M/S. I 2 TECHNOLOGIES (NETHERLAND) B.V.,MUMBAI vs. ADIT RG. - 3(1), MUMBAI

ITA No(s). 2410/M/2007, 6449/M/2008 & 1718/M/2008 i2 Technologies( Netherland)BV IN THE INCOME TAX APPELLATE TRIBUNAL, BENCH “L”, MUMBAI BEFORE SHRI JASON P. BOAZ, ACCOUNTANT MEMBER AND SHRI PAWAN SINGH, JUDICIAL MEMBER ITA No.2410/Mum/2007 (Assessment Year- 2002-03) ITA No.6449 /Mum/2008 (Assessment Year- 2004-05) M/s i 2 Technologies ACIT (International Taxation) - (Netherland) BV, 3 (1), 143-B&C,S.D.F. –V, Mumbai Vs. SEEPZ, Andheri East Mumbai-400096 PAN:AACI0320B (Appellant) (Respondent)

ITA No.1718 /Mum/2007 (Assessment Year- 2002-03) ACIT(International Taxation) -3 M/s i 2 Technologies (1), (Netherland) BV, Mumbai 143-B&C,S.D.F. –V, Vs. SEEPZ, Andheri East Mumbai-400096 PAN:AACI0320B (Appellant) (Respondent)

Assessee by Sh. A.V. Sonde : Sr. Advocate Revenue by : Sh. M.V.Rajguru (CIT- Sr. DR) Date of hearing : 21.03.2017 Date of Pronouncement : 31.03.2017 Order Under Section 254(1) of Income Tax Act PER PAWAN SINGH, JUDICIAL MEMBER: 1. This order shall dispose of a bunch of three appeals out of which first two cross Appeals for AY 2002-03. And the third appeal by assessee for AY 2002-03

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against the order of ld CIT(A) in deleting the penalty levied under section 271(1)(c) of the Act. The appeal ITA No.2410/Mum/2007 for AY 2002-03 and appeal No.ITA No.1718 /Mum/2008 for AY 2004-05 is directed against the CIT(A) -33 dated 1.12.2006 and 31.12.2007 respectively in quantum assessment. The appeal ITA No.6449 /Mum/2008 for A Y- 2002-03 is directed against the order of ld CIT(A) dated 02.05.2008 in deleting the penalty under section 21(1)(c). As facts of all the appeals are common in all the appeals hence, all the appeals were heard together and are being decided by consolidated order for avoiding conflicting decisions. 2. In ITA No.2410/Mum/2007 for AY 2002-03 the assessee has raised following grounds of appeal : (1) The learned CIT(A) erred in law in holding that consideration received for software license/sub-licensed as royalty ( Ground A to D) (2) The learned CIT(A) erred in not appreciating that Satyam Computer Services Ltd and Agrotech Food Ltd had not deducted tax at source and the Department had accepted this situation without initiating any action against them(E) . (3) The learned CIT(A) failed to adjudicate upon whether the VARs constituted a PE of appellant in India. Without prejudice to the grounds is asked the assessee submits that these VARs cannot be considered PE of the assessee in India as they did not come under the control and direction of the assessee.(F) 3. Brief facts of the case are that Assessee Company is incorporated under the law of Netherlands. The assessee is wholly subsidiary of M/s i2 Technology Inc USA. The assessee obtained the exclusive right to use, develop and enjoy the Intangible property rights to the computer software from M/s i2 Technologies (Cayman Island) Ltd. The assessee filed return of income for relevant assessment year on 17 February 2004 declaring total income of Rs.3,88,23,854/-. In the return of income the assessee claimed that Rs. 1,28,89,958/- was received on account of licence fee for the sale of software which is not taxable in India. The contention of assessee was not accepted by AO and treated the said income as ‘royalty’ and brought the same as taxable income of assessee in India. The AO further concluded that out the said income, the income on account of licence fee of software to M/s Agrotech Foods Ltd of Rs. 32,27,028/- is a direct sale and Income on licence fee to M/s Compaq Computer (India) for Rs.73,27,586/- and to M/s Satyam Computer Services for Rs.32,35,344/- are value added retail(VAR). The VARs sold these 2

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software to Premiere Instrument & Controls Ltd and Maruti Udyog Ltd and the receipt was not offered to tax by assessee on the ground the transaction are in the nature of copyrighted product rather than copyright article. The AO held that they are depending agent of the assessee and accordingly taxed the receipt u/s 44AD. On appeal before ld CIT(A) the income received on account of direct sale as well as VARs both were treated as royalty. Thus, further aggrieved by the order of Commissioner (Appeals) the assessee has filed present appeal before us. 4. Ground No1 & 2 (A to E) relates to treatment of consideration received by the assessee for software licensed / sublicensed as Royalty. We have heard the learned Advocate / Authorized Representative for the assessee and the learned departmental representative for revenue and perused the material available on record. The learned counsel for the assessee argued that the assessee company sells software to Indian companies for their use and not for resale. Although the assessee company charged as ‘licence fee’, the amount received is for the grant of non-exclusive, non-transferable perpetual license for software amount to sale of such software. The assessee company also receives fees toward annual maintenance contract entered into with the licenses of the software and such receipts were offered to tax in the return of income filed for the year under consideration. The Assessing Officer took the view that where the software has been directly sold to the end-user, the amount is chargeable to tax as ‘Royalty’ and where the software head been licensed to value-added resellers (VAR) the income would be ‘Business income’ since the VAR can be construed to be the PE of the assessee company. It was further argued by the ld Counsel that the learned CIT(A) also held that the consideration received by the assessee company is only for the right to use the copy right and not for copyrighted article. The Ld Commissioner (Appeals) also took the view that software itself is a ‘secret process’ which is used in data processing and in as such the payment is made for using such process and the payment is in the nature of royalty. The learned CIT(A) alternatively also held that software is a scientific equipment and the payment received being for use of such equipment would be construed as royalty. It was argued on behalf of assessee that income received by the assessee is not in

