The main grievance of the assessee in this appeal relates to the action of the ld. CIT (Appeals) in confirming the view expressed by the Assessing Officer in holding that the payment of USD 21,270 payable to CEVA DSP Limited, Israel, for purchase of software was in the nature of royalty and the assessee was required to deduct tax at source and pay the same to the Government.
Issue under consideration has been settled by the Hon’ble jurisdictional High Court in assessee’s own case and it has been held that payment made by the assessee to non-resident companies would amount to royalty within the meaning of Article 12 of the DTAA with the respective countries and there was obligation on the part of the assessee to deduct tax at source u/s. 195 of the I.T. Act. We therefore do not see any infirmity in the order of the ld. CIT(A), as such we do not find any merit in this appeal of the assessee.
Samsung Electronics Co. Ltd.
Deputy Director of Income-tax (International Taxation), Circle-II(1)
IT APPEAL NO. 300 (BANG.) of 2011
[ASSESSMENT YEAR 2005-06]
MARCH 22, 2012
N.K. Saini, Accountant Member – This is an appeal by the assessee against the order dated 30.12.2010 of the CIT (Appeals)-IV, Bangalore.
2. Following grounds have been raised in this appeal:
“1. That the order passed by the Commissioner of Income-tax (Appeals)-IV (hereinafter referred to as the ‘Learned CIT(A) under section 248 r.w.s. 254 of the Income-tax Act, 1961 (‘the Act’) is not based on the facts, contrary to the provisions of law and is liable to be quashed.
2. That the Learned CIT(A) erred in holding that the appellant is required to deduct tax at source and pay the same to the Government in respect of payment of USD 21,270 payable to CEVA DSP Limited, Israel, for purchase of software namely Teak SDT-Floating.
3. That the Learned erred in holding that the payment to CEVA DSP Limited, Israel towards purchase of software are in the nature of royalty.
4. That the appellant denies its liability to deduct tax at source and pay the same to the Government in respect of payment made to CEVA DSP Limited, Israel towards purchase of software.
5. That the Learned CIT(A) erred in not directing the respondents to grant refund of the tax deposited by the appellant.
6. That the appellant craves leave to add to and/or alter, amend, rescind or modify the Grounds herein above before or at the time of hearing the Appeal.”
3. The main grievance of the assessee in this appeal relates to the action of the ld. CIT (Appeals) in confirming the view expressed by the Assessing Officer in holding that the payment of USD 21,270 payable to CEVA DSP Limited, Israel, for purchase of software was in the nature of royalty and the assessee was required to deduct tax at source and pay the same to the Government.
4. The facts of the case in brief are that the assessee deducted tax at source and deposited the same to the Government treasury, however, the assessee u/s. 248 of the Income-tax Act, 1961 [hereinafter referred to as “the Act” in short”] being the person denying the liability to deduct tax, had preferred an appeal to the ld. CIT(A), who dismissed the appeal by observing in para 10 of the impugned order as under:
“10. It is true that the Hon’ble Supreme Court in the case of GE India Technology Centre Vs. CIT reported in 327 ITR 456 has referred the matter back to Hon’ble High Court to decide on the chargeability before concluding that all payments made to non-residents require deduction u/s 195. Still in the case of M/s. Samsung it is held that payment made towards “shrink-wrapped software” constitute payment made towards royalty, unless the Hon’ble High Court reverses its judgement, it is obligatory on the part of the lower authorities to follow the order of the jurisdictional High Court. It is not true that the Hon’ble Supreme Court has totally reversed the judgment of M/s. Samsung case but has stated that the Hon’ble Supreme Court judgment in the case of M/s. Transmission Corporation of AP Limited reported in 239 ITR 587 has not been properly appreciated by the Hon’ble High Court. The only issue to be decided before applying Section 195 is regarding the chargeability of the sum/part of the sum paid to the non-resident as to whether such part is taxable in India. If it is taxable, then automatically provisions of section 195 apply. Since this judgement had been reversed by the Hon’ble Supreme Court, though on a limited issue of chargeability and the matter has been remanded back to the Hon’ble High Court by the Hon’ble Supreme Court, still the ruling of the jurisdictional High Court on the issue of payments towards ‘shrink-wrapped software’ being liable to be taxed as royalty has to be followed. Even in the Micro Soft’s case the Hon’ble Delhi Tribunal has held the issue in favour of the Revenue and against the assessee. (Ref 328 ITR Part 4 initial page 5 – News – brief and www. thehindubusinessline.com dated 31.10.2010. Hence, it is held that the appellant was required to deduct tax on its payments made to non-residents on software purchases. Once it is held as royalty payments u/s 9(1)(vi), consequences of Section 195 and 201(1) follow: Accordingly it is held that the appellant’s C.A’s SSB Associates were correct in holding that the payments made by the appellant to non-residents were liable for tax deduction u/s 195. Even going by the Hon’ble Karnataka High Court observation in the appellant’s own case where in it was held that shrink-wrapped software is liable for deduction of tax, the appellant gets no relief. However, since the matter is now referred back to the Hon’ble Karnataka High Court and if the Hon’ble court reverses its judgement, the position would be different. For the time being, going by the Hon’ble Karnataka High court judgement in the appellant’s own case, it is held that the payments made software purchases from non-residents are liable for deduction under section 195.”
