Payment made for supply of software is not ‘royalty’ since it is copyrighted software and not copyright in the software

I.T.A. No. 1698 to 1702/Mds/2010
Assessment Years 2002- 03 to 2006- 07

The Dy. C.I.T Vs. M/s Abaqus Engineering Ltd. Pvt. Ltd

CO Nos. 145 to 149/Mds/2010
A/o I.T.A. Nos. 1698 to 1702/Mds/2010
Assessment Year 2002-03 to 2006-07

M/s Dassault Systems Simulia P. Ltd [Earlier known as Abaqus Engineering Pvt. Ltd.]  Vs. Dy. C.I.T

ORDER

PER BENCH:-

This is a bunch of five appeals by the Revenue and five cross objections by the assessee all directed against the order of the ld. CIT(A) – III, Chennai dated 22.7.2010 pertaining to Assessment Years 2002-03 and 2006-07 respectively. Since the issues involved in all these appeals and cross objections are same and pertain to same assessee, we are disposing them off by this consolidated order for the sake of brevity and convenience.

2. The Revenue has raised three grounds in all. However, the only issue arising out of these appeals is that the ld. CIT(A) erred in deleting the dis-allowance u/s 40(a)(i) of the Income-tax Act, 1961 [in short, the Act] on the amounts paid to M/s Abaqus Inc. without deduction of tax.

3. Briefly stated, the facts as narrated by the ld. CIT(A) in his order are that the, Assessing Officer called for a copy of the Regional Support Agreement (RSA) which was entered into by the appellant with its parent company for the distribution of software products in India. After perusing the RSA, the AD found that i) the appellant company was appointed a distributor by its parent company for the sale of software products in India; ii) the software products are general products developed by the parent company, a licensed copy of which can be sold to the end-users; iii) what is sold to the end-user is only a copy of the software product; iv) the end-user gets only a license to use the software product for a particular period. Based on these facts, the AD concluded that what was sold was only the right to use the licensed version of the software product developed by the parent company. Accordingly, he treated the payments as royalty to non-resident covered u/s 9(l)(vi) of the Act and brought it within the ambit of tax deduction u/s 195. The AD had also sought the directions of the Addl. CIT u/s 144A as to whether the payments are to be treated as royalty under section 9(1 )(vi) of the Act. The Addl. CIT issued the directions vide his letter dated December 4, 2008. In the said letter, the Addl. CIT has referred to certain clauses of the Regional Support Agreement, which are reproduced here under: despondent

“3 (d) Upon execution of a Customer Agreement or Evaluation Agreement, ABAQUS shall generate License Keys and either send them directly to the Customer or send them to Distributor for delivery to the Customer. At ABA QUS’s option, ABAQUS may allow Distributor to generate License Keys for delivery to Customers in the Territory.

4(i) At ABA QUS’ option, distributor shall provide support services in the Territory to the vendor of a third party product as if such vendor were a customer. If ABAQUS requests such services and Distributor provides such services, Distributor shall receive a distributor’s commission as described in sections 6 and 7, on the revenues received by ABAQUS for the license of the Third-party product in the Territory

5(b) – Distributor may use the tools provided with the programs to customi2e the Programs for Customers. Distributor may develop and provide application or utility software for customers to use for the programs ….

5(d) Distributor may, with ABA QUS’s prior written approval, translate the Programs user interface, related documentation and marketing materials into a local language as may be required by a local law or to facilitate and promote use of the Programs by Customers in the territory. However, (i) ABAQUS shall not be obligated to compensate the Distributor for such translations unless ABAQUS and the Distributor shall otherwise agree, (ii) copies of all such translations shall be delivered to ABAQUS at the same time they are published or delivered to any Customer, and (iii) all such translations (including any modifications to the Programs or Documentation created in the course of the translation) shall be the exclusive property of ABAQUS. ABAQUS reserves the right to require that any translation of any of the Programs into the language of the Territory be made by ABAQUS or under the supervision of ABA QUS.

