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Income Tax Appellate Tribunal, “L” Bench, Mumbai
Before: Shri B.R. Baskaran (AM)& C.N. Prasad (JM)
O R D E R Per Bench:-
In all these appeals, the common issue urged is whether the payments made by the assessee herein to foreign companies towards purchase of certain
2 Reliance Industries Ltd. software for its internal use in the business of the assessee is liable to tax in India as “Royalties” under the provisions of sec. 9(1)(vi) of the Income tax Act read with India-USA DTAA. The assessee made applications u/s 195(2) of the Act for remitting the payments without tax deduction at source. The AO held that the payments would quality as royalty as per DTAA between India and USA and accordingly directed the assessee to deduct tax at source at applicable rates. The assessee challenged the decisions rendered by the AO by filing appeals before Ld CIT(A). In some of the cases, the Ld CIT(A) has accepted the contentions of the assessee that the payments so made constitutes business income in the hands of the recipient and the same is not taxable in India, since the recipient does not have Permanent Establishment in India. The revenue has filed the appeals in those cases, where the Ld CIT(A) has decided the issue by holding the same as not royalty, but business profits. The assessee has filed appeals, where the Ld CIT(A) has upheld the view of the AO that the payments constitute royalty.
In all these cases, the assessee has purchased software from various parties for using the same in its Jamnagar Refinery complex. The case of the Ld A.R is that the software is a standardized software supplied to the assessee on non-exclusive basis and further the assessee does not have right to copy the same except as provided in the agreement for internal use. He further submitted that the source code is not supplied to the assessee and the assessee has been given only license to use the software, which is akin to shrink wrapped software. The Ld A.R submitted that the issue has been covered in favour of the assessee by the decision dated 18-05-2016 passed by the co-ordinate bench of ITAT in a group of cases, which includes assessee’s own case also in to 1984, 1986, 2523,2529/M/2008.
On the contrary, the ld D.R submitted that the Explanation 4,5 and 6 inserted by the Finance Act, 2012 to section 9(1)(vi) and Explanation inserted after sec. 9(2) are applicable to the instant cases. The Ld D.R has also given detailed written submissions on various points contested by him.
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However, as stated earlier, the co-ordinate bench has considered an identical issue in the assessee’s own case (referred supra) and has come to the conclusion that the payments made for purchase of standardized version of software shall not fall under the definition of Royalty as provided in DTAA. We notice that the co-ordinate bench has considered the provisions of sec. 9(1)(vi) of the Act including Explanations 4 to 6, the provisions of India-USA DTAA, the definition given in the Double tax avoidance agreements entered by India with Japan, Australia, Canada, UK and Netherlands. For the sake of convenience, we extract below the relevant observations made by the co- ordinate bench in the assessee’s own case:-
A perusal of the above definitions in treaties with different countries reveal that in all the treaties, the Article 12 therein, generally, deals with the payments in respect of royalties and almost identical/similarly worded definition of royalty‘ has been provided in the treaties of India with various countries. This fact has also been noticed by the Hon'ble Karnataka High court in the case of Synopsis International Old Ltd. (supra). For further discussion of the matter, as agreed by both the representatives of the parties also, we take the base definition of ‘royalty’ as provided in treaty with USA.
A comparison of the definition of royalty‘ as provided under the DTAA (USA), as reproduced above, with the definition of royalty‘ as provided under Income Tax Act shows that the same are not in paramateria with each other. The definition provided under the DTAA is the very short and restrictive definition, whereas, the definition of the royalty as provided under the Income Tax Act is a very wide and inclusive definition but the same seems to be somewhat vague also. A careful reading of the relevant provisions under the DTAA and as compared with that of the Income Tax Act, 1961, reveals that the DTAA covers only a part of the items mentioned under sub clauses (i) to (v) to Explanation 2 to section 9(1)(vi). A perusal of the definition of royalty as provided in Article 12 of DTAA‘ reveals that it is the payment which is received as consideration for the use of‘ or the right to use‘ any copyright of literary, artistic, scientific work including …..‟ (emphasis supplied by us). Hence, what is relevant is the consideration paid for the use of‘ or the right to use‘ any copyright‘. The right to use a computer software/programme has not been specifically mentioned in the DTAA with any country. We may clarify here that the contention of the revenue is that the term literary work‘ includes software‘ also, which contention we will discuss in the latter part of this order. Now coming to the relevant provisions of the Income Tax Act,1961, we may mention here that the scope of royalty‘ under clauses (a), (b), & (c) to section 9(1)(vi) is 4 Reliance Industries Ltd.
