HIGH COURT OF KARNATAKA
Commissioner of Income Tax
Vs.
Synopsis International Old Ltd.
IT Appeal NOS. 11 TO 15 & 17 OF 2008
AUGUST 3, 2010
JUDGMENT
1. These six appeals arise out of a common order passed by the Tribunal allowing the appeals by holding that the fees received by the assessee cannot be treated as royalty as defined under section 9(l)(vi) of the Income-tax Act, 1961 (for short hereinafter referred to as the ‘Act’). Aggrieved by the same, the revenue is in appeal.
2. Three appeals were filed in respect of the assessment year 2001-02, 2002-03 and 2003-04. In all the three appeals, application for stay was filed, which were also given separate numbers. At the stage of hearing on the IAs on the premise that the question involved in these appeals are already covered by the decision of the Tribunal, the three appeals were allowed and consequently, the applications of stay were dismissed. It is that composite order, which is the subject matter before us.
3. Synopsis U.S., is the owner of the copyright. It has granted a license to Synopsys International Limited, Ireland, the assessee. The technical license agreement is for a consideration to enable the assessee to use and commercially exploit the intellectual property in the Electronic Design Automation (for short ‘EDA’) Tool and Software in certain geographies.
4. Synopsis U.S. specially requires the assessee to enter into End User Software License Agreement (for short ‘EULA’) with customers to produce Synopsis U.S. property rights in the production upon documentation and intellectual property and in no event, less than a reasonable standard of care. It is for that reason that the ‘EULA’ between the assessee and the Indian customer has elaborate and restrictive clause, primarily with the object of protecting the owner’s rights in the products, documentation and the intellectual property in the software. In terms of the aforesaid license, the assessee in turn, has entered into ‘EULA’ with various customers. A reading of the aforesaid agreement shows that the Indian customer has purchased a licensed product i.e., Electronic Design Automation (for short ‘EDA’) tool/ Software from the assessee for his use as a tool on application software. The ‘EDA’ Tools support the design and production of integrated Circuits (I.Cs). An I.C. is a component which functions inside an electronic gadget (for example, mobile phone). ICs are manufactured by the semi-conductor industry through a process called fabrication. As fabrication process is an extensive process, IC manufacturers, meticulously follow a design flow process before the fabrication of I.C is taken up. ‘EDA’ tools are used in this design flow process. Design flow is a procedure which contains several sub-procedures.
5. The assessee has received US $ 9,98,098/-, 33,53,252/- and 20,97,003/- respectively for the three assessment years i.e., 2001-02; 2002-03; 2003-04 from its Indian customers. The assessing Officer treated these receipts as royalty as defined in section 9(1)(vi) of the Act and therefore, according to him the assessee is liable to pay tax in India. However, the assessee has neither filed return of income nor paid tax on its income. As the income of the assessee escaped assessment, notice under section 147 of the Act was issued after recording reasons for the same. The assessee filed its returns for all the three years, declaring NIL income but applied refund of Rs. 1,07,97,031/- for the assessment year 2001-02, likewise for other assessment years also. However, the Assessing Officer held that the assessee is liable to pay tax under section 9(l)(vi) of the Act at 20% on gross basis for the first two assessment years and 10% for the third assessment year. He also levied interest under section 234-A, 234-B and 234-C of the Act.
