: Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other than the previous year, income-tax shall be charged accordingly. (2) In respect of income chargeable under sub-section (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act.”

14 Substituted by the Finance Act 1992 (18 of 1992), sec. 3(c) (w.e.f. 1-6-1992).

29

“5. Scope of total income. (1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which— (a) is received or is deemed to be received in India in such year by or on behalf of such person ; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year ; or (c) accrues or arises to him outside India during such year :

Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-section (6) of section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India. (2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which— (a) is received or is deemed to be received in India in such year by or on behalf of such person ; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. Explanation 1.—Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India. Explanation 2.—For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India.”

30

“9. Income deemed to accrue or arise in India. (1) The following incomes shall be deemed to accrue or arise in India:— xxx xxx xxx 15(vi) income by way of royalty payable by— xxx xxx xxx (b) a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; xxx xxx xxx Explanation 2.—For the purposes of this clause, "royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for— (i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property ; (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ;

15 Inserted by the Finance Act 1976 (66 of 1976), sec 4(b) (w.e.f. 1-6-1976).

31 (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill ; 16(iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB; (v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting; or (vi) the rendering of any services in connection with the activities referred to in 17[sub-clauses (i) to (iv), (iva) and (v)]. 18Explanation 3.—For the purposes of this clause, "computer software" means any computer programme recorded on any disc, tape, perforated media or other information storage device and includes any such programme or any customized electronic data. 19Explanation 4.—For the removal of doubts, it is hereby clarified that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a 16 Inserted by the Finance Act 2001 (14 of 2001), sec. 4(i) (w.e.f. 1-4-2002). 17 Substituted by the Finance Act 2001 (14 of 2001), sec. 4(ii), for “sub-clauses (i) to (v)” (w.e.f. 1-4-2002). 18 Substituted by the Finance Act 2000 (10 of 2000), sec. 4, for Explanation 3 (w.e.f. 1-4-2001). Explanation 3 before substitution, stood as under: “Explanation 3.- For the purposes of this clause, the expression “computer software” shall have the meaning assigned to it in clause (b) of the Explanation to section 80HHE”. 19 Inserted by the Finance Act 2012 (23 of 2012), sec 4(b) (w.r.e.f 1-6-1976).

32 computer software (including granting of a licence) irrespective of the medium through which such right is transferred. 20Explanation 5.—For the removal of doubts, it is hereby clarified that the royalty includes and has always included consideration in respect of any right, property or information, whether or not— (a) the possession or control of such right, property or information is with the payer; (b) such right, property or information is used directly by the payer; (c) the location of such right, property or information is in India.”

“90. Agreement with foreign countries or specified territories. (1) The Central Government may enter into an agreement with the Government of any country outside India or specified territory outside India,— (a) for the granting of relief in respect of— (i) income on which have been paid both income- tax under this Act and income-tax in that country or specified territory, as the case may be, or (ii) income-tax chargeable under this Act and under the corresponding law in force in that country or specified territory, as the case may be, to promote mutual economic relations, trade and investment, or (b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country or specified territory, as the case may be,

20 Inserted by the Finance Act 2012 (23 of 2012), sec 4(b) (w.r.e.f 1-6-1976).

33 without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in the said agreement for the indirect benefit to residents of any other country or territory), or (c) for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that country or specified territory, as the case may be, or investigation of cases of such evasion or avoidance, or (d) for recovery of income-tax under this Act and under the corresponding law in force in that country or specified territory, as the case may be, and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement. (2) Where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.

xxx xxx xxx 21Explanation 4.—For the removal of doubts, it is hereby declared that where any term used in an agreement entered into under sub-section (1) is defined under the said agreement, the said term shall have the same meaning as assigned to it in the agreement; and where the term is not defined in the said agreement, but defined in the Act, it shall 21 Inserted by the Finance Act 2017, sec. 39 (w.e.f. 1-4-2018).

