$~
* IN THE HIGH COURT OF DELHI AT NEW DELHI
RESERVED ON: 16.01.2017
% PRONOUNCED ON: 24.01.2017
+ ITA 904/2016,
ITA 905/2016, CM APPL.46510/2016
ITA 906/2016, CM APPL.46511/2016
ITA 907/2016, CM APPL.46512/2016
ITA 908/2016, CM APPL.46513/2016
ITA 909/2016, CM APPL.46515/2016
THE COMMISSIONER OF INCOME TAX, INTERNATIONAL
TAXATION-2 ..... Appellant
versus
ZTE CORPORATION ..... Respondent
Appearance: Mr. Ruchir Bhatia, Sr. Standing Counsel with Mr. Puneet Rai,
Jr. Standing Counsel, on behalf of Revenue, in all the appeals.
Mr. Deepak Chopra with Mr. Harpreet Singh Ajmani and Mr. Rohan Khare,
Advocates for the assessees in all the appeals.
CORAM:
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
HON'BLE MR. JUSTICE NAJMI WAZIRI
S.RAVINDRA BHAT, J.
1. In these appeals, the following questions of law arise for
consideration: -
(i) Are the ITAT's findings with respect to interpretation of
Article 12 (3) of the Indo-China Double Taxation
Avoidance Agreement (DTAA), in the light of
ITA-904-909/2016 Page 1 of 21
Explanations 5 & 6 to Section 9 (1) (vi), erroneous in
law.
(ii) Is the impugned order correct in its interpretation of
Section 234B of the Income Tax Act, 1961, in the facts
and circumstances of the case.
2. Brief facts of the case are that the assessee is a tax resident of the
Republic of China and is engaged in the business of supplying telecom
equipment. During the financial years, relevant to the subject assessment
year, it was engaged in supply of telecom equipment to Indian telecom
operators; it also supplied mobile hand-sets to customers in India. It did not
file its return of income arguing that it had no Permanent Establishment (PE)
in India in terms of the provisions of Article 5 of the Indo-China Double
Taxation Avoidance Agreement ("DTAA"). On 6.10.2009 a survey under
Section 133A was undertaken at its premises and several documents were
seized. Statements of its senior executives were also recorded. On the basis
of these documents and statements, the Assessing Officer (AO) formed the
opinion that the assessee had a business connection in India and its business
had been carried through its PE in India and further income had accrued to it
during the relevant year from such business.
3. A notice under Section 148 of the Income Tax Act ("the Act") was
issued on 23.10.2009 requiring the assessee to file its return of income; it did
so, declaring Nil income. In the notes to the "statement showing
computation of income" the assessee stated that since it did not have PE in
India, its revenues were not taxable as business profits. It made detailed
submissions justifying that it had no fixed place PE, no dependent agency
PE in India, no installation PE and no service PE. It also urged that no part
ITA-904-909/2016 Page 2 of 21
of profits of supplies could be attributed to the independent PE unless it was
established by the revenue that the supplies were not at arm's length price.
4. The AO after examining various statements, concluded that the
assessee had fixed place PE, installation PE, dependent agency PE in India
and, therefore, the revenues from the supply of telecom equipment and
mobile hand sets were to be taxed in India as business profits. He, therefore,
proceeded to determine the profits attributable to the assessee's PE in India.
Before computing the profits he pointed out that the profits to the PE in
India have to be computed separately in respect of hardware and software
components of the telecom equipment and the mobile handsets.
5. The assessee had contended before the AO that the software
embedded in the telecom equipment or provided to the customers separately,
or software supplied to the various customers in India should not be treated
as royalty under Section 9(1) (vi) of the Act and also under Article 12 (3) of
the DTAA. The assessee had argued that:
a) Software is sold in the same manner as telecom equipment,
b) The software is an integral part of the telecom equipment, which
facilitates running of the said equipment.
c) The subject software has no independent value of its own.
d) No copyrights in the software are transferred to the customers.
e) No access to the "source codes" in the software is granted to the
customer.
f) Payment for software is not related to the productivity, use or number
of subscribers.
g) Customers do not have the right to commercially exploit the software.