6. Aggrieved by these three orders, the assessee preferred appeals before the Commissioner of Income Tax (Appeals)-IV, Bangalore. The Appellate Authority held that the assessee transferred such rights to its Indian customers which implies what is transferred is not the universal rights of use but in the terms of the assessee, non-exclusive, non-transferable rights to use. Had it been the use’ of copy of a copyrighted article, there would not have been the necessity of making an agreement of license for which the appellant has also received sums. Actually, what was transferred through the license agreement was the use of software owned by it. This is evident from the agreement itself. The software given in use to Indian customers was named in the agreement as “Synopsis Software”. Had this software been itself got through license from other companies, the name of the software would have borne the name of that company from which it was received. So, the words in ownership clause of the agreement i.e., “licensors own…” has been only used as a matter of precaution and of no avail whereas the ownership lies with the respondent. What is transferred through the agreement is a license to use the Synopsys Software i.e., a copyright owned by the appellant itself and not the copy of a copyrighted article. Hence, the receipt squarely falls under the definition of Royalty and therefore, taxable in India. However, the interest levied was set aside with a direction to the Assessing Officer to compute the interest after determining the income. Accordingly, he allowed the appeals in part. Aggrieved by the said order, the assessee preferred appeals before the Tribunal. The Tribunal held that the assessee was allowed to license to use the software. According to the assessee, it is a goods and by way of license agreement, the software only was allowed to use. In other words ‘a copyrighted article was transferred and no transfer was made in respect of copyright. In similar circumstances in the case of Samsung Electronics Co. Ltd. v. ITO [2005] 94 ITD 91 (Bang.) and also in case of Motorola Inc. v. Dy. CIT [2005] 95 ITD 269 (Delhi)(SB), it was decided in favor of the assessee, holding that such transactions cannot be treated as payment of royalty. Therefore, the Tribunal was of the view that the case before them was covered by the aforesaid decisions relied on by the assessee. Accordingly, the Tribunal held that the fees received by the assessee cannot be treated as a royalty as defined under section 9(1)(vi) of the Act and therefore, the appeals were allowed and the order of assessments and the order of the Commissioner of Appeals were set aside. Consequently, the applications filed for stay in all the three appeals were dismissed as having become infructuous. Aggrieved by the said orders, the present appeals are filed.
7. Learned Senior Counsel Sri E.R. Indra kumar appearing for the revenue contended that the terms of the ‘EULA’ read as a whole, makes it abundantly clear that the assessee has transferred several rights which the assessee acquired under the Technical License Agreement (TLA’). The right in the copyright as such is not transferred. For the first two years i.e., 2001-02 and 2002-03 there was no double taxation avoidance agreement between India and Ireland, which came into force only from 1/4/2002 and therefore, the consideration paid by the Indian customers to the assessee is royalty as defined under Explanation-2 to sub-section l(vi) of section 9 of the Act. The assessee has transferred some portion of his interest/right in the ‘TLA’ in favour of the Indian customers to the end-users and therefore, the Assessing Authority as well as the first appellate Court were justified in levying the tax. The judgments relied on by the Tribunal in the first place has no application to the facts of this case and more so, the question which arises for consideration in these appeals were not decided in the said two appeals. It is not a question as to whether is it a transfer of a right in the copyright or transfer of a right in the copyrighted article as decided in those cases and therefore, he submits that the order passed by the appellate authority is liable to be set aside and the assessment is to be upheld.
8. Per contra, Sri K.P. Kumar, learned Senior Counsel appearing for the assessee contended that the transaction entered into between the assessee – Indian customer do not fall within the mischief of the definition of royalty as contained in Explanation 2 to Clause (vi) of section 9 (1) of the Act. The said provision applies to a case of transfer of all or any other rights in the copyright. In the instant case, admittedly, the copyright is not transferred. What is transferred is only the use of the copyrighted article. The said article is available on the shelf and anybody can i purchase the same and as long as any right in the copyright as such is not transferred, the consideration paid for such copyrighted article would not constitute royalty as defined under the Act. He relied upon the judgment of the special Bench in the case of Motorola Inc. (supra). He also relied on the order passed by the advance ruling authority, in the case of Dassault Systems K.K., In re [2010] 188 Taxman 223 (AAR – New Delhi) and submitted the question which arise for consideration in these’ appeals are squarely covered by the aforesaid order. Therefore, he submits that the order passed by the Tribunal is valid and legal and do not call for any interference.
9. In the light of the aforesaid facts and the rival contentions, the point that arises for consideration in this appeals are:
“Whether the consideration paid by the Indian customers or end-users, to the assessee for transfer of the right to use the software/computer programme is in respect of the copyright and falls within the mischief of ‘Royalty’ as defined under Sub-clause (v) to Explanation 2 to Clause (vi) of section 9(1) of the Act?”
