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Income Tax Appellate Tribunal, BANGALORE BENCH ‘B’
Before: SHRI VIJAYPAL RAO & SHRI G MANJUNATHA
PER G MANJUNATHA, ACCOUNTANT MEMBER :
These appeals filed by the assessee are directed against the common order of Commissioner of Income – tax (Appeals)-IV,
ITA No.715-717/B/15 2 Bangalore dated 5/11/2014 for the assessment year 2009-10 to 2011- 12.
During the course of hearing in authorized representative of the assessee brought to our notice that the assessee has already filed an appeal in ITA No.31/Bang/2015 dated 5/6/2015 for the asst. year 2009-10 on similar issues which was disposed off by this Tribunal vide order dated 31/6/2015. Hence, in this appeal nothing to adjudicate, becomes infructuous and dismissed accordingly. Now, we proceed with ITA No.716 and 717.
Brief facts of the case are that the assessee is an Indian Company who is engaged in developing telecommunication equipment. During the relevant asst. year, the assessee has purchased shrink-wrap Software from Cadence Designs Ireland amounting to Rs.5,946,245/- and Rs.4,015,887/- respectively. The AO noticed that the assessee has remitted the above amounts to Cadence Designs Systems Ireland without deducting tax at source u/s 195 of the Income-tax Act 1961. The AO initiated proceedings u/s 201(1) and issued show cause notice dated 25/12/2011 why the assessee should not be considered ‘assessee in default’ for not deducting tax at source u/s 195 in respect of payment in question. In response to notice, the ITA No.715-717/B/15 3 assessee’s authorized representative Shri Puneeth, C.A appeared and submitted that the payment made to the non-resident Indian was made for the use of software under non exclusive and non transferable and licensed to use the software. Accordingly, the payments in question are not chargeable to tax in India and, therefore, no liability to deduct tax at source in respect of such payment. The AO however did not convinced with the explanation furnished by the assessee and was of the view that as per the provision of sec. 192 of the Income-tax Act 1961, the assessee was liable to deduct tax at source on the payment made to Cadence Designs Systems Ireland . During the purchase of shrink-wrap software as a payment made amounts to royalty under the Income-tax Act as well as the Indo-Ireland DTAA. The AO accordingly held that the assessee is default u/s 201 and 201(1A) and passed order u/s 201 and 201(1A) dated 14/3/2013 as under:-
“From the above discussion, it is proved that the payments made by the assessee to Cadence, Ireland during the FY 2008-09 & 2010-11 in terms of a license, constitute Royalty, both u/s 9(1)(vi) of the Income-tax Act, 1961, and under the DTAA between India and Ireland, and is chargeable to tax in India. As per sec. 195 of the Income-tax Act, the assessee was liable to deduct tax at source on the royalty payments to Cadence, Ireland.
ITA No.715-717/B/15 4
But no tax had been deducted by the assessee thereon either at the time of crediting or subsequently. As the assessee has failed to discharge its obligation to deduct tax at source as stipulated u/s 195 of the Income- tax Act, obligation to deduct tax at source as stipulated u/s 195 of the Income-tax Act, 1961, as per the provisions of sec.201(1) of the Income-tax Act, 1961, for the FY 2007-08 the assessee is held to be an assessee in default in respect of tax not deducted at source on royalty payments to Cadence, Ireland. It is liable to pay tax deductible in this regard along with the interest u/s 201(1A).