34 have the same meaning as assigned to it in the Act and explanation, if any, given to it by the Central Government.”

“195. Other sums. (1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest referred to in section 194LB or section 194LC) or section 194LD or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries") shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force: Provided that in the case of interest payable by the Government or a public sector bank within the meaning of clause (23D) of section 10 or a public financial institution within the meaning of that clause, deduction of tax shall be made only at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode. Explanation 1.—For the purposes of this section, where any interest or other sum as aforesaid is credited to any account, whether called "Interest payable account" or "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly. 22Explanation 2.—For the removal of doubts, it is hereby clarified that the obligation to comply with sub-section (1) and to make deduction thereunder applies and shall be deemed to have always applied and extends and shall be 22 Inserted by the Finance Act 2012 (23 of 2012), sec. 77(a)(ii) (w.r.e.f. 1-4-1962).

35 deemed to have always extended to all persons, resident or non-resident, whether or not the non-resident person has— (i) a residence or place of business or business connection in India; or (ii) any other presence in any manner whatsoever in India. (2) Where the person responsible for paying any such sum chargeable under this Act 23(other than salary) to a non- resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application in such form and manner to the Assessing Officer, to determine in such manner, as may be prescribed, the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub- section (1) only on that proportion of the sum which is so chargeable.”

“201. Consequences of failure to deduct or pay. (1) Where any person, including the principal officer of a company,— (a) who is required to deduct any sum in accordance with the provisions of this Act; or (b) referred to in sub-section (1A) of section 192, being an employer, does not deduct, or does not pay, or after so deducting fails to pay, the whole or any part of the tax, as required by or under this Act, then, such person, shall, without prejudice to any other consequences which he may incur, be deemed to be an assessee in default in respect of such tax: Provided that any person, including the principal officer of a company, who fails to deduct the whole or any part of the 23 Substituted by the Finance Act 2003 (32 of 2003), sec. 80(b) (w.e.f. 1-6-2003).

36 tax in accordance with the provisions of this Chapter on the sum paid to a payee or on the sum credited to the account of a payee shall not be deemed to be an assessee in default in respect of such tax if such payee— (i) has furnished his return of income under section 139; (ii) has taken into account such sum for computing income in such return of income; and (iii) has paid the tax due on the income declared by him in such return of income, and the person furnishes a certificate to this effect from an accountant in such form as may be prescribed: Provided further that no penalty shall be charged under section 221 from such person, unless the Assessing Officer is satisfied that such person, without good and sufficient reasons, has failed to deduct and pay such tax.”

37 whatever source derived, which accrues or arises or is deemed to accrue or arise to such person in India during such year. This, however, is subject to the provisions of the Income Tax Act. Certain income is deemed to arise or accrue in India, under section 9 of the Income Tax Act, notwithstanding the fact that such income may accrue or arise to a non-resident outside India. One such income is income by way of royalty, which, under section 9(1)(vi) of the Income Tax Act, means the transfer of all or any rights, including the granting of a licence, in respect of any copyright in a literary work.

38 Act, it has been clarified by the Parliament that where any term is defined in a DTAA, the definition contained in the DTAA is to be looked at. It is only where there is no such definition that the definition in the Income Tax Act can then be applied. This position has been recognised by this Court in Azadi Bachao Andolan (supra), which held:

“21. The provisions of Sections 4 and 5 of the Act are expressly made “subject to the provisions of this Act”, which would include Section 90 of the Act. As to what would happen in the event of a conflict between the provision of the Income Tax Act and a notification issued under Section 90, is no longer res integra.”