10. It is not in dispute that the Synopsys Inc. has entered into the design, manufacture, distribution and marketing of certain ‘EDA’ tools and software and to provide all services related thereto. The said company holds all right, title and interest, as a licensee to the intellectual property including the copyrights. The assessee is a subsidiary of the aforesaid company. Synopsys Corporation has granted a non exclusive license in the territory which is geographical, as described in the said agreement to use and commercially exploit the intellectual property, manufacture, market, distribute, sub-license and maintain the products and provide ail services to customers during the term of ‘TLA’ under an agreement dated 31/10/1999, for a period of one year to be continued thereafter, after mutual agreement, as per the discretion of the Synopsys Inc. In pursuance of the rights acquired under the said agreement, the assessee has entered into ‘EULA” with various Indian customers. One such agreement is dated 30/5/2002 entered into with M/s. Athena Semi-conductors Private Limited, Bangalore.
11. In pursuance of the aforesaid agreement, the assessee has granted the Indian customers a non-exclusive, non-transferable license, without right of sub-license, to use the licensed software and design techniques only in the quantity authorized by the licensee, in accordance with the documentation and in the use area with a right to licensee to make a reasonable opportunity of copies of the licensed software for backup and storage or archival purposes only. For grant of such license for use of the software, for a period of 20 years, the Indian customers, have paid consideration in lump sum. The said agreement is for a period of 20 years. It is on receipt of the said consideration, the assessee has not paid tax under section 9 of the Act, on the ground that the said consideration is not ‘Royalty’ as defined under section 9 of the Act. In support of their contention that it is not a ‘Royalty’, which is liable to tax, they rely principally on two judgments. First in the case of Motorola Inc. (supra). The question which was referred to the Special Bench was as under:-
“Whether, on the facts and in the circumstances, the revenues earned by the appellant from supply of equipment and software to Indian Telecom Operators were taxable in India”?
After referring to the arguments of the learned counsel and referring to the tax provisions of the Income-tax Act, the Special Bench of the Tribunal was of the view that “the crux of the issue is “whether the payment is for copyright or for a copyrighted article”. If it is for copyright, it should be classified as royalty both under the Income-tax Act and under the DTAA and it would be taxable in the hands of the assessee on that basis. If the payment is really for a copyrighted article, then it only represents the purchase price of the article and, therefore, cannot be considered as royalty either under the Act or under the DTAA. This issue really is the key to the entire controversy and they proceeded to address the issue. After noticing the definition of copyright as given in the copyright Act, 1957 in section 14 of the said Act and referring to the various clauses in the agreement entered into between the parties and after referring to the various judgments relied on, on behalf of the parties, it was held that the payment by the cellular operator is not for any copyright in the software but is only for the software, as such, as a copyrighted article. It follows that the payment cannot be considered as royalty within the meaning of Explanation 2 below section 9(1) of the Act. Further, they held that the software supplied was a copyrighted article and not a copyright and the payment received by the assessee in respect of the software cannot be considered as ‘Royalty’ either under the Act or DTAA.
12. Similar question arose for consideration before the Authority for Advance Rulings in case of Dassault Systems K.K., (supra) in Para.8 of the said order, the question for consideration is formulated in the following manner:-
“The first and foremost question is whether the payments received by the applicant from the VARs represent consideration for the use of, or the right to use, any copyright of literary/scientific work. Going by the language of the Act, the question is whether there is transfer of all or any rights in respect of the copyright of literary or scientific work.”
13. After referring to the facts of that particular case and the law on the point, it is observed as under at para 17 and 17.1:-
“17. Can it be said that the one time payment based on standard price minus discount paid by VAR to the applicant is in the nature of royalty? It depends on the question whether any rights that the applicant granted to the licensee/end-user include the right of using the copyright Alternatively, going by the language of IT Act, the question is whether any right in respect of copyright has been transferred. It is here the distinction between the use of copyrighted article and the use of copyright has been stressed. The copyright which is a species of intellectual property rights belongs to the owner or us assignee if any. The ownership thereof carries with it a bundle of rights which are by and large’ directed towards commercial exploitation of this intangible property right. Those rights attached to copyright are enumerated in s. 14 of the Copyright Act, 1957. If any of these rights are parted with in favour of another so that the other person can enjoy that right in the same manner in which the owner can, it can then be said that those specific rights concerning the use of copyright have been conferred on him.