very broad to cover consideration paid for any right, property or information used or services utilized for the purpose of business or profession. Further, we find that the said clauses (a), (b) & (c) of section 9(1) (vi), are not properly worded. To gather as to what payment made by the Indian resident to a foreign resident would constitute royalty, one requires to draw inference from the wording of exception to clause (b). Even, if we draw inference from the exception under clause (b) read with the wording in clause (c) which is in relation to a payment made by a non resident, even then, what the ‘royalty‘, under the Act, may constitute will be the income payable in respect of any right‘, property‘ or information‘ used or services utilized for the purpose of business or profession by such resident to a non resident. Further, vide various explanations introduced subsequently; the above definition of the ‘royalty‘ has been further expanded. ‘Explanation 4‘ inserted by Finance Act, 2012, provides that the transfer of rights in respect of any right, property or information includes and has always included the right for use or right to use a computer software including granting of a license. We find that so far as Income Tax Act is concerned, „computer software‟ has neither been included nor is deemed to be included within the scope or definition of „literary work‟ under section 9(1)(vi) of the Act. The term ‘literary work’ has been separately mentioned under clause (v) to “Explanation 2”to include the consideration paid for the same within the scope of royalty, whereas, the „Explanation 4‟ has broadened the scope of clauses (a) (b) and (c) of section 9(1)(vi) to include „computer software‟ under the definition of “right”, „property‟ or „information.‟ Hence, the computer software has been recognized as a separate item not only in 2nd proviso to clause (vi) but in „Explanation 4‟ also and has been included in the definition and within the scope of the words „right‟, „property‟ or „information‟ as provided under clauses (b) and (c) to section 9(1)(vi) . The term „computer software‟ has not been included in the meaning and scope of the term “literary work‟ under clause (v) to Explanation 2. It is also pertinent to mention here that the consideration paid for „computer software‟ has not been specifically included under the definition of royalty under the DTAA.
Under the circumstances, it cannot be said that the definition of royalty as under the Income Tax Act is in paramateria with that under the DTAA. Since the definition provided under the royalty in the DTAA is more beneficial to the assessee, hence as per the provisions of section 90, the definition of royalty as provided under DTAA is to be taken.
So far as the reliance of the Ld. D.R. on the decision of the Hon‘ble Madras High Court in the case of Vrizon Communication Singapore (supra) and of the Mumbai Tribunal in the case of Viacom 18 Media Pvt. Ltd. (supra) is concerned, we find that the said decisions have been rendered in context of some other item relating to the consideration paid for transponder/band width/telecom services. In that context, the Hon‘ble Madras High Court
5 Reliance Industries Ltd. has interpreted the right to use the equipment‘ and the word process‘ applying the definition provided under the domestic Income Tax Act as the definition of the same was not available in the DTAA. However, in the case in hand, we have to define the term literary work‘ and the term copyright; the definitions of the same are not available under the Income Tax Act, but, the same are available under the Copyright Act, 1957.
The Hon‘ble Delhi High Court in the case of DIT vs Nokia Networks OY [2012] Taxmann.com 225 (Delhi) has held that though Explanation 4‘ was added to section 9(1)(vi) by the Finance Act 2012 with retrospective effect from 1.6.1976 to provide that all consideration for user of software shall be assessable as royalty, the definition in the DTAA has been left unchanged. That in Siemens AG 310 ITR 320 (Bom), it was held that amendments cannot be read into the treaty. As the assessee has opted to be assessed by the DTAA, the consideration cannot be assessed as royalty despite the retrospective amendments to the Act. The relevant findings of the Hon‘ble Delhi High Court as given in para 23 of the said decision, for the sake of convenience are reproduced as under:
“However, the above argument misses the vital point namely the assessee has opted to be governed by the treaty and the language of the said treaty differs from the amended Section 9 of the Act. It is categorically held in CIT Vs. Siemens Aktiongesellschaft, 310 ITR 320 (Bom) that the amendments cannot be read into the treaty. On the wording of the treaty, we have already held in Ericsson (supra) that a copyrighted article does not fall within the purview of Royalty.”
Further, in a recent judgment in the case of DIT Vs New Skies Satellite BV, (ITA 473/2012 vide order dated 08.02.2016), the Hon‘ble Delhi High Court has observed that no amendment to the Act, whether retrospective or prospective can be read in a manner so as to extend its operation to the terms of an international treaty. In other words, a clarificatory or declaratory amendment, much less one which may seek to overcome an unwelcome judicial interpretation of law, cannot be allowed to have the same retroactive effect on an international instrument affected between two sovereign states prior to such amendment. That an amendment to a treaty must be brought about by an agreement between the parties. Unilateral amendments to treaties are therefore categorically prohibited. Even the Parliament is not competent to effect amendments to international instruments. As held by the Hon‘ble Supreme Court in Azadi Bachao Andolan (2003) 263 ITR 607, these treaties are creations of a different process subject to negotiations by sovereign nations. While relying on the decision of the Hon‘ble Madras High Court, in CIT vs VR. S.RM. Firms & Ors, the Hon‘ble Delhi High Court has held that the tax treaties are considered to be mini legislation containing in themselves all the relevant aspects or features which are at variance with the general
6 Reliance Industries Ltd. taxation laws of the respective countries. The Parliament is not equipped with the power to, through domestic law, change the terms of a treaty. Amendments to domestic law cannot be read into treaty provisions without amending the treaty itself. It is fallacious to assume that any change made to domestic law to rectify a situation of mistaken interpretation can spontaneously further their case in an international treaty. Therefore, mere amendment to Section 9(1)(vi) cannot result in a change. It is imperative that such amendment is brought about in the agreement as well. Hon‘ble Delhi High Court concluded in the said decision (supra) that the Finance Act, 2012 will not affect Article 12 of the DTAAs, it would follow that the first determinative interpretation given to the word royalty prior to the amendment in the Income Tax Act will continue to hold the field for the purpose of assessment years preceding the Finance Act, 2012 and in all cases which involve a Double Tax Avoidance Agreement, unless the said DTAAs are amended jointly by both parties.