Tax Liability of the assessee: The tax liability of the assessee, Tejas Networks Ltd., u/s 201(1) & 201(1A) for the asst. year 2009-10 (FY 2008-09) is determined as under: Month Amount in Tax Interest u/s Rs deductible 201(1A) u/s 201(1) Rs. Rs. 08-07-2008 537,500 53,750 30,638 14.-10-2008 593,750 59,375 32,063 11-12-2008 617,500 61,750 32,110 26-03-2009 637,500 63,750 31,238 Total 2,386,250 238,625 126,049
ITA No.715-717/B/15 5
The tax liability for the asst. year 2010-11 (FY 2009-10) is determined as under:
Month Amount in Tax Interest u/s Rs. deductible 201(1A) u/s 201(1) Rs. Rs 12-06-2009 587,500 58,750 27,025 08-07-2009 2,136,813 213,681 96,157 08-09-2009 611,125 61,113 26,279 14-12-2009 573,125 57,313 22,925 01-02-2010 2,037,682 203,768 77,432 Total 5,946,245 594,625 249,818
The tax liability for the asst. year 2011-12 (FY 2010-11) is determined as under:
Month Amount in Tax Interest u/s Rs. deductible 201(1A) u/s 201(1) Rs. Rs 13.08.2010 2,046,494 204,649 65,488 31.01.2011 1,969,393 196,939 5 3,174 Total 4,015,887 401,588 118,662
ITA No.715-717/B/15 6
Aggrieved by the order u/s 201 and 201(1A) of the Act, the assessee preferred on appeal before the learned
CIT(A) by declaring the assessment and contended before the learned CIT(A) that the payment made in question were not royalty with the meaning of sec. 9(1) of Indo-
Ireland DTAA. The learned CIT(A) dismissed the assessee’s appeal vide order dated 5/11/20114 by following the decision of the Hon’ble High Court of Karnataka in the case of CIT Vs. Samsung Electronics
Co. Ltd., . 245 ITR 181
“Thereafter, it is very clear from the express terms of the agreement that the right to use copy righted software has been transferred to the assessee. Keeping in view the fact that the judgment of the Hon’ble High Court of Karnataka takes the nature of binding precedent the amounts in question paid as consideration for the right to use copy-righted- software amounts to Royalty within the meaning of the Act read with respective DTAA, the contentions of the assessee’s representative are rejected.”
ITA No.715-717/B/15 7
Aggrieved by the order of the CIT(A), the assessee is in appeal before us.
The authorized representative of the assessee during the course of hearing brought to our notice that the appeals are already decided against the assessee in assessee’s own case in dated 5/6/2015. We further submit that the Hon’ble High Court of Karnataka has also have judgment against the assessee in the case of Samsung Electronics Co. Ltd., (Supra), wherein the assessee is also one of the party.
On the other hand, the learned DR supported the order of the CIT(A).
We have heard both the parties, perused the material available on record and also considered the orders of the authorities below. During the course of hearing both the counsels brought to our notice that the issue involved in these appeals are decided against the assessee in dated 5/6/2015. We find that the issue before us is whether the payments made for acquiring the shrink-wrap Software amounts to royalty u/s 9(1)(vi) of the Income-
ITA No.715-717/B/15 8 tax Act and also Indo- Ireland DTAA and, therefore, tax at source required to be deducted as per the provision of sec. 195 of the Income-tax Act. As pointed out by the AR, the issue is already decided in favour of the assessee in assessee’s own case by this tribunal in dated 5/6/2015 considering the ratio of Hon’ble Karnataka High Court in the case of Samsung Electronics Co. Ltd., (Supra).
The Hon’ble High Court in its decision in the case of Samsung Electronics Co. Ltd., (Supra) while deciding the issue observed as under: 4.3.2 The Hon'ble High Court in its decision in Samsung Electronics Co. Ltd. (supra) while examining the term ‘royalty’ vis-a-vis computer software has observed as under:- “In view of the abovesaid definition of "royalty", it is clear that the necessary ingredient to be satisfied to find out as to whether the payment would amount to "royalty" is as follows -payment of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work.
It has been universally accepted that a literary work is entitled to copyright and wherefore, a literary work is ITA No.715-717/B/15 9 entitled to be registered as copyright. In India, the provisions of section 2(o) of the Copyright Act, 1957, defines "literary work" as under :
"'literary work' includes computer programmes, tables and compilations including computer databases ;"
Therefore, "computer software" has been recognized as copyright work in India also.