ITA-904-909/2016 Page 3 of 21
h) Software supply is in the nature of transfer of copyrighted article and
not transfer of "a copyrighted right".
6. The assessee also relied on the definition of "copyright" under Section
14 of the Indian Copyright Act, 1957. It also relied on the decision of Delhi
Special Bench Tribunal in Motorola India vs DCIT (95 ITD 269). It was
therefore stated that the receipts from sale of computer software is in the
nature of payment for the use of copyrighted article as against payment for
use of a copyright in the software and hence such payment shall not
constitute royalty under India- China tax treaty.
7. The AO also referred to the decision of the Authority for Advance
Ruling in Worley Parsons Pty. Ltd.(AAR No. 747 of 2007) for the
proposition that the payments for software should be taxed on case basis,
since the same were not effectively connected to the PE of the assessee in
India. The assessee in its reply distinguished this decision on facts and
pointed out that AAR held so since no material evidence was placed by the
assessee to demonstrate the role played by the PE under the PMS contract
and its relationship with the royalty revenue earned under the BE &P
contract. It was pointed out that the applicant before the ruling was not able
to demonstrate 'effective connection' between the BE &P revenue and PE
under the PMS contract. The AO rejected these contentions.
8. Aggrieved by the AO's order, the assessee appealed to the CIT (A).
The appellate commissioner accepted the assessee's contentions and found
as follows:
(i) Assessee had fixed place PE and dependent agency PE in India.
However, he did not accept the AO's plea as regards installation PE in India.
ITA-904-909/2016 Page 4 of 21
(ii) On the issue of taxation of software embedded in telecom equipment
mobile handsets, CIT(A) held it to be taxable as business profit.
(iii) As regards the computation of profits attributable to PE, the CIT(A)
held that 2.5% of total sales made by foreign company in India was to be
attributed as business profits of PE (including the value of software).
(iv) The CIT(A) also directed the AO to delete the interest levied under
Section 234B.
9. Both the assessee and the revenue appealed to the ITAT. On the
question of attribution of profits, the ITAT rendered the following findings:
"we find that the level of operations carried out by assessee through
its PE in India are considerable enough to conclude that almost entire
sales functions including marketing, banking and after sales were
carried out by PE in India and, therefore, keeping in view the decision
of Hon'ble Supreme Court in the case of ZTE Corporation
Ahmedbhai Umarbhai & Co. (supra), the decision of Rolls Royce
(supra) and Nortel Networks India International Inc. (supra), we are
of the opinion that it would meet the ends of justice if 35% of net
global profits as per published accounts out of transactions of
assessee with India are attributed to PE in India in respect of both
hardware and software supplied by assessee to Indian customers. At
this juncture we may point out that while deciding the department's
appeal in subsequent part of this order, we have upheld the findings
of ld. CIT(A) to tax the income from sale of software as business
income and not royalty. We may point out that in AY 2009-10 the AO
estimated the operating profits at 7.5% as against the weighted
average of net operating profit at 2.53% as per the global accounts.
We are not inclined to accept this mode of computation resorted by
AO, particularly in view of Rule 10 of the IT Rules, which mandates
ITA-904-909/2016 Page 5 of 21
the AO to go by the published accounts of assessee. In the result
assessee's ground no. 6 in AY 2009-10 stands allowed. We may
further clarify that our decision does not amount to enhancement of
income because overall tax effect will be less as compared to tax
computed by AO/CIT(A)."
10. On the two surviving issues, i.e., applicability of Section 234-B and
whether amounts paid towards software constituted "royalty" the impugned
order held in favour of the assessee. The ITAT followed the decisions of this
court in Commissioner of Income Tax v Alcatel Lucent Canada [2015] 372
ITR 475 (Del) which had in turn relied on Director of Income Tax v
Erricsson AB (2012) 343 ITR 470. On the issue of interest under Section
234B, reliance was placed on Director of Income Tax v GE Packaged Power
Inc. 373 ITR 65 and relief was granted to the assessee.