Now the assessee is in appeal.
5. The ld. counsel for the assessee was fair enough to admit that the issue has been decided against the assessee in assessee’s own case by the Hon’ble jurisdictional High Court vide order dated 15.10.2011. However, against the said order, the assessee preferred a SLP before the Hon’ble Supreme Court. It was further stated that a similar issue has been decided in favour of the assessee and against the revenue by the Hon’ble Delhi High Court in the case of DIT v. Ericsson A.B.  204 Taxman 192/ 16 taxmann.com 371, copy of the said order was furnished.
6. In his rival submissions, the ld. CIT(DR) strongly supported the impugned order passed by the ld. CIT(A) and further submitted that now the issue has been settled by the Hon’ble jurisdictional High Court in assessee’s own case in favour of the revenue vide order dated 15.10.2011 in ITA No.2808/2005 & Others, therefore the ld. CIT(A) was fully justified in deciding the issue against the assessee.
7. We have considered the submissions of both the parties and carefully gone through the material available on record. In the present case, it is not in dispute that in assessee’s own case, identical issue has been decided by the Hon’ble jurisdictional High Court and Their Lordships in the judgment dated 15.10.2011 while deciding the ITA No.2808/2005 & Ors., observed in paras 20 to 25 as under:
“20. Having regard to the above said definition of ‘royalty’, we have to consider the contents of software licence agreement entered into by non-resident with Samsung Electronics and also 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) progam(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 alteration or reverse engineering or creating sub-licences. What is transferred under the said licence is the licence to use the software and 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 licenses set forth in Exhibit A to the agreement only to End Users pursuant to a valid Actuate shrinkwrap or other Actuate license 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. Distributor shall have no rights to the Software other than the rights expressly set forth in the agreement. Distributor shall not modify or copy any part of the Software or Documentation. Distributor may not use sub-distributors 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 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, trademark, trade secret and other intellectual property rights pertaining thereto, shall be and remain the sole property of Actuate. 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 non-resident 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 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.
21. It is further contended by the learned senior counsel appearing for the respondents that in view of the fact that what is supplied by the non-resident to the respondent in India is only a shrink wrapped software/off-the-shelf software, which is not customised to suit the needs of the respondent, the said software is to be treated as goods and there is sale of the software and copy of the software. Therefore, the question of paying any royalty would not arise. In support of the said contention, the learned senior counsel appearing for the respondents has strongly relied upon the decision of the Hon’ble Supreme Court in Tata Consultancy Services’ case (supra) (hereinafter referred to as the TCS’s case), wherein the Hon’ble Supreme Court was considering the question as to whether the canned software sold by the appellants can be termed to be “goods” and as such assessable to sales tax under the Andhra Pradesh General Sales Tax Act, 1957. Having regard to the broad definition of ‘goods’ under Section 2(h) of the said Act and also the provisions of Article 366(12) of the Constitution of India, the Hon’ble Supreme Court was pleased to answer the said question for determination by holding that once the ‘information’ or ‘knowledge’ is transformed into physical existence and recorded in physical form, it is corporeal property. The physical recording of the software is not an incorporeal right to be comprehended and accordingly, held that the software marketed by the appellants therein indisputably was canned software and thus, sale of the same would attract the provisions of the Andhra Pradesh General Sales Tax Act, 1957.