Having regard to the above said definition of "royalty", we have to consider the contents of software licence agreement entered into by the nonresident with Samsung Electronics and also the respondents in the case represented by Sri Ganesh, learned senior counsel and Sri Aravind Dattar, wherein it is a case of purchase, sale or distribution or otherwise of the off-the-shelf software. It is described as a "software licence agreement", wherein it is averred that customer accepts an individual, non- transferable and non-exclusive licence to use the licensed software program(s) on the terms and conditions enumerated in the agreement. It is further averred that the customer-Samsung Electronics-shall protect confidential information and shall not remove any copyright, confidentiality or other proprietary rights provided by the non-resident. However, what is granted under the said licence is only a licence to use the software for internal business without having any right for making any ITA No.715-717/B/15 10 alteration or reverse engineering or creating sub- licences. What is transferred under the said licence is the licence to use the software and the copyright continue to be with the non-resident as per the agreement. Even as per the agreement entered into with the other distributors as also the end-user licence agreement, it is clear that the distributor would get exclusive non-transferable licence within the territory for which he is appointed and he has got right to distribute via resellers the software, upon payment of the licences set forth in exhibit A to the agreement only to end users pursuant to a valid Actuate shrinkwrap or other actuate licence agreement and except as expressly set forth in the said agreement, distributor may not rent, lease, loan, sell or otherwise distribute the software the documentation or any derivative works based upon the software or documentation in whole or in part. Distributor shall not reverse engineer, decompile, or otherwise attempt to derive or modify the source code for the software. The distributor shall have no rights to the software other than the rights expressly set forth in the agreement. The distributor shall not modify or copy any part of the software or documentation. The distributor may not use subdistributors for further distribution of the software and documentation without the prior consent of Actuate. What is charged is the licence fee to be paid by the distributor of the software as enumerated in exhibit A to the agreement. Further, clause 6.01 of the agreement dealing with title states that the distributor acknowledges
ITA No.715-717/B/15 11 that actuate and its suppliers retain all right, title and interest in and to the original, and any copies (by whomever produced), of the software or documentation and ownership of all patent copyright, trade mark, trade secret and other intellectual property rights pertaining thereto, shall be and remain the sole property of Actuate. The distributor shall not be an owner of any copies of, or any interest in, the software, but rather is licenced pursuant to the agreement to use and distribute such copies. Actuate represents that it has the right to enter into the agreement and grant the licences provided therein and confidentiality is protected. Therefore, on reading the contents of the respective agreement entered into by the respondents with the non-resident, it is clear that under the agreement, what is transferred is only a licence to use the copyright belonging to the non-resident subject to the terms and conditions of the agreement, as referred to above, and the nonresident supplier continues to be the owner of the copyright and all other intellectual property rights. It is well settled that copyright is a negative right. It is an umbrella of many rights and licence is granted for making use of the copyright in respect of shrink wrapped software/off-the-shelf software under the respective agreement, which authorizes the end user, i.e., the customer to make use of the copyright software contained in the said software, which is purchased off the shelf or imported as shrink wrapped software and the same would amount to transfer of part of ITA No.715-717/B/15 12 the copyright and transfer of right to use the copyright for internal business as per the terms and conditions of the agreement. Therefore, the contention of the learned senior counsel appearing for the respondents that there is no transfer of copyright or any part thereof under the agreements entered into by the respondent with the non- resident supplier of software cannot be accepted.…………
………..It is well settled that in the absence of any definition of "copyright" in the Income-tax Act or the DTAA with the respective countries, in view of article 3 of the DTAA, reference is to be made to the respective law regarding the definition of "copyright", namely, Copyright Act, 1957, in India, wherein it is clearly stated that "literary work" includes computer programmes, tables and compilations including computer (databases). Section 16 of the Copyright Act, 1957, states that no person shall be entitled to copyright or any similar right in any work, whether published or unpublished, otherwise than under and in accordance with the provisions of the said Act or of any other law for the time being in force, but nothing in this section shall be construed as abrogating any right or jurisdiction to restrain a breach of trust or confidence. Section 14 of the said Act dealing with the meaning of "copyright" reads as follows :
"14. Meaning of copyright.-For the purposes of this Act,
ITA No.715-717/B/15 13
'copyright' means the exclusive right subject to the provisions of this Act, to do or authorise the doing of any of the following acts in respect of a work or any substantial part thereof, namely : (a) in the case of a literary, dramatic or musical work, not being a computer programme, (i) to reproduce the work in any material form including the storing of it in any medium by electronic means ;
(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) ;
ITA No.715-717/B/15 14
(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 a cinematograph film, (i) to make a copy of the film, including a photograph of any image forming
ITA No.715-717/B/15 15 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 a 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."