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the nature of royalty, the software license granted by it are in the nature of ‘Shrink Wrapped Software’ or ‘Packaged Software’ which does not result in royalty income for the assessee. In support of his argument they learned counsel for assessee relied upon the decision of Hon’ble Delhi High Court in case of CIT Versus Infrasoft Ltd[2013] 220 taxman 273, decisions of Mumbai Tribunal in ADIT Versus Ban Global B.V. [2016] 49 ITR(T) 73, Qad Europe BV Versus DCIT 53 ITR(T) 259, ADIT Vs First Advantage Private Limited[2017] 77 taxman.com 195, Galatea Ltd. v/s. DCIT(IT) [2016] 46 ITR (T) 690, International Ltd. vs. ADIT(IT) [2016] 68 taxman.com 97, Reliance Industries Ltd. [2016] 69 taxman.com 311, [2011] 16 taxman.com 371, Solid Works Corporation [2012] 51 SOT 34, Software & System (P.) Ltd. v/s DCIT/ACIT [2014] 47 taxman.com 140, Antwerp Diamond Bank NV Engineering Centre [2014] 65 SOT 23, Inc. v/s. ADIT [2015] 61 taxman.com 36, Team Telecom International (P.) Ltd. [2011] 12 ITR (T) 688 and ADIT(IT) v/s. Colgate Palmolive Marketing SDN BHD [ITA Nos. 2129-2130/8311/Mum/04/; ITA No. 2639/5794/5423/Mum/2006, ITA No. 5920/Mum/2007]. On the other hand the learned DR for the Revenue supported the order of authority below. The learned DR for the Revenue further argued that the Hon’ble Delhi High Court and various Tribunals have examined the issue of royalty only under clause (v) of Explanation 2 to section 9(1)(vi) of the Act and the corresponding clause of DTAA but not under any other clause of Explanation to section 9(1)(vi). The use of software is covered under clause (iii) of Explanation 2 to section 9(1)(vi) of the Act/DTAA as use of process. The AO correctly held that the consideration received by assessee for sale/supply/lease of software as royalty for the use or right to use of copyright in software under clause (v) of Explanation 2 to section 9(1)(vi) of the Act as well as under DTAA. The AO also put an alternative contention that whether software fits (falls) into one of the categories mentioned in clause (i) & (iii) to Explanation 2 to section 9(1)(vi) of the Act. The ld. DR further relied that the various decision relied by ld. AR of the assessee including of decision of Hon’ble Delhi High Court in Infrasoft Ltd. (supra) and would argue that various decision of Mumbai Tribunal were not available at the time of assessment order or during the proceedings before First

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Appellate Authority (FAA), therefore, the lower authority has no occasion to examine whether the ratio of those decision can be applied in the present case. The AO has examined the issue of royalty as “process” which has not been discussed by Hon’ble Delhi High Court or in various decisions by Mumbai Tribunal. The ld. DR for the Revenue made submissions that in case the Tribunal comes to the conclusion that the issue raised in the present appeal is covered by the above referred decisions, then the assessee’s case needs to be examined afresh on the fact as well as on law including the issue of process before giving the benefit of favorable decision to the assessee. The ld. DR for the Revenue referred that in Global Tally System Ltd. the Mumbai Tribunal vide order dated 20.04.2016 and Ahmedabad Tribunal in LMT Ltd. (152 ITD 873) has restored the matter back to the file of ld. CIT(A). The ld DR for the revenue also referred and relied on the decision of Hon’ble Karnataka High Court in CIT Vs Samsung Electronics Ltd. [2012] 345ITR 494. In the rejoinder argument, the ld. Sr. Counsel of assessee argued that the point of “process” was considered by Delhi Tribunal in Datamine International in para 10, 11 & 12 and in Qad Europe BV v/s. DCIT 53 ITR(T) 259. The ld. Counsel for assessee further relied upon the decision of special bench in ITO vs. Prasad Production [2010] 125 ITD 263 (Chennai) (SB). 5. We have considered the rival contention of the parties and have gone through the orders of authorities below. During the assessment, the AO asked the assessee to justify the claim of non-taxability of license fees of Rs. 1,28,89,958/-. The assessee filed its detailed reply dated 07.03.3003. The AO observed that Satyam Computer Services Ltd. and Compaq Computer (India) Pvt. Ltd. acted as Value Added Reseller (VAR) for Premium Instruction and Control Ltd. (PRICOL) and Maruti Udyog Ltd. Satyam Computer Services Ltd. and Compaq Computer (India) Pvt. Ltd. which acted as VAR for assessee which are not in the business of selling the license software to the end user but for the assessee-company and were treated as agents of assessee and thus the assessee forms a permanent establishment through its agent. Thus, the amount received from Satyam Computer Services Ltd. amounting to Rs. 1,23,35,344/- and Rs. 73,27,586/- respectively was taxed as royalty income as per the provision of section 44D of

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the Act. The AO further observed that assessee-company entered into agreement with M/s Agrotech Food Ltd. wherein the license is sold directly. In the license agreement, it was clarified that ownership entitled and the licensed product including corrective update, adaptation enhancement or copies deliverable and services shall be owned by assessee. The assessee also agree to provide support service to the license product which can be purchased annually support basis, thus the assessee has received license fees from the following three parties: (a) Compaq Computer (India) Pvt. Ltd. Rs. 73,27,586/- (b) Satyam Computer Services Ltd. Rs. 23,35,344/- (c) M/s Agrotech Food Ltd. Rs. 32,27,028/-

Thus, the AO taxed the receipt from Compaq Computer (India) Pvt. Ltd. and Satyam Computer Services Ltd. @ 20% as per the provision of section 44D and the receipt of Rs. 32,27,028/- received from M/s Agrotech Food Ltd. was treated as royalty and taxed @ 15%. The Ld. CIT(A) while considering the appeal of the assessee held that the consideration received by the assessee is only for the right to use the copyright and not copyrighted article. The ld. CIT(A) also concluded that software itself is secret process which is used in data processing and as much the payment is made for using such process, the payment is in the nature of royalty. The ld. CIT(a) in alternative also held that software is a scientific equipment and the payment received for use of such equipment would be construed as royalty. The Hon’ble Delhi High Court in DIT vs. Infrasoft Ltd. while considering the substantial question of law, whether the consideration received by grant of license for use of software is not royalty within the meaning of Article 12(13) of DTAA between India and USA and held as under:

“81. The Supreme Court in TAta Consultancy Services case' (supra) have thus laid down that Computer programs are the product of an intellectual process, but once implanted in a medium they are widely distributed to computer owners. That a computer program may be copyrightable as intellectual property does not alter the fact that once in the form of a floppy disc or other medium, the program is tangible movable and available in the marketplace. 82. The Supreme Court has further held that a software programme may consist of various commands which enable the computer to perform a designated task. The copyright in that programme may remain with the originator of the programme. But the moment copies are made and marketed, it becomes goods which are susceptible to 6

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sales tax. Even intellectual property' once it is put on to a media, whether it be in the form of books or canvas (In case of painting) or computer discs or cassettes and marketed would become "goods". There is no difference between a sale of a software programme on a CD/floppy disc from a sale of music on a cassette/CD or a sale of a film in a video cassette/CD. In all such cases, the intellectual property has been incorporated on a media for, purposes of transfer. Sale is not just of the media which by itself has very little value. The software and the media cannot be split up. What the buyer purchases and pays for is not the disc or the CD. As in the case of paintings or books or music or films the buyer is purchasing the intellectual property and not the media i.e. the paper or cassette or disc or CD. The software itself, i.e. the physical copy, is not merely a right or an idea to be comprehended by the understanding. 83. It has been further held that the purchaser of computer software neither desires nor receives mere knowledge, but rather receives a certain arrangement of matter that will make his or her computer perform a desired function. This arrangement of matter, physically recorded on some tangible medium, constitutes a corporeal body. The form of the delivery of the software-magnetic tape or electronic transfer via modem- is of no relevance. That the software can be transferred to various media i.e. from tape to disc, or tape to hard drive, or even that it can be transferred over the telephone lines, does not take away from the fact that the software was ultimately recorded and stored in physical form upon a physical object. Recorded as such, the software is not merely an incorporeal idea to be comprehended, and would be of no use if it were. Rather, the software is given physical existence to make certain desired physical things happen. One cannot escape the fact that 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 disc, tape, hard drive, or other device. That the information can be transferred and then physically recorded on another medium is of no moment, and does not make computer software any different than any other type of recorded information that can be transferred to another medium such as film, video tape, audio tape, or books. It is now common knowledge that books, music, and even movies or other audio/visual combinations can be copied from one medium to another. They are also all available on computer in such forms as floppy disc, tape, and CD-ROM. Such movies, books, music, etc. can all be delivered by and/or copied from one medium to another, including electrical impulses with the use of a modem. Assuming there is sufficient memory space available in the computer hard disc drive such movies, books, music, etc. can also be recorded into the permanent memory of the computer. That the information, knowledge, story, or idea, physically manifested in recorded form, can be transferred from one medium to another does not affect the nature of that physical manifestation as corporeal, or tangible. Likewise, that the software can be transferred from one type of physical recordation, e.g., tape, to another type, e.g., disk or hard drive, does not alter the nature of the software, it still has corporeal qualities and is inextricably intertwined with a corporeal object. The software must be stored in physical form on some tangible object somewhere. In sum, once the "information" or "knowledge" is transformed into physical existence and recorded in physical form, it is corporeal property. The physical recordation of this software is not an incorporeal right to be comprehended. 84. To further elucidate the nature of the transaction in the case of the Assessee it is necessary to examine some of the clauses of the Licensing software agreement entered into by the Assessee with its customers: INFRASOFT LICENCE AGREEMENT. 2. GRANT, SUPPLY AND USE OF LICENCE

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(a) Infrasoft grants Licensee a non-exclusive, non-transferable licence to use the software in accordance with this Agreement and the Infrasoft Licence Schedule. The licence is perpetual unless identified as being for a specified term in the Infrasoft Licence Schedule. (b) Any third party software incorporated in the software is licensed only for use with the software. (c) Infrasoft will supply one copy of the software for each site and, when applicable, one set of support information to the Licensee. Licensee shall pay Infrasoft a fee for additional copies of any printed support information supplied by Infrasoft. (d) Licensee may make one copy of the software and associated support information for backup purposes, provided that the copy, shall include Infrasoft's copyright and other propnetary notices. All copies of the Software shall be the exclusive property of Infrasoft. (e) The Software includes a licence authorisation device, which restricts the use of the Software as specified in the Infrasoft Licence Schedule. (f) The Software shall be used only for Licensee's own business as defined within the Infrasoft Licence Schedule and shall not, without prior written consent from Infrasoft: (i) be loaned, rented, sold, sub-licensed or transferred to any third party ii) used by any parent, subsidiary or affiliated entity of Licensee iii) Used for the operation of a service bureau or for data processing (g) If Licensee was granted an educational licence, as identified on the Infrasoft Licence Schedule, the Software may only be used for instruction or research purposes and not for any commercial purposes. (h) Licensee may not copy, decompile, disassemble or reverse-engineer the Software without Infrasoft's written consent.' The Licensee's rights shall not be restricted by this Clause 2(h) to the extent that local law grants Licensee a rig~( to do so for the purpose of achieving interoperability with other software and in addition thereto Infrasoft undertakes to make information relating to interoperability available. to Licensee subject to such reasonable conditions as Infrasoft may from time to time impose including a reasonable fee for doing so. To ensure Licensee receives the appropriate information, Licensee must first give Infrasoft sufficient details of its objectives and the other software concerned. Requests for the appropriate information should be directed to the Vice President Technical of Infrasoft. 3. LICENCE FEES, PAYMENT AND TAXES (a) Licensee shall pay Infrasoft a licence fee for the use of the Software as agreed in the order. Infrasoft confirms that where the Licensee has purchased the Software through an authorised reseller of the Software the Licensee shall owe no license fees to Infrasoft where the Licensee has made payment of the licence fees to the authorised reseller. (b) All licence fees are exclusive of and net of any taxes, duties or other such additional sums including, but without prejudice to the foregoing generality, value added/purchase tax, excise tax (tax on sales, property or use), import or other duties and whether levied in respect of this Agreement, the Software its use or otherwise. All