8(a) Distributor agrees to reproduce, affix, or have affixed copyrights or other proprietary notices to any copies in the form specified by ABAQUS

8 (b) During the term of this Agreement, Distributor shall have the right to use ABA QUS(s trademarks and Program names in any advertising, marketing, technical or other material produced or distributed by the Distributor in connection with the Programs. However, Distributor must first obtain ABAQUS approval: (i) to use materials that were not provided to Distributor by ABAQUS or (ii) to use ABA QUS(s trademark and Program names outside the Territory.”

4. On the basis of the above clauses, reproduced in his directions u/s 144A, the Addl. CIT arrived at the following conclusions:

i) The appellant was given the right to use ABAQUS trademarks and programs in its business for marketing;

ii) appellant has been given the right to reproduce, affix or have affixed copyrights;

iii) ABAQUS Inc has also allowed the appellant to generate license keys for delivery to customers and

iv) the appellant is also allowed to customise and modify the programs for its business. Accordingly, the Addl. CIT concluded that it is not a purchase of mere software and held that the payment made was a royalty u/s 9(1 )(vi) of the Act.

He has also relied on the decision of Chennai Bench of the ITAT in Zylog Systems Ltd, which was stated to be identical on facts. Further, he referred to the decision of the Hyderabad Bench of ITAT in Cheminor Drugs Ltd (76 ITO 3), where it was held that the assessee cannot take an unilateral decision that payments made by him are not chargeable to tax and that he has to necessarily approach the AD u/s 195(2) to make any payment to non-resident without deduction of taxes. Accordingly, the Addl. CIT concluded that provisions of section 195 are applicable to the payments made by the appellant and they are liable for deduction of taxes at source. The AD has made the letter of the Addl. CIT a part of his order and disallowed the payment made by the appellant u/s 40(a) (i).

5. In appeal before the ld. CIT(A), the Id. AR has vehemently argued against the above disallowance and has filed detailed written submissions. He has also relied upon various decisions in support of his contention. From the submissions made, the steps undertaken by the appellant in the course of the distribution are stated as follows:

^“Its marketing department interacts with various companies and wins contracts from customers for licensing the software products to be procured from Abaqus Inc. Once it has bagged orders for the products, it places orders on Abaqus Inc for the product. The customer is required to send various machine details, especially machine host id in which the software is to be installed by the customer. The software sold by Abaqus Inc is specific to the network of system. The software is installed on the main system and can be used only on the machine that is on the same LAN (“Iocal area network”), i.e it is not allowed to be installed in the system other than the one of which the host id is provided to Abaqus Inc. In order to use the software over LAN, the main machine in which it is installed, should remain on. The software license agreement (Clause 4 of the license agreement) too has a specific restriction to this effect. The license agreement is entered into between the customer and Abaqus Inc and a Letter of Assurance signed by the customer is sent to Aba qus Inc. Having signed the license agreement, the appellant requests Abaqus Inc for providing the software download links. Thereafter, license key gets generated (based on the hostid given by the customer) at Aba qus’s end and subsequently it is provided to the appellant, which in turn sends it to the customer, to ensure that the appellant can monitor the transaction. The license keys are only a security device, as referred to under the software license agreement (para 4 of clause 4 of the license agreement). The license key and the links are sent to the customer. The customer downloads the software directly from the US server (via the links) and installs the software using the license key. The process of generation of license key does not require any engineering knowledge, and can be undertaken by anyone who understands the basic use of computers. The generation of keys is similar to the password for running the software in customer’s system and at any rate it cannot be compared to “replication” or “duplication” of the software, as it only facilitates the installation and activation of the software, when it is used for the first time. Once the installation is done, the appellant submits the invoice for payment to the customer. Abaqus Inc in turn raises an invoice on the appellant for the products sold to the appellant, clearly mentioning the name of customer to whom the software is sold by distributor. The invoice is settled periodically by the appellant retaining its own share of agreed margin. The software is procured and distributed by the appellant on agreed margin of 7/11 of the sales consideration. The software of Aba qus Inc is shrink wrap software, ready for distribution and does not require any customisation”.