It may also be noted that under section 51 of the Act dealing with "When copyright infringed" states that copyright in a work shall be deemed to be infringed-when any person, without a licence granted by the owner of the copyright or the Registrar of Copyrights under the Act or in contravention of the conditions of a licence so granted or of any condition imposed by a competent authority under the Act does anything, the exclusive right to do which is by the Act conferred upon the owner of the ITA No.715-717/B/15 16 copyright. Section 52 of the Act dealing with certain acts not to be infringement of copyright states that the following acts shall not constitute an infringement of copyright, namely :
"52.(1)(aa) the making of copies or adaptation of a computer programme by the lawful possessor of a copy of such computer programme, from such copy (i) in order to utilise the computer programme for the purpose for which it was supplied ; or (ii) 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."
It is clear from the abovesaid provisions of the Copyright Act that the right to copyright work would also constitute exclusive right of the copyright holder and any violation of the said right would amount to infringement under section 51 of the Act. However, if such copying of computer programme is done by a lawful possessor of a copy of such computer programme, the same would not constitute infringement of copyright and wherefore, but for the licence granted in these cases to the respondent to make copy of the software contained in shrink-wrapped/off-the- shelf software into the hard disk of the designated computer and to take a copy for back-up purposes, the end
ITA No.715-717/B/15 17 user has no other right and the said taking back-up would have constituted an infringement, but for the licence. Therefore, licence is granted for taking copy of the software and to store it in the hard disk and to take a back-up copy and right to make a copy itself is a part of the copyright. Therefore, when licence to make use of the software by making copy of the same and to store it in the hard disk of the designated computer and to take back-up copy of the software, it is clear that what is transferred is right to use the software, an exclusive right, which the owner of the copyright, i.e., the respondent-supplier owns and what is transferred is only right to use copy of the software for the internal business as per the terms and conditions of the agreement. The decision of the Delhi High Court in CIT v. Dynamic Vertical Software India P. Ltd. [2011] 332 ITR 222 (Delhi) relied upon by Sri Aravind Dattar, learned senior counsel appearing for the respondents in some of the cases in support of his contention that by no stretch of imagination, payment made by the respondents to the non-resident suppliers can be treated as "royalty" is not helpful to the respondents in the present cases as in the said case, the Delhi High Court was considering the provisions of section 40(a)(i) of the Act and the order of the High Court reads as follows (page 223) : "What is found, as a matter of fact, is that the assessee has been purchasing the software from Microsoft and sold it further in Indian market by no stretch of imagination, it
ITA No.715-717/B/15 18 would be termed as royalty."