Further, we find that in all the decisions of the Hon‘ble High Courts, relied upon by both the Ld. Representatives of both the parties, i.e. not only in the decisions relied upon by the assessee of the Hon‘ble Delhi High Court in the case of Infrasoft Ltd. (supra) and Ericson A.B. (supra), but also in the decisions relied upon by the Revenue i.e. Samsung Electronics Company Ltd. & Others (supra), Synopsis International Old Ltd. (supra) and of the Tribunal in the case of Reliance Infocom Ltd. (supra), the different Benches of the High Courts and the Tribunal have been unanimous to hold that as per the law laid down by the Hon‘ble Supreme Court in the case of Union of India vs. Azadi Bachao Andolan (2003) 263 ITR 607, that where a specific provision is made in the DTAA, that provision will prevail over the general provisions contained in the Income Tax Act if, the same is more beneficial to the assessee as provided under section 90(2) of the Income tax Act. All the Hon‘ble High Courts (supra) have also been unanimous to further hold that the definition of royalty‘ is restrictive in DTAA whereas the definition of royalty under the Income Tax Act is broader in its content; Therefore, the definition of royalty in DTAA is more beneficial to the assessee and hence the case of the assessee is to be examined in the light of the definition of royalty as provided in the DTAA and that the provisions of the DTAA will, in such an event, override the provisions of the Income Tax Act.
Since, in the cases in hand also, the Ld. AR of the assessee has stated that the definition of treaty in the DTAA is more beneficial to the assessee and that the case of the assessee be decided taking the definition as provided in the treaty, hence, in the light of above cited decisions, we proceed to examine as to the consideration paid by the assessee for the purchase of the software can be covered within the scope of the definition of royalty‘ as provided under the DTAA.
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As discussed in earlier paras of this order, that though the definition of royalty‘ under DTAA not only covers the payment made as a consideration for the use of, or the right to use, any copyright of a literary work but also for certain other rights/items such as any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, scientific equipment etc. However, the Ld. DR has neither stressed nor has advanced any argument as to that software falls in any of the above mentioned other categories. All the contentions of the revenue are concentrated on the point that software is covered under the term copy right in a literary work‘ and thus included in the definition of ‘royalty‘ as provided under the DTAAs of India with the other countries as detailed in the table above. It has been submitted by the ld. DR that the definition of ‘Literary work‘ as provided under the domestic law viz. Copyright Act, 1957 should be considered while deciding the scope of the term Royalty as defined under the treaty. This issue has been discussed by 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, observing that any term not defined in the convention shall, unless the context otherwise requires, have the meaning which it has under the laws of that State‘ concerning the tax to which the convention applies. Hence, the reference is to be made to the respective law of the taxing State (India in this case) regarding the definition of ‘literary work‘ and copyright‘. The relevant part of the Article 3 of the DTAA for the purpose of ready reference is reproduced as under:
Art 3. (2.) As regards the application of the Agreement by a Contracting State, any term not defined therein shall, unless the context otherwise requires, have, the meaning which it has under the law of that State concerning the taxes to which the Agreement applies.
Hence, the first question before us, at this stage, is as to whether the term literary work‘ as mentioned in the definition of royalty in the treaty would include software‘ or not?
We note that the term 'Literary work' covers work, which is expressed in print or writing irrespective of the question of its literary merit or quality. It must be expressed in some material form, i.e. writing or print or in some form of notation or symbols, which means in a form capable of either visually or audibly recreating the representation of the original work. As per the provisions of section 2(o) of the Indian Copyright Act, 1957, the term literary work includes computer programs, tables and compilations including computer data base. Therefore, the computer software has been recognized as a literary work in India, if they are original intellectual creations.
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The next controversy that has been raised before us as to whether the sale of software can be said to be sale of Goods‘ or grant of License to use‘ the same. In the past, software were often sold as an integral part of the computer system, but now a days, software products are sold or licensed in the form of computer readable media such as diskettes and CD-ROMs or directly over the Internet. The software sale/purchase contracts involve two distinct parties who could discuss all the terms of such agreement between them. The rights assigned by the author/owner of the software would be very specific in their scope, indicating clearly to the purchaser the actions that he/she is permitted to perform in relation to the software embedded in such discs. Software contracts, like many other transactions, are governed by the common law principles as embodied in the Indian Contract Act. Contracts can be in the nature of sale or assignment/license. If the computer software is considered as a 'goods', the Sale of Goods Act, 1930‘ will have relevance in the formation and execution of the sale contract. In context of copyright law, a license is a permission to do an act, that, when the doing of the same without permission, would be unlawful. In Software Licences, the copyright owner retains substantial rights and greater ability to control the use of software. Licence may have provisions relating to the persons who may use the programme, the number of copies that can be made, warranty, limitation of liability, distribution of the software, etc. These are generally biased towards the licensor. Now, the question before us is as to whether the sale of such computer software by the non-resident to the resident assessee amounts to the transfer for the use of or the right to use any copyright in a literary work?