6. The Id. AR further stated that the appellant does not have any right to make copies even for distribution. In this regard, the appellant has referred to clause 5(b) of the RSA and has explained that each time while entering into a sale transaction with the customer in India, a request for sending a separate download link is made to Abaqus Inc and a separate license key is generated, specific to the customer. The appellant neither has any possession of the software, nor any right to use it nor any right to make copies or commercially exploit the software. Thus, the appellant is a distributor simpliciter, distributing software for a margin. The Id. AR further submitted that every invoice raised by Abaqus Inc on the appellant was raised on the last day of every month listing the names of clients to whom the licenses were distributed by the appellant during the month. Hence, the appellant cannot be said to have acquired any license or copyright from Abaqus Inc, as the license agreement is entered into directly between the end customer and Abaqus Inc. The Id. AR has further referred to the terms of the software license agreement entered into by Abaqus Inc, USA with the end customer and submitted that even the end customer only received a non-transferable and non-exclusive license for using the software for a specified period. The permission to use was limited to the end customer and its employees. The customers are not permitted to make copies, disassemble, modify the software or remove any proprietary markings or legend on the software.

7. As regards the clauses of the RSA referred to by the Addl. CIT in his directions u/s 144A of the Act, the Id. AR submitted that the conclusions drawn are contrary to the facts. With regard to clause 3(d) of the RSA referred to by the Addl. CIT, the Id. AR submitted that the appellant was allowed to generate the licence key only for the purpose of monitoring the transaction. It was further submitted that far from being a right, the generation of license keys was a responsibility 8thrust upon the assessee to generate the keys when required in any customer^Gs case. With regard to clause 4(i) of the RSA, he submitted that this was only an option which was not actually exercised and hence not relevant to the question of determining whether the payment in this case is a royalty. With regard to clause 5(b) of the RSA, he submitted that this clause cannot be read in isolation, but wholly and along with clause 5(a) of the RSA. The relevant portions were reproduced as below:

“Clause 5(a) – Abaqus encourages distributor to perform consulting and other services outside the scope of Section  4that promote the use of the programs and to receive compensation for such additional services from customers and prospective customers. Distributor shall not represent or imply that such services are being performed by or on behalf of Abaqus.

Clause 5(b) Distributor may use the tools provided with the programs to customi2e the Programs for Customers. Distributor may develop and provide application or utility software for customers to use for the programs. However, Distributor shall  not modify any Program. bundle any software with any Program, or distribute or make any non-Program software  available as if such software were a part of the Program.”

8. On the basis of the above, the Id. AR submitted that these are only Additional Services , which may be provided by the assessee to the customers and it receives separate compensation for such services. With regard to clause 5(d) of the RSA, the Id. AR submitted that the RSA is a standard document used globally by Abacus Inc. The documentation referred to in the clause 5(d) is the program user interface, related documents or marketing material, which is normally in English. The aforesaid clause would be relevant in territories where other languages such as Spanish or French is prevalent rather than English, as in such countries, translation of the documentation would be necessary. The Id. AR submitted that appellant’s case the need for translation into local language never arose. With regard to clause 8(a) of the RSA, the Id. AR submitted that the whole clause 8(a) had to be read, which reads as follows:

