ADIT Vs TII Team Telecom International Pvt. Ltd. (ITAT Mumbai)- In terms of the provisions of Article 12 (3) of the Indo Israel tax treaty, royalty is defined, for the purposes of this tax treaty, as “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 cinematography films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience”.
The question then arises whether a payment for computer software cannot be a payment for use of or right to use of ‘a copyright of literary, artistic or scientific work, including cinema photographic film’, and, while examining this question, it is important to bear in mind the fact that there is a specific mention about the use “of” copyright. The only other clause in which payment for software could possibly fall is “consideration for use of, or right to use of, a “process”. Let us examine these two aspects of the definition of ‘royalty’ under the India Israel tax treaty.As regards the question whether the payment for software could be treated as payment for “use of, or the right to use, any copyright of literary, artistic or scientific work”, we find that this issue directly came up for consideration of a Special Bench of this Tribunal in the case of Motorola Inc. (supra). That was a case in which the Special Bench had an occasion to decide whether payment for software amounts to ‘royalty’, for the purposes of India Sweden tax treaty (229 ITR Stat 11) which incidentally is the same as in Indo Israel tax treaty and which also defines royalty as “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 cinematography films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience”. The Special Bench, after a very erudite discussion on various facets of the issue before them, concluded that “we hold that the software supplied was a copyrighted article and not a copyright right, and the payment received by the assessee in respect of the software cannot, therefore, be considered as royalty either under the IT Act or the DTAA”. Right now we are only concerned with the provisions of the tax treaty, and we have noticed that the provisions of tax treaty as before the Special Bench are exactly the same as before us in this case. The issue, therefore, as to whether payment for supply of software can be viewed as a payment for copyright or not is no longer res integra. The Special Bench has decided this issue in favour of the assessee, and the views so expressed by the Special Bench, being from a higher forum than this division bench, are binding on us. In any case, as the provisions of Article 12(3) specifically provide, what is liable to be treated as royalty is payment for “use of, or the right to use, any copyright of literary, artistic or scientific work”, and the connotations of “use of copyright” of a work are distinct from the use of a copyrighted article. The meaning of “use of copyright of a work” cannot be treated as extending to “use of a copyrighted work” as well, as it would amount to doing clear violence to the words employed by the treaty. Copyright is one thing, and copyrighted article is quite another thing. To give a simple example, when a person is using a music compact disc, that person is using the copyrighted article, i.e. the product itself, and not the copyright in that product. As held by the Special bench, in Motorola’s case (supra), the four rights which, if acquired by the transferee, constitute him the owner of a copyright right, and these rights are :
(i) The right to make copies of the computer programme for purposes of distribution to the public by sale or other transfer of ownership, or by rental, lease, or lending.
(ii) The right to prepare derivative computer programmes based upon the copyrighted computer programme
(iii) The right to make a public performance of the computer programme.
(iv) The right to publicly display the computer programme.
It is not even revenue’s case that any of these rights have been transferred by the assessee, on the facts of this case, and, for this reason, the payment for software cannot be treated as payment for use of copyright in the software. As we hold so, we may mention that in the case of Grace mac (supra), a contrary view has been taken but that conclusion is arrived at in the light of the provisions of clause (v) in Explanation 2 to Section 9(1)(vi) which also covers consideration for “transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work” – a provision which is clearly larger in scope than the provision of Article 12(3) of the Indo Israel tax treaty. The word “of” between ‘copyright’ and ‘literary, artistic or scientific work” is also missing in the statutory provision. The treaty provision that we are dealing with are thus certainly not in pari materia with this statutory provision, and, by the virtue of Section 90(2) of the Act, the provisions of India Israel tax treaty clearly override this statutory provision. In Grace mac decision (supra), the coordinate bench was of the view that the provisions of the applicable tax treaty and the Income Tax Act are “identical” – a position which does not prevail in the situation before us. We, therefore, see no reasons to be guided by Grace mac decision (supra). The next issue that we need to consider is whether a payment for software can be said to be a payment for “process” as a computer program is a nothing but a set of instruction lying in the passive state and this execution of instructions is ‘ a process’ or ‘ a series of processes’. No doubt, in terms of the provisions of Section 2 (ffc) of the Indian Copyright Act, 1957, a computer program, i.e. software, has been defined as “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”, but the moot question is as to what is that a customer pays for when he buys, or to put it in technical terms ‘obtains licence to use’ the software –for the process of executing the instructions in the software, or for the results achieved on account of use of the software. To draw an analogy, it is akin to a situation in which a person hires a vehicle, and the question could be as to what does he pay for – for the use of the technical knowhow on the basis of which vehicle operates, or for the use of a product which carries passengers or goods from one place to another. The answer is obvious. When you pay for use of vehicle, you actually pay for a product which carries the passengers or goods from one place to another and not the technical knowhow on the basis of which such a product operates. Same is the case with the software, when someone pays for the software, he actually pays for a product which gives certain results, and not the process of execution of instructions embedded therein. As a matter of fact, under standard terms and conditions for sale of software, the buyer of software is not even allowed to tinker with the process on the basis of which such software runs or to even work around the technical limitations of the software. In Asia Satellite Telecommunications Ltd Vs DCIT (78 TTJ 489), a coordinate bench of this Tribunal did take the view that when an assessee pays for transponder hire, he actually pays for the a process inasmuch as transponder amplifies and shifts the frequency of each signal, and, therefore, payment for use of transponder is infact a payment for process liable to be treated as ‘royalty’ within meanings of that expression under Explanation 2 to Section 9 (1)(vi) of the Income Tax Act. However, when this decision came up for scrutiny of Hon’ble Delhi High Court, in the case reported as Asia Satellite Telecommunications Co Ltd Vs DIT (332 ITR 340), Their Lordships, after a very erudite and detailed discussion, concluded that “we are unable to subscribe to the view taken by the Tribunal in the impugned judgement on the interpretation of Section 9(1)(vi) of the Act”. It cannot, therefore, be open to us to approve the stand of the revenue to the effect that the payment for software is de facto a payment for process. That is a hyper technical approach totally divorced from the ground business realities. It is also important to bear in mind the fact that the expression ‘process’ appears immediately after, and in the company of, expressions “any patent, trade mark, design or model, plan, secret formula or process”. We find that these expressions are used together in the treaty and as it is well settled, as noted by Maxwell in Interpretation of Statutes and while elaborating on the principle of noscitur a sociis , that when two or more words which are susceptible to analogous meaning are used together they are deemed to be used in their cognate sense. They take, as it were, their colours from each other, the meaning of more general being restricted to a sense analogous to that of less general.
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI E BENCH, MUMBAI
Before Shri Pramod Kumar (Accountant Member)
and Shri Vijay Pal Rao (Judicial Member)
ITA No. 3939/Mum/2010
Assessment year: 2006- 07
Additional Director of Income Tax
(International Tax)- Range 2(2), Mumbai …………… ………… Appellant
Vs.
TII Team Telecom International Pvt. Ltd. ………………… Respondent
c/o Sudit Parekh & co.
Ballard Estate, 2nd floor, ADI Marzban Path,