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such taxes shall be the responsibility of the Licensee and shall be payable in addition to the licence fee. (c) Infrasoft advises the Licensee that the Software contains a mechanism which Infrasoft may activate to deny the Licensee use of the Software in the event that the Licensee is in breach of payment terms or any other provisions of this Agreement. 4. ** ** ** 5. OWNERSHIP, INTELLECTUAL PROPERTY AND INDEMNITY (a) All copyrights and intellectual property rights in and to the Software, and copies made by Licensee, are owned by or duly licensed to Infrasoft. Infrasoft warrants that it has the power to grant the licence rights contained in this Agreement. 85. The Licensing Agreement shows that the license is non-exclusive, non-transferable and the software has to be uses in accordance with the Agreement. Only one copy of the software is being supplied for each site. The licensee is permitted to make only one copy of the software and associated support information and that also for backup purposes. It is also stipulated that the copy so made shall include Infrasoft's copyright and other proprietary notices. All copies of the Software are the exclusive property of Infrasoft. The Software includes a licence authorisation device, which restricts the use of the Software. The software is to be used only for Licensee's own business as defined within the Infrasoft Licence Schedule. Without the consent of the Assessee the software cannot be loaned, rented, sold, sub-licensed or transferred to any third party or used by any parent, subsidiary or affiliated entity of Licensee or used for the operation of a service bureau or for data processing. The Licensee is further restricted from making copies, decornpile, disassemble or reverse-engineer the Software without Infrasoft's written consent. The Software contains a mechanism which Infrasoft may activate to deny the Licensee use of the Software in the event that the Licensee is in breach of payment terms or any other provisions of this Agreement. All copyrights and intellectual property rights in and to the Software, and copies made by Licensee, are owned by or duly licensed to Infrasoft. 86. The Licensing Agreement shows that the license is non-exclusive, non-transferable and the software has to be uses in accordance with the agreement. Only one copy of the software is being supplied for each site. The licensee is permitted to make only one copy of the software and associated support information and that also for backup purposes. It is also stipulated that the copy so made shall include Infrasfot’s copyright and other proprietary notices. 11 copies of the Software are the exclusive property of Infrasoft The Software includes a licence authorisation device, which restricts the use of the Software. The software is to be used only for Licensee's own business as defined within the Infrasoft Licence Schedule. Without the consent of the Assessee the software cannot be loaned, rented, sold, sub-licensed or transferred to any third party or used by any parent, subsidiary or affiliated entity of Licensee or used for the operation of a service bureau or for data processing. The Licensee is further restricted from making copies, decompile, disassemble or reverse-engineer the Software without Infrasoft's written consent. The Software contains a mechanism which Infrasoft may activate to deny the Licensee use of the Software in the event that the Licensee is in breach of payment terms or any other provisions of this Agreement. All copyrights and intellectual property rights in and to the Software, and copies made by Licensee, are owned by or duly licensed to Infrasoft. 87. In order to qualify as royalty payment, it is necessary to establish that there is transfer of all or any rights (including the granting of any licence) in respect of

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copyright of a literary, artistic or scientific work. In order to treat the consideration paid by the Licensee as royalty, it is to be established that the licensee, by making such payment, obtains all or any of the copyright rights of such literary work. Distinction has to be made between the acquisition of a "copyright right" and a "copyrighted article". Copyright is distinct from the material object, copyrighted. Copyright is an intangible incorporeal right in the nature of a privilege, quite independent of any material substance, such as a manuscript. Just because one has the copyrighted article, it does not follow that one has also the copyright in it. It does not amount to transfer of all or any right including licence in respect of copyright. Copyright or even right to use copyright is distinguishable from sale consideration paid for "copyrighted" article. This sale consideration is for purchase of goods and is not royalty. 88. The license granted by the Assessee is limited to those necessary to enable the licensee to operate the program. The rights transferred are specific to the nature of computer programs. Copying the program onto the computer's hard drive or random access memory or making an archival copy is an essential step in utilizing the program. Therefore, rights in relation to these acts of copying, where they do no more than enable the effective operation of the program by the user, should be disregarded in analyzing the character of the transaction for tax purposes. Payments in these types of transactions would be dealt with as business income in accordance with Article 7. 89. There is a clear distinction between royalty paid on transfer of copyright rights and consideration for transfer of copyrighted articles. Right to use a copyrighted article or product with the owner retaining his copyright, is not the same thing as transferring or assigning rights in. relation to the copyright. The enjoyment of some or all the rights which the copyright owner has, is necessary to invoke the royalty definition. Viewed from this angle, a non-exclusive and non-transferable licence enabling the use of a copyrighted product cannot be construed as an authority to enjoy any or all of the enumerated rights ingrained in Article 12 of DTAA. Where the purpose of the licence or the transaction is only to restrict use of the copyrighted product for internal business purpose, it would not be legally correct to state that the copyright itself or right to use copyright has been transferred to any extent. The parting of intellectual property rights inherent in and attached to the software product in favour of the licensee/customer is what is contemplated by the Treaty. Merely authorizing or enabling a customer to have the benefit of data or instructions contained therein without any further right to deal with them independently does not, amount to transfer of rights in relation to copyright or conferment of the right of using the copyright. The transfer of rights in or over copyright or the conferment of the right of use of copyright implies that the transferee/licensee should acquire rights: either in entirety or partially co-extensive with the owner/transferor who divests himself of the rights he possesses pro tanto, 90. The license granted to the licensee permitting him to download the computer programme and storing it in the computer for his own use is only incidental to the facility extended to the licensee to make use of the copyrighted product for his internal business purpose. The said process is necessary to make the programme functional and to have access to it and is qualitatively different from the right contemplated by the said paragraph because it is only integral to the use of copyrighted product. Apart from such incidental facility, the licensee has no right to deal with the product just as the owner would be in a position to do. 91. There is no transfer of any right in respect of copyright by the Assessee and it is a case of mere transfer of a copyrighted article. The payment is for a copyrighted article and represents the purchase price of an article and cannot be considered as royalty either under the Income-tax Act or under the DTAA.