“Clause 8(a) Distributor agrees that, during and after the Term of this Agreement, the Programs and all related materials, information and technology provided by ABAQUS are the exclusive property of ABAQUS. Upon termination of this Agreement, Distributor will return (and delete from any media storage retained by the Distributor) all copies of the Programs, or any part of them, and any other information or technology furnished by ABAQUS. Distributor agrees to keep confidential and to utilise its best efforts to prevent and protect the Programs, and any part of them,” from unauthorised disclosure by Distributor and Distributors representative, employees or Customers. Distributor agrees to treat all information concerning the Programs as it treats its own software and propriety information requiring maximum protection against unauthorised access or use. Distributor agrees that it will not make or permit to be made any more copies of the Programs than are necessary for the use permitted in this Agreement by the Distributor. Distributor agrees to reproduce- affix- or have affixed copyrights or other proprietary notices to any copies in the form specified by ABA QUS. Distributor agrees that a copyright notice is not enough to treat a Program as a Published work. Without ABA QUS’s consent, Distributor shall not register, discontinue any registration or enter into any agreement affecting any trademark or any copyright covering material used or to be used in connection with the Programs. ~

9. Based on the above, the Id. AR submitted that it is a duty cast upon the appellant, far from being a right, to merely reproduce and affix copyright notices or other proprietary notices to the copies of the products as specified by Abaqus Inc. He stated that this is merely a clerical routine to be carried out by the assessee to safeguard the interests of Abaqus Inc. With regard to clause 8(b) of the RSA, the appellant submitted that the whole clause 8(b) had to be read, which is reproduced as follows:

“During the term of this Agreement, Distributor shall have the right to use ABA QUS’s trademarks and Program names in any advertising, marketing, technical or other material produced or distributed by the Distributor in connection with the Programs. However, Distributor must first obtain ABAQUS approval:

(i) to use materials that were not provided to Distributor by ABAQUS or

(ii) to use ABA QUS’s trademark and Program names outside the Territory. In using ABA QUS’s trademark and Program names, Distributor shall clearly indicate ABA QUS’s right to those trademarks or trade names.

Distributor shall acquire no rights in or to any such trademark or Program name by virtue of use and shall immediately cease such use upon termination of this Agreement”

10. In this regard, the Id. AR submitted that being a distributor of Abaqus Inc’s products, the appellant company was bound to use the brand name of Abaqus while marketing its products, which could not be equated with the use of trademark or copyright. Further, on the decision of the ITAT, Chennai in Zylog Systems Ltd referred to by the Add!. CIT in his directions, the Id. AR submitted that the case was distinguishable on facts. It was submitted that Zylog Systems Limited was involved in the development of software, which involved the usage of the software licensed from a foreign company for developing its own commercial software and marketing the same under the logo and trademark of a foreign company. Further, Zylog Systems Limited was also permitted to copy the software. However, the case of the appellant stands on a different difficult footing for the reasons discussed above.

11. The Id. AR has also relied on various decisions in support of his contention that dis-allowance u/s 40(a)(i) of the payment to parent company at USA towards the purchase of software is not justified and is not in accordance with the provisions of the Act, DTAA or are contrary to the ratios of various judicial authorities. The Supreme Court in the case of Bharat Sanchar Nigam Ltd and Anr Vs. UOI and Ors (45 STC 91) has held that to constitute a transaction for the transfer of the right to use the goods, the transferee should have an exclusive legal right to use the goods and not merely a licence to use the goods and the transfer-or cannot again transfer the same rights to others during the period of right to use the goods by the transferee. The Supreme Court in case of Tata Consultancy Services Vs State of Andhra Pradesh (1 SCC 308) and held that software is to be treated as goods even as per the Article 366(12) of the Constitution of India, whether it is tangible or intangible The Special Bench of the Delhi Tribunal in case of Motorola Inc. vs DCIT (95 ITD 269) has elaborately discussed and held that if the payment is towards purchase of a copyrighted article and not the copyright itself then the payment cannot be termed as “royalty” under the Act. The Id. AR further submitted that the AAR in a recent ruling in the case of its own group company, namely, Dassault Systems KK, Japan v. DIT (AAR No 821/2009) has held that payments by distributors in India to Dassault Systems KK for purchase of software cannot be treated as royalty under section 9(1 )(vi) of the Act. The AAR held that no rights in relation to copyright were transferred nor any right of using the copyright as such was conferred on the licensee. The Id. AR accordingly submitted that the facts of the case are identical to the appellant‘s case and involves the product life-cycle management software solutions, which are similar to the products distributed by the appellant. The Id. AR also submitted that the payment does not fit within the meaning of royalty under section 14 of the Copyright Act, 1957 and hence cannot be treated as royalty under section 9(1 )(vi) of the Act. This was upheld by the ITAT, Special Bench decision in Motorola Inc (Supra) and the AAR ruling in Dassault Systems KK (supra). The Id. AR has further relied upon various decisions of the Tribunal, which relate to similar payments of software purchase, where it was held that the payments cannot be treated as royalty under the Act. At the time of final hearing, he has placed reliance on some recent decisions i.e., ITO (IT) v. Prasad Productions Ltd, [2010•TIOL•182• ITAT•MAD•SB], Van Oord ACZ India (P) Ltd v. CIT, [2010-TIOL•187- HC-DEL•IT] and Velankani Mauritius Ltd v. DDIT (IT) [2010•TII­64• ITAT• BANG•I NTL].