The plea raised on behalf of the Revenue is that in case of sale of software, the title to the disk, manual etc. in which the software is embedded may pass to the buyer, but, the title to Intellectual Property in the software does not. The Ld. DR has relied upon the decision of the Hon‘ble Karnataka High Court in CIT vs. Samsung Electronics Company Ltd. & Others (2012) 345 ITR 494 wherein it has been observed that under the agreement, what had been transferred was only a license to use the copyright belonging to the non-resident subject to the terms and conditions of the agreement and that the non-resident supplier continued to be the owner of the copyright and all other intellectual property rights; license is granted for making use of the copyright in respect of software under the respective agreement and that the same would amount to transfer of part of the copyright. The Ld. DR has also relied upon another decision of the Hon‘ble Karnataka High Court in the case of CIT vs. Synopsis International Old Ltd. (2013) 212 taxman 454, wherein, the Hon‘ble Karnataka High Court has observed that even in case of end-user software license agreement granted for a non exclusive, non transferable, without right of sub license of use of the licensed software and design techniques, that does not take away the software out of the definition of the copyright. Even if it is not a transfer of exclusive right in the copyright,
9 Reliance Industries Ltd. the right to use the confidential information embedded in the software in terms of the license makes it abundantly clear that there is transfer of certain rights which the owner of a copyright possesses in the said computer software/programme in respect of the copyright. The Hon‘ble Karnataka High Court while analyzing the provisions of the DTAA held that the consideration paid for the use‘ or right to use‘ the said confidential information in the form of computer programme software itself constitutes royalty and attracts tax.
However, different benches of the Hon‘ble Delhi High Court in the case of DIT vs. Infrasoft Ltd. (supra); DIT vs Nokia networks OY (supra) and in the case of DIT vs. Ericson A.B.(supra) have been unanimous to hold that the license granted to the licensee permitting him to download the computer programme and storing it in computer for its own use is only incidental to the facility extended to the licensee to make use of the copyrighted product for his internal business purposes. The said process is necessary to make the program functional and to have access to it. 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. The Hon‘ble Delhi High Court has observed that in such a case there is no transfer of any right in respect of copyright to the assessee and it is a case of 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. The Hon‘ble Delhi High Court has further held that what is transferred is neither can be right in the software nor the use of the copyright in the software, but is the right to use copyrighted material or article which is clearly distinct from the rights in a copyright and the same does not give rise to any royalty income and would be the business income‘ of the non-resident. The Hon‘ble Delhi High Court in the case of Infrasoft Ltd. (supra) has also relied upon another decision of the Hon‘ble Delhi High Court in the case of DIT vs. Nokia Networks OY‖ (2013) 212 taxman 68 wherein the Hon‘ble Delhi High Court has held that the copyright is distinct from material object. It is intangible, incorporeal right in the nature of privilege, quite independent of any material substance such as manuscript. The transfer of the ownership of a physical thing in which copyright exists comes to the purchaser with the right to do with it whatever he pleases, except the right to make copies and issue them to the public. Just because one has the copyrighted article, it does not follow that one has also copyright in it.
Now, after going through the divergent views of the different Benches of the Hon‘ble High Courts on this issue and considering the different aspects of the matter, our humble view in respect of this issue is as follows: Section 2 (7) of the Sale of Goods Act, 1930 defines 'goods' as 'every kind of movable property other than actionable claims and money, and includes stock and shares, growing crops, grass....' This definition of 'goods' thus includes all types of movable properties, whether tangible or intangible. The Hon‘ble Supreme Court in the case of Tata Consultancy Services vs State of Andhra Pradesh‖ 271
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ITR 401 (2004), has considered computer software as 'goods' and stated that notwithstanding the fact that computer software is intellectual property, whether it is conveyed in diskettes, floppy, magnetic tapes or CD ROMs, whether canned (shrink-wrapped) or uncanned (customized), whether it comes as part of the computer or independently, whether it is branded or unbranded, tangible or intangible; is a commodity capable of' being transmitted, transferred, delivered, stored, processed, etc., and therefore, as a 'good' liable to sales tax. The Hon‘ble Supreme Court held that, 'it would become goods‘ provided it has the attributes thereof having regard to (a) its utility; (b) capable of being bought and sold; and (c) capable of being transmitted, transferred, delivered, stored and possessed. If a software whether customized or noncustomized satisfies these attributes, the same would be goods.' The Hon‘ble Apex court while citing the decision of the US court in Advent Systems Ltd v Unisys Corporation (925) F 2d 670 (3rd Cir 1991), held 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 market place. In such a case, the intellectual property has been incorporated on a media for purposes of transfer. The software and the media cannot be split up.
In Associated Cements Co. Ltd. vs. Commissioner of Customs, AIR 2001 SC 862, the Hon‘ble Supreme Court examined whether the drawings and license could be considered as goods‘. The Hon‘ble Supreme Court held that all tangible, movable articles are goods for charge of custom duties under section 12 read with section 2(22)(e) of the Customs Act, 1962, irrespective of what the article may be or may contain. It may be that what the importer wanted and paid for was technical advice or information technology, an intangible asset, but the moment the information or advice is put on media, whether paper or cassette or diskette or any other thing, that what is supplied, it becomes chattel. The Hon‘ble Supreme Court, thus, held that the intellectual property such as drawings, license and technical material when put on a media is to be regarded as an article and there is no scope for splitting the engineering drawings or encyclopedia into intellectual input on the one hand and the paper on which it is scribed on the other hand.
No doubt, the dominant object of sale in such transaction is the computer software and not the disk or the CD upon which such software is loaded. As understood by us, what the computer programme‘ or the software‘ is an expression of work/ideas written on a media in a computer programming language and that is why it has been included worldwide in the category of literary work. As per the definition provided in section 2 (ffc) of the Indian Copyright Act 1957‘ "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; As per
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Explanation 3 to section 9(1)(vi), the computer software has been defined as follows:
“… 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.”