11. Mr. Ruchir Bhatia, learned counsel argues that the ITAT fell into
error, in holding that payment for the embedded software, was not royalty.
It was submitted that software prices also have separately been mentioned in
the contract itself. The following conditions under the contract between the
assessee and its vendor were relied on:
"ARTICLE 34 LICENSE 34.1 Subject to this Article, Buyer is hereby
granted a limited, non- transferable, perpetual, non-exclusive license
to use the Software and Documentation provided pursuant to the
Contract ("Software License"). Buyer agrees that the copyright in the
Software and Documentation licensed to it by Supplier including any
renewals, extensions, or expansions thereof, shall be treated as
proprietary of Supplier or its sub-suppliers. 34.2 Buyer shall not make
any copies of Software or Documentation, except for archival back up
purposes. Buyer shall not translate, reverse engineer, modify,
decompile, disassemble or create derivative works from the Software.
ITA-904-909/2016 Page 6 of 21
34.3. Buyer may assign the right to use the Software License to a third
party in India for the purpose of operations and maintenance of the
Buyer's Network , provided that any such third party agrees in writing
to abide by all of the terms and conditions of this Software License.
34.4. The Software licensed under a Purchase Order may be delivered
in. an inseparable package also containing software programs and
features other than the Software. Buyer may use such other software
programs and features unless expressly provided otherwise in the
Purchase Order.
34.5. The obligations of Buyer under this Article, shall survive the
termination or expiration of this Contract for any reason."
12. It was submitted that the judgments in DIT Vs. Nokia Networks OY 58
ITR 259, Erricson, and Alcatel Lucent (supra) are distinguishable, because
of the difference in terminology of the DTAAs in those cases. Counsel
emphasized that the software has not been sold but licensed to the customers
and there is separate consideration for the software. This was the reason why
the assessee could submit details of payments received in lieu of supply of
software for F.Ys. 2006-07, 2007-08, 2008-09 and 2009-10. Mr. Bhatia
urged that the software is sometimes independently supplied to the
customer, who is given the right to use the software for the purpose of its
business thereby assigning the user the right to commercially exploit the
software.
13. It was urged on behalf of the revenue that the term "copyrighted
article" is not defined in the Indian Copyright Act. The assessee has
assigned the customers "the right to use the software". Such assignment
meant that the customers were given the "right to use the copyrighted right
in the software." It was urged, furthermore that right and title passed to the
ITA-904-909/2016 Page 7 of 21
customer in the case of hardware but not in the case of software. In terms of
the contract between the assessee and the customers, the buyer has no title or
ownership rights. The buyer could neither license nor sell nor alienate or
part with its possession. In view of this the said transaction is not a sale
under Sale of Goods Act but is a limited right to use the software and hence
the payment for the same is a form of royalty. It was stressed that as the
agreement specifically provided for licensing of the software, such licensing
amounted to transfer of copyright and not merely transfer of copyrighted
article as is the contention of the assessee.
14. It was also argued that "royalty" was not effectively connected with
the PE in India. The relevant extract of the finding of AO were relied upon.
It was also submitted that the ITAT failed to note and appreciate
Explanations 5 and 6 inserted to Section 9 (1) (vi) of the Act with
retrospective effect by the Finance Act, 2012. In this case, the assessee
failed to establish that the rights, property or the contract in respect of which
the royalty is payable is effectively connected to the PE of the assessee in
India. The further argument is that the AO's finding- that in the present case
of the assessee such royalty is not effectively connected with the PE and
therefore is not covered under Article 12(5) of the DTAA between India and
China is correct. The taxability of the payments characterized as royalty is to
be governed under Article 12(2) of the DTAA read with Section 90(2) of the
Act.