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right contemplated by the said provision becausei1t is only integral to the use of copyrighted product. The right to make a backup copy purely as a temporary protection against loss, destruction or damage has been held by the Delhi High Court in Nokia Networks OY (supra) as not amounting to acquiring a copyright in the software.” 99. In view of the above we accordingly hold that what has been transferred is not copyright or the right to use copyright but a limited right to use the copyrighted material and does not give rise to any royalty Income. Further, the Co-ordinate Bench of Mumbai Tribunal in DIT vs. Reliance Industries Ltd. (2016) 69 taxman.com 311(Mum Trib.) while considering the issue related with purchase of different type of software from resident of different countries wherein, India has tax treaty/DTAA held as under:

“41. …… The Income Tax Act does not specifically include the “computer software‟ in the term “literary work” and under such circumstances, if we apply the provisions of Income Tax to define the scope of „Literary Work‟, then perhaps the „computer software‟ will be out of the scope of the term royalty as defined under the DTAA. However, if we apply the Copyright Act, then the „computer software‟ will have to be included in the term „literary work‟ but to constitute „royalty‟ under the treaty, the consideration should have been paid for the use of or the right to use the copyright in the „literary work‟ and not the „literary work‟ itself. 42. Further, when we read the definition of copyright and literary work as provided in the Copyright Act, 1957, it is also important to note down that what constitutes infringement of copyright and what are the exceptions to it. If the software purchased by the assessee and the use of it by the assessee is covered within the exceptions as provided under section 52 of the Copyright Act, then in that event it cannot be said that the transfer of right to use or for use of the copyright has passed. The proviso to section 57 of the Copyright Act has further clarified that the author of the work shall not have right to restrain or claim damages in respect of any adaptation of a computer programme to which clause (aa) of sub section (1) of section 52 applies. 43. Further in case of imported software i.e. if the original work has been published outside India, as per the provisions of the Copyright Act, apart from the work being original and not copied from elsewhere, the work should be first published in India or if the work is published outside India, the author on the date of publication, if the author is dead, at the time of his death, should be citizen of India. In case of unpublished work, the author on the date of making of a work should be a citizen of India or domicile in India. Section 40 of the Copyright Act 1957, provides for International Copyrights. As per the section 40 of the said Act, the Government of India may by an order published in the official gazette direct that all or any provisions of this Act shall apply to the work published or unpublished in any territory outside India. Such a right is extended in relation to countries which have entered into a treaty or which are a party to a convention relating to rights of the copyright owners and have undertaken to make such provisions in their laws in relation to the Indian 12

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authors for protection of their rights in their country. Sections 40, 40A and section 41of the Copyright Act, 1957 are relevant in this respect. Section 42 of the Copyright Act, however, put certain restrictions on the rights in works of foreign authors first published in India wherein it has been provided that if a foreign country does not give adequate protection to the works of the Indian authors, the Central Government may direct that such of the provisions of the Act as confer copyright on works first published in India of the foreign authors shall not apply. So if a foreign country recognizes the copyrights of the Indian authors in their copyrighted work, the India also allows the copyright to the foreign authors on reciprocal basis. So a foreign author can claim the copyright in a product, if India has a treaty with that country or if India and that other country are signatories of the certain international treaties or conventions e.g. Berne convention to which India is a signatory. Under such circumstances, in respect of works done in foreign countries or by foreign authors, the copyright does not automatically flow or extended to them. The rights of the foreign author are to be examined in the light of the Copyright Act and the relevant treaty or the convention, if any, signed by India with that country to which the foreign author belongs. The copyright in a foreign product thus does not flow automatically or impliedly, so far as the Indian copyright laws are concerned. 44. Hence, while interpreting the definition of ‗royalty‘ as provided in the DTAA, it is to be seen as to what has been purchased by the assessee i.e. whether the ‗copyright‘ itself has been purchased or what the assessee has purchased is only a ‗copyrighted work‘. It is also required to be analysed as to whether the use of such right would amount to infringement of copyright if a license or permission in this respect is not given by the owner; and when assessee has purchased a copyrighted product, whether the use of the same for the business purpose of the assessee is covered within the exceptions as provided under section 52 of the Copyright Act. Further, in case of imported work/product, whether the protection of copyright is available to the foreign author in terms of section 40,40A, 41 and 42 of the Copyright Act 1957. 45. The provisions of the Copyright Act, as discussed above are clear and unambiguous in this respect. If the assessee has purchased a copy of a computer software programme and he uses the said copy for his business purpose and if the said use falls within the scope and purview of the exceptions of section 52, such as the use of it for the purpose for which it is supplied and to make backup copies for temporary purpose as a protection against loss or damage and doing of any act necessary to obtain information essential for operating the software for the purpose for which it is purchased etc. as provided under section 52of the copyright Act, then in that event it cannot be said to be an infringement of copyrights of the author or owner of the work. Even the Hon‘ble Karnataka High Court in the case of ―Samsung Electronics Company Ltd. & Others‖ (supra) while relying upon Article 3 sub section (2) of the DTAA with US as the identically worded article being there in almost all the tax treaties with other countries, has held that any term not defined in the convention shall, unless the context otherwise requires, have the meaning which it is under the laws of that ‗State‘ concerning the tax to which the convention applies. In view of above, when we see the definition as per the statutory provisions/domestic law of the country i.e. Copyright Act,1957 of India (the taxing State in this case), it is apparent that the fair use of the work 13