Hence, like any other literary work, computer programme can not be read or utilized without downloading on a media like hard disk, CD, floppy or any other such device. An author of a literary work may be having some ideas in his mind in an intangible form but the copyright in those ideas is created only when they are expressed in a particular manner in the shape of some impressions, symbols or language or visuals etc. on a media such as book, film or CD or screen etc. Now a days, not only the computer programmes, but also, the other literary work can be transmitted over the internet from one media/computer to the other media /computer. But these expressions of ideas called literary work including computer programmes cannot be read or utilized without downloading or writing them on a media. Hence, though the same as a result of advancement in technology can be transmitted in an intangible form, but to constitute a literary work, these have to be transformed into a tangible form. Computer programmes in itself can not be equated and categorized into an intangible material or right, such as a business or commercial right like copy right, right to practice some profession or noncompeting right etc.; Once incorporated on a media, it become goods‘ and cannot be to be said to be copy right in itself; however a copy right can be created in respect of such computer software/ideas expressed on a media. Further the copyright doesn‘t protect the idea itself but only protects the way or the manner in which such ideas are expressed.
In the case in hand, the software has been embedded in a disk. The assessee/purchaser after paying the price of the disk, is supposed to have right to use that goods/disc. On the completion of the sale, the property in such a goods passes to the buyer and the buyer has every right of fair use of the said product and subject to the conditions mentioned in the sale agreement which in fact are restrictions or limitations to the effect that the buyer will not misuse the product which may amount to infringe of copyright in the product. So what the buyer purchases is the copyrighted product and he is entitled to fair use of the product. The restriction or the terms mentioned in the agreement are the conditions of sale restricting misuse and cannot be said to be license to use. The purchaser, thus, is entitled to perform all or any of the activities which is essentially required for the fair use for the purpose for which the product is purchased by him. Section 52 of the Copyright Act expressly recognizes such a right of the purchaser, which we will discuss in later part of this order.
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Further, the computer software, as generally observed, has a shorter life cycle. When software is sold, the owner gets the price of the copy of the product/work. He in fact receives the price for the expected life of the work and product. In such case the purchaser pays the price for the product itself and not for the license to use.
Even if we assume, for the sake of arguments, that it is the license to use which is granted by the owner of the software, the question comes as to whether it is a license to use the software itself or the copy right in the software. The contention of the Revenue is that in case of software Licenses, the copyright owner gives a license to use the copyright in the software and that the owner of software exercises power over not only the software itself, but also, over people who may wish to use the software and that the owner of the software decides who will use his work. It has therefore been strongly contended on behalf of the Revenue that it is the right given to use the copyright in the software.
We, however, are not convinced with the above argument of the revenue. Even if, the owner of a software makes a contract for sale/supply of such software to a specific person/persons as it may not be of use to general customers, because the same being Industry/ task specific, that, itself, doesn‘t in any way may mean or infer that the owner has transferred or sold the copy right in the work. One has to understand the difference between the term „use of copy right in software‟ and use of software‟ itself. To constitute „royalty‟ under DTAA, it is the consideration for transfer of „use of copyright in the work‟ and not the „use of work‟ itself.
In our view, the sale of a CD ROM/diskette containing software is not a license but it is a sale of a product which of course is a copyrighted product and the owner of the copyright by way of agreement puts the conditions and restrictions on the use of the product so that his copyrights in such copyrighted article or the work, may not be infringed. The purchaser gets the right to use the product/diskette along with the property in the good‘ in the shape of work embedded or written in it when the sale is complete i.e. when such diskette/COD ROM is delivered by the seller to the purchaser in lieu of the consideration paid to him. Thus what is restricted by the so called agreement or commonly used software license is that the user will not infringe the copyrights of the owner of the work in the product. The purchaser is always entitled to fair use of the work which he has purchased. The terms of agreements in case of software are thus the conditions of the sale of the product.
Further, a question, which needs to be examined whether the statutory rights of the purchaser/user of the software can be curtailed or done away with by the terms of such licenses/agreements. A License Agreement, in spite of the fact that it may fulfill all the requirements of a 13 Reliance Industries Ltd.
valid contract, such an agreement may not be enforceable, if, its stipulations conflict with the law governed in the country where such licenses are intended to be enforced, or if it is an unconscionable or unreasonable bargain. In computer software, generally it is the tendency of software producers to do away with the rights and privileges of the user, even which are specifically conferred upon the user by the relevant prevalent laws such as Copyright Act, Contract Act and other relevant laws. The fair use of the purchased article is the other plea which contradicts the license theory. As per the provisions of section 52 of the Copyright Act 1957, which has provisions similar to the provisions of section 117 of the US Copyright Act, the owner of a copyright of computer software is legally entitled to fair use that copy of software even without a license from the software publisher and any condition put in a license restricting the fair or reasonable use of the product purchased by the buyer in that respect will have to be ignored. If the license severely limits the rights of the consumers, such as implied conditions and warranties in a contract, it cannot be enforced. If in the license agreement, there are certain conditions which are in violation of the provisions of the Contract Act, then such conditions cannot be enforced and even under some circumstances, the whole contract can be held to be void. Further the condition in the agreement that the ownership of each copy of software would remain with the software publisher and that the user will have only right to use the software is to be looked in terms of the Indian Contract Act to arrive at a conclusion whether such a condition is reasonable and is not against the public policy or whether it is restricting the fair use of right of the user/purchaser of the product. It is also a determinative factor as to whether the property in the goods after buying the product/ software CD has passed on to the purchaser or not as per the provisions of Sale Of Goods Act 1930‘. So what the buyer buys is the copyrighted product and he is entitled to fair use of the product as is provided under section 52 of the Copyright Act. He is also entitled to perform all or any of the activities which is essentially required for the fair use and for the purpose for which the product is purchased by the buyer. Even as discussed above, even if we assume that such licenses may be legally enforceable in relation to all the terms mentioned therein, even then, what at the most can be assumed is that the licensor/owner has granted the right to use the software. It doesn‘t in any manner gives any inference that the seller/licensor has given/licensed the copyright in the software. It may also be pointed out here that whether such an license agreement is signed or not by the licensee/purchaser, still the owner of the product will have the copyrights in such a product, as are defined and explained under the Indian Copyright Act; even the registration of the product or the work under the Copyright Act is not compulsory. The owner of the work is deemed to be protected in relation to the copyrights in the work but the fair use of the product/work cannot be denied and any clause in such agreement should be deemed to be void as against the principle of fair use of the product.