12. The Id. AR, in the alternative, has taken the course to the non discrimination clause under the DTAA between India and USA. He argued that even if the payments are considered to be royalty, they cannot be disallowed u/s 40(a)(i) of the Act by virtue of Article 26(3) of the DTAA, which deals with non-discrimination. It was pointed out that prior to the insertion of the words “rent, royalty” u/s 40(a)(ia) of the Act by the Finance Act, 2006 with retrospective effect from April 1,2006, there was no provision for dis-allowance of royalty payments if tax was not deducted at source while making payments to a resident, whereas section 40(a)(i) of the Act provides for dis-allowance if the same payment is made to non-resident. It was also pointed out that the applicability of amended section 40(a)(ia) was postponed to AY 2007-08 by Circular 1 of 2007 dated April 27, 2007. Hence, for the AY 2006-07 for which the appellant is in appeal at present, there was no provision in the Act requiring deduction of tax on payments made to residents. For this proposition, the Id. AR relied upon the decisions of the ITAT, Delhi in the cases of Herbalife International India Private limited v. ACIT, 101 ITD 450 and Millennium Info-com Technologies Ltd v. ACIT, 117 ITD 114, wherein it was held that the provisions of section 40(a)(i) of the Act cannot be invoked if it amounts to discrimination against the non-residents.

13. The ld. CIT(A), after considering the submissions of the ld. A.R. of the assessee, held as under:

“I have considered the rival submissions and the material on record. I have also carefully perused the decisions relied upon by the AO and the Id. AR. I find that the AO himself in his order u/s 143(3) has stated that the what was sold by the appellant was only a copy of the software product and that the end user gets only a license to use the software product for a particular period. Hence, it is not in dispute that there was no transfer of a copyright, but only a sale of a copyrighted product. The AO has subsequently referred to the directions issued by the Addl. CIT under section 144A, while passing the assessment order. He has also enclosed copy of the direction with the assessment order. The direction of the Addl. CIT has referred to various clauses of the RSA, based on which the Addl. ACIT concluded that the appellant had the right to reproduce, affix or have affixed copyrights, generate license keys etc. However, on a perusal of the terms of the agreement, I find that the relevant clauses have not been considered in their totality and context. This aspect has been explained in detail by the Id. AR in the earlier part of this order with which I am in agreement. For instance, the conclusion as to reproduction of copyrights has been taken out of the context from the RSA, whereas the relevant clause merely referred to a duty on the appellant, and not its right, to ensure that labels are affixed etc. Further, the generation of license keys was more a duty on the appellant and not a right granted. The clause relating to the right to use trademark is more linked with the normal activity of distribution of the US company’s products by way of sale in India. Further, the RSA does not permit the appellant to make any copy or modify the software. Based on the invoice submitted by the Id. AR, which were also before the AO at the time of assessment, I find that the purchase of software products by the appellant was directly related to the sale of the product to the ultimate customers. From a careful perusal of the actual terms of the RSA, it is found that the conclusions drawn are not fully supported by the facts. Further, the activities carried out by the appellant, as explained in its submissions and reproduced earlier, also indicate that the software product is not even physically delivered to the appellant. It is directly downloaded by the end-customer, who enters into a software licensing agreement directly with the US company and receives the relevant password for downloading the software from the US company.