Therefore, the contention of the learned senior counsel appearing for the respondents that there is no transfer of any part of copyright or copyright under the impugned agreements or licences cannot be accepted. Accordingly, we hold that right to make a copy of the software and use it for internal business by making copy of the same and storing the same in the hard disk of the designated computer and taking back up copy would itself amount to copyright work under section 14(1) of the Act and license is granted to use the software by making copies, which work, but for the licence granted would have constituted infringement of copyright and the licensee is in possession of the legal copy of the software under the licence. Therefore, the contention of the learned senior counsel appearing for the respondents that there is no transfer of any part of copyright or copyright and transaction only involves sale of copy of the copyright software cannot be accepted. It is also to be noted that what is supplied is the copy of the software of which the respondent-supplier continues to be the owner of the copyright and what is granted under the licence is only right to copy the software as per the terms of the agreement, which, but for the licence would amount to infringement of copyright and in view of the licence granted, the same would not amount to infringement under section 52 of the Copyright Act as referred to above. Therefore, the amount paid to the non-
ITA No.715-717/B/15 19 resident supplier towards supply of shrink-wrapped software, or offthe-shelf software is not the price of the C. D. alone nor software alone nor the price of licence granted. This is a combination of all and in substance, unless licence is granted permitting the end user to copy and download the software, the dumb C. D. containing the software would not in any way be helpful to the end user as software would become operative only if it is downloaded to the hardware of the designated computer as per the terms and conditions of the agreement and that makes the difference between the computer software and copyright in respect of books or prerecorded music software as book and prerecorded music C. D. can be used once they are purchased, but so far as software stored in dumb C. D. is concerned, the transfer of dumb C. D. by itself would not confer any right upon the end user and the purpose of the C. D. is only to enable the end user to take a copy of the software and to store it in the hard disk of the designated computer if licence is granted in that behalf and in the absence of licence, the same would amount to infringement of copyright, which is exclusively owned by non-resident suppliers, who would continue to be the proprietor of copyright. Therefore, there is no similarity between the transaction of purchase of the book or prerecorded music C. D. or the C. D. containing software and in view of the same, the Legislature in its wisdom, has treated the literary work like books and other articles separately from "computer" software within the meaning
ITA No.715-717/B/15 20 of the "copyright" as referred to above under section 14 of the Copyright Act.
It is also clear from the abovesaid analysis of the DTAA, the Income-tax Act, the Copyright Act that the payment would constitute "royalty" within the meaning of article 12(3) of the DTAA and even as per the provisions of section 9(1)(vi) of the Act as the definition of "royalty" under clause 9(1)(vi) of the Act is broader than the definition of "royalty" under the DTAA as the right that is transferred in the present case is the transfer of copyright including the right to make copy of software for internal business, and payment made in that regard would constitute "royalty" for imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill as per clause (iv) of Explanation 2 to section 9(1)(vi) of the Act. In any view of the matter, in view of the provisions of section 90 of the Act, agreements with foreign countries DTAA would override the provisions of the Act. Once it is held that payment made by the respondents to the non- resident companies would amount to "royalty" within the meaning of article 12 of the DTAA with the respective country, it is clear that the payment made by the respondents to the non-resident supplier would amount to royalty. In view of the said finding, it is clear that there is obligation on the part of the respondents to deduct tax at source under section 195 of the Act and ITA No.715-717/B/15 21 consequences would follow as held by the hon'ble Supreme Court while remanding these appeals to this court. Accordingly, we answer the substantial question of law in favour of the Revenue and against the assessee by holding that on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was not justified in holding that the amount(s) paid by the respondent(s) to the foreign software suppliers was not "royalty" and that the same did not give rise to any "income" taxable in India and wherefore, the respondent(s) were not liable to deduct any tax at source and pass the following order :”
Respectfully following the decision of the Hon’ble Karnataka High Court in the case of Samsung Electronics Co. Ltd., (Supra) and also decision of the Co-ordinate Bench of this Tribunal in the assessee’s own case in dated 5/6/2015, we are of the opinion that the contentions raised by the assessee are not acceptable for the reason that the payment in question was consideration for the right to use copy right shrink-wrap software amounts to royalty within the meaning of sec. 9(1)(vi) of the Act and also Art 12 of the Indo- Ireland DTAA, therefore, grounds raised by the assessee are dismissed.
ITA No.715-717/B/15 22
In the result, the assessee’s appeal for the asst. year 2010-11 and 2011-12 are dismissed.
Order pronounced in the open court on 16th Oct, 2015.