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Further, to determine whether a copyright in a work is infringed or not or would be deemed to be infringed or not, the most important test is to find out whether the use is likely to harm the potential market or the value of the copyrighted work. When it is not the allegation of the owner/purchaser of the work that the purchaser/user was reproducing the work and distributing it so as to affect his potential market in exercising the reproduction right, then it cannot be said that the user has infringed the rights of the purchaser, who in fact has paid the consideration to use the copyrighted work. The use of the product itself‘ by the purchaser for the purpose for which he purchases such a product/diskette/CD ROM is thus comes within the scope of fair use. Copyright does not protect the fair or exclusive use of the work, rather, the purpose of copyright protection is to regulate the reproduction of the copies of the copyrighted work and distribution thereof. It is pertinent to mention here that the use of information viz. a new technology or invention, though, can be protected under the Patents Act, 1970; yet, under the Patents Act 1970, the computer Software cannot be patented. The computer software, subject to certain exception, has been specifically excluded from patentable items under the Patents Act, 1970.
At this stage, we think it appropriate to discuss here the relevant provisions of the Copyright Act, 1957 also. The copyright has been defined under section 14 of the Copyright Act, 1957 as under:
Meaning of copyright – For the purposes of this Act, copyright‘ means the exclusive right subject to the provisions of this Act, to do or authorize the doing of ay 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 from including the storing of it in any medium by electronic means; (ii) to issue copies 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- cls. (i) to (vi);
(b) in the case of a computer programme,- (i) to do any of the acts specified in cl. (a); 15 Reliance Industries Ltd.
(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. ……………………
A perusal of the above provisions of the copyright Act reveals that the computer software is included in the definition of literary work and is covered under the purview and scope of copyright. The exclusive rights to do or authorize the doing of certain acts as mentioned in clause (a) and clause (b) of section 14 vests in the owner of the work such as to reproduce the work, to issue copies, to make translation or adaptation, to sell or give on commercial rental in respect of a work. The internal use of the work for the purpose it has been purchased does not constitute right to use the copy right in work. Our above view also finds support from certain other provisions of the Copyright Act, which we discuss in the following paras.
Section 51 of the copyright Act deals as to when the copyright is infringed, which, for the sake of convenience, is reproduced as under:
CHAPTER XI Infringement of Copyright
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 Registrar of Copyrights under this Act or in contravention of the conditions of a licence so granted or of any condition imposed by a competent authority under this Act- (i) does anything, the exclusive right to do which is by this Act conferred upon the owner of the copyright, or (ii) permits for profit any place to be used for the communication of the work to the public where such communication constitutes an infringement of the copyright in the work, unless he was not aware and had no reasonable ground for believing that such communication to the public would be an infringement of copyright; or (b) when any person- (i) makes for sale or hire, or sells or lets for hire, or by way of trade displays or offers for sale or hire, or (ii) distributes either for the purpose of trade or to such an extent as to affect prejudicially the owner of the copyright, or (iii) by way of trade exhibits in public, or 16 Reliance Industries Ltd.
(iv) imports into India, any infringing copies of the work Provided that nothing in sub-clause (iv) shall apply to the import of one copy of any work for the private and domestic use of the importer. Explanation.- For the purposes of this section, the reproduction of a literary, dramatic, musical or artistic work in the form of a cinematograph film shall be deemed to be an "infringing copy".
Certain provisions of section 52 of the Copyright Act which are relevant are also reproduced as under: ―
Certain acts not to be infringement of copyright.-(1) The following acts shall not constitute an infringement of copyright, namely:
(a) a fair dealing with a literary, dramatic, musical or artistic work 104 [not being a computer programme] for the purposes of private use, including research; criticism or review, whether of that work or of any other work;
(aa) the making of copies or adaptation of a computer programme by the lawful possessor of a copy of such computer programme, from such copying order to utilize the computer programme for the purposes for which it was supplied; or to make back-up copies purely as a temporary protection against loss, destruction or damage in order only to utilise the computer programme for the purpose for which it was supplied;
(ab) the doing of any act necessary to obtain information essential for operating inter-operability of an independently created computer programme with other programmes by a lawful possessor of a computer programme provided that such information is not otherwise readily available;
(ac) the observation, study or test of functioning of the computer programme in order to determine the ideas and principles which underline any elements of the programme while performing such acts necessary for the functions for which the computer programme was supplied;
(ad) the making of copies or adaptation of the computer programme from a personally legally obtained copy for non-commercial personal use;
The proviso to section 57 of the Act is also relevant. The said section 57 of the Act of 1957 is also reproduced as under: ―
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[Author‘s special rights. (1) Independently of the author‘s copyright and even after the assignment either wholly or partially of the said copyright, the author of a work shall have the right- (a) to claim authorship of the work; and (b) to restrain or claim damages in respect of any distortion, mutilation, modification or other act in relation to the said work which is done before the expiration of the term of copyright if such distortion, mutilation, modification or other act would be prejudicial to his honour or reputation:
Provided that the author shall not have any 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.