22. The question as to whether the payment made for import of software or supply of software by the non-resident Companies was royalty or not was not at all in issue in TCS’s case and the question was whether canned software sold by the appellants therein amounted to sale of goods under the Andhra Pradesh General Sales Tax Act. Further, the issue of transfer of right to use the goods as per the expanded definition of ‘sale’ did not come up for consideration in that case. On the other hand the issue in the present case is as to whether the payment would amount to ‘royalty’ within the meaning of Income Tax Act and DTTA. In the said TCS’s case, it has been held that copyright in computer program may remain with the originator of the program, but, the moment copies are made and marketed, if becomes goods, which are susceptible to tax. The contention of the assessee that the consideration received by the non-resident supplier towards the software products would amount to ‘royalty’ within the meaning of DTAA with respective country was not at all considered in the said case. Therefore, the said decision in TCS’s case is not helpful to the respondents in the present cases. It is well settled that the intent of the legislature in imposing Sales Tax and Income Tax are entirely different as Income Tax is a direct tax and Sales Tax is an Indirect Tax and wherefore, mere finding that the computer software would be included within the term ‘Sales Tax’ would not preclude this Court from holding that the said payments made by the respondents to the non-resident Company in the present cases would amount to ‘royalty’ unless the respondents are able to prove that the said payment is for the sale of computer software, wherein the income would be from the business and in the absence of any permanent establishment of the non-resident supplier, there is no obligation on the part of the payee to make deduction under Section 195(1) of the Act.
23. It is well settled that in the absence of any definition of ‘copyright’ in the Income Tax Act or DTAA with the respective Countries, in view of clause 3 of the DTAA, reference is to be made to the respective law regarding 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 meaning of ‘Copyright’ reads as follows:-
“14. Meaning of Copyright. – For the purposes of this Act, “copyright” means the exclusive right subject to the provisions of this Act, to do or authorise the doing of any of the following acts in respect of a work or any substantial part thereof, namely: –
(a) in the case of a literary, dramatic or musical work, not being a computer programme,-
(i) to reproduce the work in any material form including the storing of it in any medium by electronic means;
(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 ease 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 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, on 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 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-
** ** ***
(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.”
24. It is clear from the above said 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 program 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 backup purposes, the end user has no other right and the said taking backup 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 Dynamic Veritcal Software India (P.) Ltd.’s case (supra) 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, 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 :-
“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 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 licenses 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 licence is granted to use the software by making copies, which work, but for the licence granted would have constituted infringement of copyright and licencee 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-resident supplier towards supply of shrink-wrapped software, or off-the-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 of the ‘Copyright’ as referred to above under Section 14 of the Copyright Act.
25. It is also clear from the above said analysis of the DTAA Income Tax Act, 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 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 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 facts and circumstances of the case, the ITAT 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:-
All the appeals are allowed. The order passed by the Income Tax Appellate Tribunal, Bangalore Bench ‘A’ impugned in these appeals is set aside and the order passed by the Commissioner of Income Tax (Appeals) confirming the order passed by the Assessing Officer (TDS)-I is restored.” [Emphasis supplied].
8. From the aforesaid referred to judgment dated 15.10.2011 in ITA No.2808/2005 & Others, it is crystal clear that the issue under consideration has been settled by the Hon’ble jurisdictional High Court in assessee’s own case and it has been held that payment made by the assessee to non-resident companies would amount to royalty within the meaning of Article 12 of the DTAA with the respective countries and there was obligation on the part of the assessee to deduct tax at source u/s. 195 of the I.T. Act. We therefore do not see any infirmity in the order of the ld. CIT(A), as such we do not find any merit in this appeal of the assessee.
9. In the result, the appeal is dismissed.