6.1.2 There is, no doubt, some controversy as to the liability on sale of software, whether it is a mere sale of goods or whether it could be inferred as royalty, where the copyright is retained by the supplier. The Honourable Supreme Court has repeatedly held software as goods, whether it is on CO, floppy, diskettes, papers or any other media or whether it is canned or un canned, or licensed or unlicensed, branded or unbranded, tangible or intangible being a commodity capable of being transmitted, transferred, delivered, stored, processed etc. as decided in TATA Consultancy Services v. State of Andhra Pradesh 271 1TR 401(SC). The same view was taken by the Honourable supreme Court in Bharat Sanchar Nigam Ltd. v. UOI 282 ITR 273 and Sprint RPG India Ltd. v. Commissioner of Customs 2SCC 486(SC). These decisions should have equal application for income tax purpose as well. Moreover, I find that under similar set of facts concerning the appellant’s group company, the Honourable AAR had held that the payments by distributors to Dassault Systems KK (supra) cannot be treated as royalty under the Act. Based on the facts of the above case, I find that the impugned payment does not fit within the meaning of royalty. The Special Bench in Motorola Inc (Supra) has held that purchase of software, which was only a purchase of a copyrighted product and not the copyright itself cannot be treated as royalty payment. The Honourable ITAT, Bangalore in its recent decision in the case of MIs Velankani Mauritus Ltd v. DCIT (IT), Bangalore f2010- TII-64-ITAT^GBANG^GINTLJ dealt with a similar issue. The question was whether the income can be treated as royalty either under IT Act or the DTAAs. The assessee had supplied off-the-shelf shrink wrapped software to Infosys Technologies Ltd. The Hon’ble ITAT distinguished the case of CIT & Ors v. Samsung Electronics Co. Ltd. 320 ITR 209 (Karn) and followed the cases of Motorala Inc v. DCIT 95 ITD 269 (Del)(SB), Airports Authority of India f2010^GT10L- 19^GAAR^GITJ and Tata Consultancy Services v. State of AP, 271 ITR 401 (SC) and held “the sale of software cannot be treated as income from royalty either under the IT Act or under the terms of DTAA^I. Further, the Special Bench of ITAT, Chennai in the case of Prasad Productions Ltd (supra) after considering various decisions including that of Frontier Offshore Exploration (India) Ltd, ITA No.2037/Mds/2006, Transmission Corporation of AP Ltd v. CIT 239 ITR 587 (SC), CIT v. Eli Lilly & Co (India) (P) Ltd 178 Taxman 505 (SC), CIT v. Samsung Electronics Co. Ltd 320 ITR 209 (Kar), Van Oord ACZ India (P) Ltd v. CIT 189 Taxman 232 (Del) etc. has held that when the payer has a bona fide belief that the income is not chargeable to tax at all, there is no application of the section 195 at all and there is no liability on the payer to follow its provisions when making payment to non-residents. As a consequence, all the proceedings as a result of non-compliance thereof would be otiose. In view of the above factual position and legal authorities, I am of the considered opinion that the payments cannot be treated as royalty u/s 9(1)(vi) of the Act.

6.1.3 I also find merit in the alternate ground (ground no.6) raised by the appellant in respect of the non-discrimination clause under the DTAA between India and USA. The Article 26(3) of the DTAA is clearly against any discrimination against the nonresident, whereby any payment to the non-resident is not allowed as a deduction in computing the income of the resident payer. The decisions of the Delhi Bench of the ITAT in Herbal life International (Supra) and Millennium Info-com (Supra) also support the appellant’s case. Since, similar payments without deduction of tax to residents would not invite dis-allowance u/s 40(a)(ia) in the AY 2006•07, which is the subject assessment year before me, I agree that the dis-allowance in the present case u/s 40(a)(i) of the payments to the non-residents would amount to discrimination against the non-resident, which is not permitted. Hence, for this reason as well, it is held that there could not be any dis-allowance u/s 40(a)(i) of the payments made by the appellant.