Hence, as per section 51 of the Act, copyright in a work shall be deemed to be infringed when any person without license granted by the owner of the copyright or in contravention of the conditions of a license so granted does anything, the copyright of the owner is stated to be infringed.
However a perusal of the above provisions of the Copyright Act further reveals that even in some cases unauthorized uses of a copyright work is not necessarily infringing. An unlicensed use of the copyright is not an infringement unless it conflicts with one of the specific exclusive rights covered by the copyright statue. Further there are certain exceptions also. As per the proviso to sub clause (iv) to the clause (b) to section 51, import into India of one infringing copy of any work for the private and domestic use of the importer will not be considered as infringement.
Further, the section 52 of the Act provides for certain other exceptions and the doing of such acts as mentioned under section 52 is not considered as infringement of the copyright as per the statute.
In case of software, it has been provided that making of copies or adaptation of a computer programme by the lawful possessor of a copy of such computer programme from such copy in order to utilize the computer programme for the purpose of which it was supplied or to make back-up copies purely as a temporary protection against loss, destruction or damage and in order to utilize the computer programme and further the doing of any act necessary to obtain information essential for operating inter operatability of an independently created computer programme with other programmes in case such information is not otherwise readily available, the observation, study or test of functioning of computer programme with determination, the ideas and principles necessary for the functions for which the computer programme was supplied and the making of copies or adaptation of computer programme from a personally
18 Reliance Industries Ltd. and legally obtained copy from non-commercial personal use, have been excluded from the definition of infringement of copyright.
Even import of one infringed copy of the work for private and domestic work of the importer has been excluded from the scope of infringement of Copyright under the Act.
It is also pertinent to mention here that 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.
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.
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 authors for protection of their rights in their country. Sections 40, 40A and section 41of the Copyright Act, 1957 are relevant in this respect.
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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.
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.
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 20 Reliance Industries Ltd.
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 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 can not be said to grant of or infringement of copyright in the light of specific statutory provisions of Copyright Act 1957.
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 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 IndiaMalaysia 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:
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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 with 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 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.”
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.
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.
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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.
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. 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.
We notice that the co-ordinate bench of tribunal has decided an identical issue in the case of M/s Baan Global B V (supra) has considered an identical issue and rendered its decision as under:-
“10. We have heard the rival submissions, perused the relevant finding given in the impugned order and also the various decisions, cited before us. The sole issue involved before us is, whether the payment received by 23 Reliance Industries Ltd. the assessee on sale of computer software product is to be treated as income by way of “royalty” or business income. In case, if it is a ‘business’ income, then admittedly, assessee being a non-resident company with no permanent establishment in India, the same will not be taxable in India and if it is a “royalty”, then it has to be taxed at the rate of 15% as provide under the treaty. Thus, the only issue for consideration is, whether the said payment falls within the terms of “royalty” under Article 12(4) of India-Netherland DTAA or under 9(1)(vi) of Income Tax Act. Here again, it is an undisputed fact that, assessee being a tax resident of Netherland has sought benefit under Indo Netherland DTAA, therefore, the payment received by the assessee from its Indian Subsidiary, INFOR India has to be examined under the treaty provisions. Briefly recapitulating the relevant facts for the purpose of our adjudication emanating from the impugned order is that, Assessee Company is engaged in the business of development and sale of computer software and also provides “other general services” in relation to the software. For both the activities, it has entered into a “distribution agreement” with its Indian subsidiary INFOR India which mainly functions as a distributor of computer software. So far as payments received from “other general services” of Rs.4,79,36,944/-, same has been offered to tax in India as ‘fee for technical services’ on which there is no dispute. The dispute is with regard to the payment of Rs.3,75,25,291/- received by the assessee company as a sale consideration for the computer products supplied by it. The computer software is sold “off shelf” which is mainly used by the Indian customer in their business for financial accounting, inventory management, HR management etc. INFOR India carries out marketing and sale of the software in India and places order with the assessee. The software supplied is then distributed to the Indian customers through INFOR. The consideration charged by INFOR India is based on terms agreed between the assessee and INFOR India as per the ‘distribution agreement’. Under the terms of the agreement, as noted by the CIT(A), there is no transfer of any copyright in the software product. The payment received by the assessee is purely towards a copyrighted software product as against the payment for any copyright itself. The assessee does not give any right to use the copyright embedded in the software. In other words, the Indian Customer (or INFOR India) except for the limited right to access the copyright software for its own business purpose does not acquire any kind of right to exploit the copyright in the computer software. These facts have not been controverted by the department and, therefore, what has been incorporated and stated by the CIT(A) in his order is reckoned as admitted facts.
Now, on these facts, we have to decide, whether the payment received by the assessee can be reckoned as “royalty” within the terms of article 12(4) of DTAA. Before that, the relevant paragraph of Article 12 dealing with the definition of “royalty” reads as under:-
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“4. The term “royalties” as used in this Article means 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 cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience”.