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for the purpose of which it is being purchased and doing of such other acts including making of copy for protection from damage or loss cannot, in any case, said to be any infringement of copyright whether or not any license in this respect has been granted by the author/owner of the work. The right to use or for use of the product accrues to the purchaser by the operation of the statute and as held by the Hon‘ble Delhi High Court in the case of ―Infrasoft Ltd.‖ (supra), the same would amount to the sale of a goods and the acts done such as downloading of the same to the computer or making backup copies etc. would be the necessary acts for enabling the use of the product and would not amount to the transfer of copyright therein, but only the transfer of the copyrighted product and thus will not be covered under the definition of royalty under DTAA. The consideration, thus, paid will be the business income of the non-resident and taxable in accordance with the provisions of DTAA. We may clarify here that even in cases where the owner of the copyrighted work may restrict the use of or right to use the work by way of certain terms of the license/software agreement, the validity or the enforceability of the same may be subject matter in other laws such as Indian Contract Act 1872 , Sale of goods Act 1930 or the Consumer Protection Act 1986 etc., but, the same in any way cannot be said to grant of or infringement of copyright in the light of specific statutory provisions of Copyright Act 1957. 46. While finalizing this order, we have come across a recent decision of the Co-ordinate Delhi Bench of the Tribunal in the case of ―Datamine International Ltd. vs. ADIT‖ in ITA No.5651/Del/2010 vide order dated 14.03.16 on the identical issue wherein the definition of royalty vis-à-vis computer software in the light of India UK Treaty has been discussed. The Tribunal in para 12.1 of the said order(supra) has observed that in the India-UK Treaty, in para 3(a) of Article 13 which deals with the definition of royalty‘ in the relevant India-UK Treaty, there was no specific mention of word computer software‘ along with other terms such as ‗literary, artistic or scientific work, patent, trade mark‘ etc. The Tribunal observed that such a language of the India-UK DTAA was in sharp contrast to the specific use of the term computer software‘ or computer software programme‘ together with other terms such as literary, artistic or scientific work, patent, trade mark etc. in many other DTAAs such as India Malaysia Treaty, wherein, the term ‗computer software programme‘ has been separately mentioned along with the words copy right of a literary, artistic or scientific work …. plan, knowhow, computer software programme, secret formula or process. The Delhi Bench of the Tribunal (supra) has further illustrated on this point as under: ― “To illustrate, Article 12 of the DTAA between India and Malaysia defines 'Royalties' to mean 'payments of any kind received as consideration for the use of or right to use any copyright of a literary, artistic or scientific work……….. plan, knowhow, computer software programme, secret formula or process…..' Similarly, the DTAA between India and Kazakhstan defines the term 'royalties' in Article 12(3)(a) to mean : 'payments of any kind received as a consideration for the use of or the right to use any copyright of literary, artistic or scientific work including software, cinematograph films…'. Similarly, the DTAA Turkmenistan also defines 'Royalties' in Article 12 to mean : 'payments of any kind received as consideration for the use of or the right to use any copyright of literary, artistic or scientific work, ….. computer software, any patent, trademark…'. It is thus clear that wherever the Government of India intended to include consideration for the use of software as 'Royalties', it explicitly provided so 14

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in the DTAA with the concerned country. Since Article 13(3)(a) of the DTAA with UK does not contain any consideration for the use of or the right to use any 'computer software', the same cannot be imported into it. 47. The above analysis made by the Tribunal (supra) of various tax treaties of India with other countries clinches the issue. Even at the cost of repetition, we deem it proper to refer to the observations of the Hon‘ble Delhi High Court in the case ―DIT Vs New Skies Satellite BV, (supra), that an international instrument affected between two sovereign states is the result of the negotiations by those sovereign nations which in itself is considered to be mini legislation containing in it all the relevant aspects or features which may be at variance with the general taxation laws of the respective countries and the same are to be read as such. We, therefore, fully agree with the observations of the co-ordinate bench of the Tribunal in the case of ―Datamine International Ltd. vs. ADIT (supra) that wherever the Government of India intended to include consideration for the use of software as 'Royalties', it explicitly provided so in the DTAA with the concerned country viz. Malaysia, Kazakhstan and Turkmenistan. We find that in the cases before us, in the DTAA of India with respective countries (names mentioned in the chart given above), the definition of royalty in none of the respective treaties specifically include any consideration for the use of or the right to use any ‘computer software’ and therefore, the same cannot be imported or read into it. 48. We may further clarify here that without expressing our opinion or any view in relation to the definition of ‘royalty’ vis-à-vis ‘computer software‘ as provided under the Income Tax Act, we have given our findings only in respect of the scope of royality‘ under the DTAA. 49. In view of our detailed discussion made above, the assessee cannot be said to have paid the consideration for use of or the right to use copyright but has simply purchased the copyrighted work embedded in the CD- ROM which can be said to be sale of ‘good‘ by the owner. The consideration paid by the assessee thus as per the clauses of DTAA cannot be said to be royalty and the same will be outside the scope of the definition of ´royalty’ as provided in DTAA and would be taxable as business income of the recipient. The assessee is entitled to the fair use of the work/product including making copies for temporary purpose for protection against damage or loss even without a license provided by the owner in this respect and the same would not constitute infringement of any copyright of the owner of the work even as per the provisions of section 52 of the Copyright Act,1957. 50. Even otherwise, the Revenue has not cited any direct case law of the jurisdictional High Court of Bombay before us. In the case laws cited by the Revenue of the Hon‘ble Karanatka High Court in the matter of ―CIT vs. Samsung Electronics Company Ltd. (supra) and ―CIT vs. Synopsis International Old Ltd. (supra), though, a view in favour of the Revenue has been taken, but the Hon‘ble Delhi High Court in the case of ―DIT vs. Infrasoft Ltd.‖ (supra), which is a latter decision, has discussed the Samsung case also and has taken the view in favour of the assessee. The Hon‘ble Delhi High court has taken the identical view favouring the assessee in the case of ―DIT vs Nokia Network‖ (supra) and in the case of ―DIT vs.