“28. A survey of the aforesaid cases makes it clear that the judicial consensus in India has been that Section 90 is specifically intended to enable and empower the Central Government to issue a notification for implementation of the terms of a Double Taxation Avoidance Agreement. When that happens, the provisions of such an agreement, with respect to cases to which they apply, would operate even if inconsistent with the provisions of the Income Tax Act. We approve of the reasoning in the decisions which we have noticed. If it was not the intention of the legislature to make a departure from the general principle of chargeability to tax under Section 4 and the general principle of ascertainment of total income under Section 5 of the Act, then there was no purpose in making those sections “subject to the provisions of the Act”. The very object of grafting the said two sections with the said clause is to enable the Central Government to issue a notification under Section 90 towards implementation of the terms of DTACs which would automatically override the provisions of the Income Tax Act

39 in the matter of ascertainment of chargeability to income tax and ascertainment of total income, to the extent of inconsistency with the terms of DTAC.” (emphasis supplied)

40 default”, and thus, is made liable to pay tax, interest and penalty thereon. This position is also made amply clear by the referral order in the concerned appeals from the High Court of Karnataka, namely, the judgment of this Court in GE Technology (supra).

41 accepted. Relying on the expression “chargeable under the provisions of the Act” occurring in Section 195(1) of the Act, it was held “the obligation to deduct TAS, is however, limited to the appropriate proportion of the income chargeable under the Act forming part of the gross sum of money payable to the non-resident”.

“18. We now come to the issue of applicability of DTAA. As observed by the High Court, the matter was not argued before it in that behalf, yet the issue was dealt with by the High Court. In our view, the reasoning that weighed with the High Court is quite correct. The obligation to deduct Tax at Source under Section 194E of the Act is not affected by the DTAA and in case the exigibility to tax is disputed by the assessee on whose account the deduction is made, the benefit of DTAA can be pleaded and if the case is made out, the amount in question will always be refunded with interest. But, that by itself, cannot absolve the liability under Section 194E of the Act.

42 the Appellant was liable to deduct Tax at Source in terms of Section 194E of the Act.”

“2. Interpretation.—In this Act, unless the context otherwise requires,— (a) “adaptation” means,- xxx xxx xxx

43 (v) in relation to any work, any use of such work involving its rearrangement or alteration;

xxx xxx xxx

(d) “author” means,—

24(vi) in relation to any literary, dramatic, musical or artistic work which is computer-generated, the person who causes the work to be created;

xxx xxx xxx

25(fa) “commercial rental” does not include the rental, lease or lending of a lawfully acquired copy of a computer programme, sound recording, visual recording or cinematographic film for non-profit purposes by a non-profit library or non-profit educational institution;

xxx xxx xxx

(ffb) “computer” includes any electronic or similar device having information processing capabilities

(ffc) “computer programme” means a set of instructions expressed in words, codes, schemes or in any other form, including a machine readable medium, capable of causing a computer to perform a particular task or achieve a particular result;

xxx xxx xxx

24 Substituted by Act 38 of 1994, sec. 2 (w.e.f. 10-5-1995). 25 Inserted by Act 27 of 2012, sec. 2(ii) (w.e.f. 21-6-2012).

44

(m) "infringing copy" means-- (i) in relation to a literary, dramatic, musical or artistic work, a reproduction thereof otherwise than in the form of a cinematograph film; (ii) in relation to a cinematographic film, a copy of the film made on any medium by any means; (iii) in relation to a sound recording, any other recording embodying the same sound recording, made by any means; (iv) in relation to a programme or performance in which such a broadcast reproduction right or a performer's right subsists under the provisions of this Act, the sound recording or a cinematographic film of such programme or performance,; if such reproduction, copy or sound recording is made or imported in contravention of the provisions of this Act;

xxx xxx xxx

26(o) "literary work" includes computer programmes, tables and compilations including computer databases;”

“14. Meaning of copyright.-- For the purposes of this Act, copyright means the exclusive right subject to the provisions of this Act, to do or authorise the doing of any of the following acts in respect of a work or any substantial part thereof, namely-- (a) in the case of a literary, dramatic or musical work, not being a computer programme,-- (i) to reproduce the work in any material form including the storing of it in any medium by electronic means;