From the plain reading of the article it can be inferred that, it refers to 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 cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. Thus, in order to tax the payment in question as “royalty”, it is sine qua non that the said payment must fall within the ambit and scope of Para 4 of Article 12. The main emphasis on the payment constituting ‘royalty’ in Para 4 are for a consideration for the ‘use of’ or the ‘right to use’ any copyright.......... The key phrases “for the use” or “the right to use any copyright of”; “any patent…….; “or process”, “or for information………,”; “or scientific experience”, etc., are important parameter for treating a transaction in the nature of “royalty”. If the payment doesn’t fit within these parameters then it doesn’t fall within terms of “royalty” under Article 12(4). The computer software does not fall under most of the term used in the Article barring “use of process” or “use of or right to use of copyrights” Here first of all, the sale of software cannot be held to be covered under the word “use of process”, because the assessee has not allowed the end user to use the process by using the software, as the customer does not have any access to the source code. What is available for their use is software product as such and not the process embedded in it. Several processes may be involved in making computer software but what the customer uses is the software product as such and not the process, which are involved into it. What is required to be examined in the impugned case as to whether there is any use or right to use of copyright? The definition of copyright, though has not been explained or defined in the treaty, however, the various Courts have consistently opined that the definition of “copyright” as given in the ‘Copyright Act, 1957’ has to be taken into account for understanding the concept. Section 14 of the said Act defines the ‘copyrights’ to mean as under:-
“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, -
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(i) to reproduce the work in any material form including the storing of it in any medium by electronic means; (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); (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.” (c) in the case of an artistic work,- (i) to reproduce the work in any material form including depiction in three dimensions of a two dimensional work or in two dimensions of a three dimensional work; (ii) to communicate the work to the public; (iii) to issue copies of the work to the public not being copies already in circulation; (iv) to include the work in any cinematograph film; (v) to make any adaptation of the work; (vi) to do in relation to an adaptation of the work any of the acts specified in relation to the work in sub-clauses (i) to (iv); (d) In the case of cinematograph film, - (i) to make a copy of the film, including a photograph of any image forming part thereof; (ii) to sell or give on hire, or offer for sale or hire, any copy of the film, regardless of whether such copy has been sold or given on hire on earlier occasions; (iii) to communicate the film to the public; (e) In the case of sound recording, - (i) to make any other sound recording embodying it; (ii) to sell or give on hire, or offer for sale or hire, any copy of the sound recording regardless of whether such copy has been sold or given on hire on earlier occasions; (iii) to communicate the sound recording to the public. Explanation: For the purposes of this section, a copy which has been sold once shall be deemed to be a copy already in circulation”.
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Thus, the definition of ‘copyright’ in section 14 is an exhaustive definition and it refers to bundle of rights. In respect of computer programming, which is relevant for the issue under consideration before us, the copyright mainly consists of rights as given in clause (b), that is, to do any of the act specified in clause (a) from (i) to (vii) as reproduced above. Thus, to fall within the realm and ambit of right to use copyright in the computer software programme, the aforesaid rights must be given and if the said rights are not given then, there is no copyright in the computer programme or software. As noted by the CIT(A), under the terms of the agreement between the assessee and INFOR India, the agreement specifically forbids them from decompiling, reverse engineering or disassembling the software. The agreement also provides that the end user shall use the software only for the operation and shall not sublicense or modify the software. None of the conditions mentioned in section 14 of the Copyright Act are applicable. If the conclusion of Ld, CIT(A) are based on these facts and agreement, then he has righty concluded that the consideration received by the assessee is for pure sale of “shrink wrapped software” off the shelf and hence, cannot be considered as a “royalty” within the meaning of Article 12(4) of the DTAA, as the same is consideration for sale of copyrighted product and not to use of any copyright.
One of the issue which was raised by the Ld. DR before us is that, the Explanation 4 to section 9(1)(vi) which has been with brought by Finance Act 2012 with retrospective effect in section 9(1)(vi), therefore, the meaning and definition of ‘royalty’ as given therein should be read into the DTAA. We are unable to appreciate this contention of the Ld. DR because the retrospective amendment brought into statute with effect from 01.06.1976 cannot be read into the DTAA, because the treaty has not been correspondingly amended in line with new enlarged definition of ‘royalty’. The alteration in the provisions of the Act cannot be per se read into the treaty unless there is a corresponding negotiation between the two sovereign nations to amend the specific provision of “royalty” in the same line. The limitation clause cannot be read into the treaty for applying the provisions of domestic law like in Article 7 in some of the treaties, where domestic laws are made applicable. Here in this case, the ‘royalty’ has been specifically defined in the treaty and amendment to the definition of such term under the Act would not have any bearing on the definition of such term in the context of DTAA. A treaty which has entered between the two sovereign nations, then one country cannot unilaterally alter its provision. Thus, we do not find any merit in the contention of the Ld. DR that the amended and enlarged definition should be read into the Treaty.”
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Accordingly, by following the decisions rendered by the co-ordinate benches of the Tribunal (referred supra), we hold the payments made for purchase of standardized software cannot be considered to be a royalty with the meaning of provisions of sec. 9(1)(vi) as well as India-USA DTAA. The orders passed by Ld CIT(A) holding the above view are upheld and other orders passed by Ld CIT(A) and that of the assessing officer are set aside.
In the result, the appeals filed by the revenue are dismissed and the appeals of the assessee are allowed.
Order has been pronounced in the Court on 8.3.2017.