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Ericson A.B.‖ (supra) also. The Hon‘ble Bombay High Court in the case of The Addl. Commissioner of Sales Tax vs. M/s Ankit International, Sales Tax Appeal No.9 of 2011 vide order dated 15 September, 2011 while relying upon the decisions of the Hon‘ble Supreme Court in The Commissioner of Income Tax V. Vegetable Product Ltd. (1973) 88 ITR 192 and in Mauri Yeast India Pvt. Ltd. V. State of U.P. (2008) 14 VST 259(SC) : (2008) 5 S.C.C. 680 has held that, if two views in regard to the interpretation of a provision are possible, the Court would be justified in adopting that construction which favours the assessee. Reliance can also be placed in this regard on the decision of Hon‘ble Supreme Court in ―Bihar State Electricity Board and another vs. M/s. Usha Martin Industries and another: (1997) 5 SCC 289. We accordingly adopt the construction in favour of the assessee. 51. The Ld. A.R. of the assessee, at this stage, has raised another important argument. He has submitted that the purchase orders for the softwares were made much prior to the year 2012. The dates of purchase orders have been mentioned in the 4th column of the table drawn in initial paras of this order. He has submitted that explanation 4 to section 9(1)(vi) has been inserted by Finance Act, 2012 with retrospective effect 01.06.1976, vide which the right for use or right to use a computer software including granting of license has been included in the definition of the term right, property or information, the consideration paid for which has been deemed to be income by royalty under section 9(1)(vi) of the Act. He has stated that the said explanation though preceded with the phrase ‘ it is hereby clarified and is followed by the words ‘includes’ and has always included‘ yet the said explanation cannot be applied retrospectively. He has stated that vide said explanation, computer software has been specifically added into the definition of right, property or information. However, prior to the insertion of explanation 4 to section 9(1)(vi), no such interpretation as has ever been done by any court of law to include computer software in the definition of right, property or information under section 9(1)(vi) of the Act. He has further invited our attention to sub clause (v) to Explanation 2 (as reproduced and discussed above) under which the consideration paid for the transfer of all or any rights in respect of any copyright in literary, artistic or scientific work was to be considered in the definition of royalty. He has further stated that the above clause (v) to Explanation 2 to section 9(1)(vi) as discussed above was in paramateria to the definition of royalty as provided under the treaty. He, therefore, has contended that in view of this, the assessee was not supposed to deduct TDS on the remittance made for the purchase of software prior to the bringing of amendment/insertion of Explanation 4 to the section 9(1)(vi) of the Act, as per the interpretation of the relevant provision done by various courts, the assessee was under bonafide belief that no TDS was deductable as the consideration paid for purchase off the shelf/shrink wrapped software would not fall in the definition of royalty. Even the above view of the assessee has been subsequently confirmed by the various decisions of the Tribunal in the own case of the assessee. He, bringing our attention to the orders dated 29.10.2010 (supra) and 26.11.2010 (supra) and also various other orders in the case of assessees in the earlier assessment years has contended that the different benches of the Tribunal have upheld the findings in relation to the interpretation of the provisions of section 9(1)(vi) made by the first appellate

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authority [CIT(A)] which has been summed up in the following points: ― (a) It is now established law that Computer software after being put on to a media then sold, becomes goods like any other Audio Cassette or painting on canvas or a book and that the Assessing Officer is wrong in holding that Computer software media, continues to be an intellectual property right and that the Assessing Officer was wrong in treating this computer software as a "Patent" or as "Invention‖ the payment cannot be termed as "Royalty". (b)That the definition of the term 'Royalty' in article 12(3) of the Indo-US DTAA is restrictive than what is provided in section 9(1)(vii) of the Income tax Act, 1961 that in such a situation the provisions of the Double Taxation Avoidance Agreement override the domestic law. (c) That the assessee has purchased a copyrighted article and not the copyright. There is no transfer of any part of copyright (d) As what is paid is not "royalty" under the Indo-US DTAA, and as it is covered Article 7, which deals with "Business Profit" and as the foreign party does not have Permanent Establishment in India, the same is not taxable in India and the assessee is not required to deduct tax at source from the said payment. (e) The present computer software cannot be treated as a patent or an invention. 52. The ld. AR has further relied in this respect on the decision of the Hon‘ble Supreme Court in the case of ―Sedco Forex International Drill INC. & Others vs. Commissioner of Income Tax & another‖ (2005) 199 CTR (SC) 320 and also of the co-ordinate bench of the Tribunal in the case of ―Rich Graviss Products (P.) Ltd. vs. ACIT‖ (2014) 49 taxman.com 531 (Mum-Trib.). He has also relied upon the decision of the co-ordinate bench of the Tribunal in the case of ―JM Morgan Stanley Securities Pvt. Ltd. vs. ACIT‖ in ITA No.6340/M/2004 decided vide order dated 05.03.2007 wherein the Tribunal has taken a view that wherein an earlier case a specific view has been taken in the case of an assessee, then the consistency should be maintained in the subsequent year on identical set of fact and circumstances. 53. The Ld. D.R., on the other hand, has stressed that since the Explanation 4 has been inserted with retrospective effect, hence the same should be read for the purpose of definition of royalty in the years in which the liability to deduct TDS had arisen. 54. We have considered the above submissions of the Ld. Representatives of the parties. Admittedly, as noted in 4th column of the table drawn in para 4 of this order, the purchase orders were made by the assessee for the softwares as mentioned in column No.5, prior to the bringing of amendment vide Finance Act, 2012, though the amendment has been made with retrospective effect from 01.06.1976. However, we find that the said amendment vide which the Explanation 4 has been inserted to section 9(1)(vi) has the effect of change in the law as was existing and even interpreted by the various higher courts of the country prior to the insertion of Explanation 4 in the said provision. By the introduction of the said Explanation 4, computer software has been specifically included in the definition of ‗right, property or information‘ which was never assumed to have been included by any court of law prior to the insertion of Explanation 4 vide amendment of Act of 2012. The Hon‘ble Supreme Court in the case of ―Sedco Forex International Drill INC. & Others vs. Commissioner