26 Substituted by Act 38 of 1994, sec. 2 (w.e.f. 10-5-1995).

45 (ii) to issue copies of the work to the public not being copies already in circulation; (iii) to perform the work in public, or communicate it to the public; (iv) to make any cinematograph film or sound recording in respect of the work; (v) to make any translation of the work; (vi) to make any adaptation of the work; (vii) to do, in relation to a translation or an adaptation of the work, any of the acts specified in relation to the work in sub-clauses (i) to (vi);

(b) in the case of a computer programme-- (i) to do any of the acts specified in clause (a); 27(ii) to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer programme:

Provided that such commercial rental does not apply in respect of computer programmes where the programme itself is not the essential object of the rental.”

“16. No copyright except as provided in this Act.-- No person shall be entitled to copyright or any similar right in any work, whether published or unpublished, otherwise than under and in accordance with the provisions of this Act or of any other law for the time being in force, but nothing in this section shall be construed as abrogating any right or juri iction to restrain a breach of trust or confidence.”

“18. Assignment of copyright.-- (1) The owner of the copyright in an existing work or the prospective owner of the 27 Substituted by Act 49 of 1999, sec. 3 (w.e.f. 15-1-2000).

46 copyright in a future work may assign to any person the copyright either wholly or partially and either generally or subject to limitations and either for the whole term of the copyright or any part thereof:

Provided that in the case of the assignment of copyright in any future work, the assignment shall take effect only when the work comes into existence.

28Provided further that no such assignment shall be applied to any medium or mode of exploitation of the work which did not exit or was not in commercial use at the time when the assignment was made, unless the assignment specifically referred to such medium or mode of exploitation of the work:

Provided also that the author of the literary or musical work included in a cinematograph film shall not assign or waive the right to receive royalties to be shared on an equal basis with the assignee of copyright for the utilisation of such work in any form other than for the communication to the public of the work along with the cinematograph film in a cinema hall, except to the legal heirs of the authors or to a copyright society for collection and distribution and any agreement to contrary shall be void:

Provided also that the author of the literary or musical work included in the sound recording but not forming part of any cinematograph film shall not assign or waive the right to receive royalties to be shared on an equal basis with the assignee of copyright for any utilisation of such work except to the legal heirs of the authors or to a collecting society for collection and distribution and any assignment to the contrary shall be void.

28 Inserted by Act 27 of 2012, sec. 8 (w.e.f. 21-6-2012).

47

(2) Where the assignee of a copyright becomes entitled to any right comprised in the copyright, the assignee as respects the rights so assigned, and the assignor as respects the rights not assigned, shall be treated for the purposes of this Act as the owner of copyright and the provisions of this Act shall have effect accordingly.

(3) In this section, the expression "assignee" as respects the assignment of the copyright in any future work includes the legal representatives of the assignee, if the assignee dies before the work comes into existence.”

“19. Mode of assignment.—

xxx xxx xxx (3) The assignment of copyright in any work shall also specify the amount of royalty and any other consideration payable, to the author or his legal heirs during the currency of the assignment and the assignment shall be subject to revision, extension or termination on terms mutually agreed upon by the parties.”

“30. Licences by owners of copyright-- The owner of the copyright in any existing work of the prospective owner of the copyright in any future work may grant any interest in the right by licence in writing by him or by his duly authorised agent:

Provided that in the case of a licence relating to copyright in any future work, the licence shall take effect only when the work comes into existence.

Explanation.--Where a person to whom a licence relating to copyright in any future work is granted under this section dies before the work comes into existence, his legal

48 representatives shall, in the absence of any provision to the contrary in the licence, be entitled to the benefit of the licence.

2930A. Application of section 19.— The provisions of section 19 shall, with any necessary adaptations and modifications, apply in relation to a licence under section 30 as they apply in relation to assignment of copyright in a work.”

“51. When copyright infringed. Copyright in a work shall be deemed to be infringed-- (a) when any person, without a licence granted by the owner of the copyright or the