6.2 Before concluding, it may be stated that reference to some cases in the order is avoided either due to their irrelevance or to relieve the order from the burden of repetitive ratio decidendi laid down in such decisions.”

14. Before us the ld. D.R. vehemently argued in support of the order of the Assessing Officer whereas the ld. A.R. of the assessee supported the order of the ld. CIT(A).

15. We have heard the rival submissions and perused the orders of the lower authorities and the material available on record. In the instant case, we find that no specific error in the order of the ld. CIT(A) could be pointed out by the ld. D.R. We find that the ld. CIT(A) has followed the decision of the Delhi Special Bench of the Tribunal in the case of Motorola Inc. Vs. DCIT 95 ITD 269. We find that following the above decision of the Mumbai ‘E’ Bench of the Tribunal in the case of ADIT Vs. TII Team Telecom International ITA Nos. 3939/Mum/2010 order dated 26.8.2011 has held as under:

“17. 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 know-how 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 know-how 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 in fact a payment for process liable to be treated as ‘royalty’ within meanings of that expression under Explanation 2 to Section 9 (l)(vi) of the Income Tax Act. However, when this decision came up for scrutiny of Honourable 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. This principle of interpretation of statutes, in our considered view, holds equally good for interpretation of a treaty provision. Explaining this principle in more general terms, a very distinguished former colleague of ours Honourable Shri M.K. Chaturvedi, had, in an article interpretation of Taxing Statutes’ (AIFTP Journal: Vol. 4 No.7, July, 2002, at p. 7), put it in his inimitable words as follows:

“Law is not a brooding omnipotence in the sky. It is a pragmatic tool of the social order. The tenets of law being enacted on the basis of pragmatism. Similarly, the rules relating to interpretation are also based on common sense approach. Suppose a man tells his wife to go out and buy bread, milk or anything else-she needs, he will not normally be understood to include in the terms “anything else she needs” a new car or an item of jewellery. The dictum of ejusdem generis refers to similar situation. It means of the same kind, class or nature. The rule is that when general words follow particular and specific words of the same nature, the general words must be confined to the things of same kind as specified. Noscitur a sociis is a broader version of the maxim ejusdem generis. A man may be known by the company he keeps and a word may be interpreted with reference to the accompanying words. Words derive colour from the surrounding words.”

16. In the instant case, we find that the assessee sold copy righted software and not copyright in the software. Therefore, we do not find any good reason to interfere with the order of the ld. CIT(A). It is confirmed. Grounds of appeal taken by the Revenue are dismissed.

17. The assessee has filed cross objections for Assessment Years 2002-03 to 2005-06 wherein the following common grounds have been taken:

“1. The ld. CIT(A) has erred in not considering the contention of the assessee against the validity of reopening of the assessment by stating that it is academic in nature.

2. The ld. CIT(A) has erred in not considering that the Assessing Officer could not have had reason to believe that the income of the assessee escaped assessment when there were binding precedents in favour of the assessee.”

18. In the cross objections for Assessment Year 2006-07 the following ground of cross objection has been taken:

“The ld. CIT(A) has erred in not upholding the plea of the assessee that the directions issued by the Additional Commissioner of Income-tax were beyond the scope of his powers u/s 144A of the Act as the Addl. CIT had conclude the issue, whereas he was empowered only to provide mere guidance.”

18. As the only addition made in the reassessment was found to be unsustainable, no grievance remains to the assessee. The ld. A.R. of the assessee conceded that if the issue is decided in favour of the assessee, the grounds taken in cross objections would become infructuous and only academic in nature and would require no separate adjudication. Therefore, the cross objections are dismissed.