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of Income Tax & another‖ (supra) has held that if an explanation added to a provision changes the law, then it is not to be presumed to be retrospective irrespective of the fact that the phrase used are ‗it is declared‘ or ‗for the removal of doubts‘. As it is an admitted position that in the earlier years, not only the various High Courts but also the Tribunal in the cases of the assessee has taken a view that the consideration paid for the purchase of the software cannot be treated as royalty; the assessee was, thus, under the bonafide belief that no TDS/withholding of tax was required to be done in respect to said purchases. The assessee had no reason to believe or to foresee a subsequent event vide which the definition of royalty has been extended to include the consideration for the use of or right to use the software has been included in the definition of royalty under the Act. As per the existing law which was in operation at the time of purchase of software, the assessee was under the bonafide belief that there was no liability to deduct tax in respect of the consideration paid for the said purchase of software. It may be further observed that as the definition as was in existence before the insertion of Explanation 4, there was a remote possibility to give a broad interpretation to the definition of right, property or information so as to include the right to use or right for use of the software in the said definition. The Explanation 4 has brought and added a further meaning to the provision which was not supposed to be foreseen by the assessee. The co-ordinate bench of the Tribunal in the case of Rich Graviss Products (P.) Ltd. vs. ACIT (supra), while relying upon various other decisions of the Tribunal, has held that the disallowance cannot be made under section 40(a)(ia) on the basis of a subsequent amendment brought into the Act with retrospective effect. In view of this, even otherwise, the Explanation 4 inserted vide Finance Act, 2012 cannot be applied retrospectively to the case of the assessee as the said Explanation 4 has the effect of change in law and the assessee was not expected to foresee such change at the time of making the remittance in consideration of purchase of the software in question. Hence, under such circumstances, even otherwise, the assessee was not supposed to deduct TDS on such purchases.” From the above factual discussion and respectfully following the legal position as determined by Hon’ble Delhi High Court in Infrasoft Ltd. (supra) and the decision of coordinate bench of Mumbai Tribunal in Reliance Industries Ltd (supra), we are of the opinion that the assessee has transferred the copyrighted article/ material which does not give rise to any royalty income as held by ld CIT(A) in the impugned order. We order accordingly. In the result the ground No.1 &2 ( A to E) of the appeal are allowed.

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Compaq are well established company in the field of software services and question of their dependent upon the assessee does not arise. On the other hand the ld DR for the revenue submitted that he has no objection if this ground of appeal is restored to the file of Ld CIT(A) for adjudication on merit. 7. We have considered the contentions of the ld representatives of the parties. We have noticed that ld CIT(A) has not adjudicate the ground of appeal despite specific ground of appeal raised by assessee. Hence, we deem it appropriate to restore this ground of appeal to the file of ld CIT(A) to decide the issue afresh in accordance with law. Needless to say that the ld CIT(A) shall grant opportunity of hearing to the assessee before passing the order. In the result this ground of appeal is allowed for statistical purpose. ITA No. 1718/Mum/2008 for AY 2004-05 8. The assessee has raised identical grounds of appeal as raised in appeal for AY 2002-03. The facts for the assessment year under consideration are also similar. We have already allowed the appeal of the assessee for AY 2002-03 on similar facts. Hence, this appeal is also allowed with similar observations. ITA No. 6449/Mum/2008 for AY 2002-03 9. This appeal is filed by Revenue against deletion of penalty levied u/s 271(1)(c) of the Act. 10. Brief facts of the case are that the assessee in the return of income claimed Rs. 1,28,89,958/- was received on account of licence fee for the sale of software and the same is not taxable in India. The contention of assessee was not accepted by AO and treated the income as royalty and brought the same as taxable income in India. The AO further concluded that out the said income, the income on account of licence fee of software to M/s Agrotech Foods Ltd of Rs. 32,27,028/- is a direct sale and Income on licence fee to M/s Compaq Computer (India) for Rs.73,27,586/- and to M/s Satyam Computer Services for Rs.32,35,344/- are value added retail(VAR). The VARs sold these software to Premiere Instrument & Controls Ltd and Maruti Udyog Ltd and the receipt was not offered to tax by assessee on the ground the transaction are in the nature of copyrighted product rather than copyright article. The AO held that M/s Satyam and Compaq is

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depending agent of the assessee and accordingly taxed the receipt u/s 44AD. On appeal before ld CIT(A) the income received on account of direct sale as well as VARs both were treated as royalty. After receipt of order from CIT(A)/ First Appellate Authority, the AO levied the penalty of Rs. 1,28,89,958/- being 100% on the income sought to be evaded vide order dated 28th March 2008. On appeal against the penalty order before the ld. CIT(A), the penalty was deleted holding that assessee under the bonafide belief had claimed the certain income as not taxable and not included the income in the total income and disclosed this fact in the return of income. The ld CIT(A) further held that the addition was made in the assessment order purely due to the interpretation of law and not because of non- furnishing the inaccurate particular of income or concealment of income. Thus, aggrieved by the order of ld. CIT(A), the Revenue has filed the present appeal before us. 11. We have heard ld Sr Counsel for assessee and ld Sr CIT-DR for revenue and perused the material available on record. The ld Counsel for the assessee supported the order of ld CIT(A). On the other hand the ld DR for the revenue supported the order of AO. 12. Along with this appeal, we have also heard the appeal against the quantum assessment ( vide ITA No. 2410/Mum/2007 )wherein we have granted full relief to the assessee as holding that consideration received for software licence/sub- licence is not royalty. As in the quantum assessment, the treatment of the income has been reversed; consequently the disallowance in the assessment order is deleted. Thus, the appeal filed by Revenue even on merit left no merit for further consideration. Because, as the order on the basis of which the penalty was levied has been set-aside by us. Even otherwise the penalty was levied by AO on account of different treatment besides claimed by the assessee. It is the settled law that mere disallowance of claim which is based on bonafide belief cannot be a basis for levy of penalty. There is no specific allegation or finding by AO the that assessee has intentionally and deliberately furnished the inaccurate particular or concealed the income. Hence, appeal filed by the Revenue is dismissed.

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