15. Mr. Bhatia made an alternative submission that even if this court were
to uphold the finding that the payments made were not royalty, under Article
12(3), they nevertheless constituted payments for the right to use equipment
ITA-904-909/2016 Page 8 of 21
under the same provision of the DTAA. It was highlighted that the latter part
of the provision did not exist in the Indo-Finland DTAA, interpreted by this
court in Ericcson (supra).
16. Mr. Deepak Chopra, learned counsel argued that the revenue is
foreclosed from arguing that the payments were in the nature of royalty.
Once the question of PE was settled in its favour, the issue of the payments,
receiving separate treatment as royalty, did not arise, because of Article 12
(5) of the DTAA in question. It was also submitted that the ITAT did not
commit any error in its application of the rulings in Ericson, Nokia and
Alcatel Lucent (supra).
17. It is evident from the above factual narration that the first question
argued and which arises for consideration is whether payments made by the
assessee's customers to it constituted royalty, in respect of software
supplied. The software so supplied is not independent, but necessary for the
hardware supplied by it, under the contract. The assessee also provides
upgrades for the software. The AO held that the payments made for the right
to use the software was royalty as per clause (i), (iii) and (v) to Explanation
2 to section 9(1)(vi) of the Act. According to him, the software is a secret
formula or process for the purpose of Explanation 2 (i) and (iii) and was also
a copyright in terms of Explanation 2 (v). Further, such payments were also
royalty under Article 12(3) of the DTAA between India and China. The
assessee's plea that the payments for supply of software along with
hardware are in the nature of business profits and not royalty, was rejected
and it was held that the revenue was in appeal against the decision of the
ITAT in Motorola (supra). It was therefore held that payment received
ITA-904-909/2016 Page 9 of 21
against supply of software was in the nature of royalty under Section9(1)(vi)
of the Act and also under Article 12(3) of India-China DTAA.
18. Before proceeding further, it would be necessary to extract the
relevant provisions of the DTAA. Article 12, which is pertinent in this
context, reads as follows:
"ROYALTIES AND FEES FOR TECHNICAL SERVICES
1. Royalties or fees for technical services arising in a Contracting
State and paid to a resident of the other Contracting State may be
taxed in that other Contracting State.
2. However, such royalties or fees for technical services may also
be taxed in the Contracting State in which they arise, and
according to the laws of that Contracting State, but if the recipient
is the beneficial owner of the royalties or fees for technical
services, the tax so charged shall not exceed 10 per cent of the
gross amount of the royalties or fees for technical services.
3. The term "royalties" as used in this Article means 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 including
cinematograph films and films or tapes for radio or television
broadcasting, any patent, trade mark, design or model, plan, secret
formula or process, or for the use of, or the right to use, industrial,
commercial or scientific equipment, or for information concerning
industrial, commercial or scientific experience.
4. The term "fees for technical services" as used in this Article
means any payment for the provision of services of managerial,
technical or consultancy nature by a resident of a Contracting
State in the other Contracting State, but does not include payment
for activities mentioned in paragraph 2(k) of Article 5 and Article
15 of the Agreement.
ITA-904-909/2016 Page 10 of 21
5. The provisions of paragraphs 1 and 2 shall not apply if the
beneficial owner of the royalties or fees for technical services, being
a resident of a Contracting State, carries on business in the other
Contracting State in which the royalties or fees for technical
services arise, through a permanent establishment situated therein,
or performs in that other Contracting State independent personal
services from a fixed base situated therein, and the right, property or
contract in respect of which the royalties or fees for the technical
services are paid is effectively connected with such permanent
establishment or fixed base. In such case the provisions of Article 7
or Article 14, as the case may be, shall apply."
19. In Ericson (supra) this court had to deal with the supply of equipment
with software, and interpret the Indo-Sweden DTAA: similar to the facts of
this case. The Indo-Sweden DTAA provided, by Article 13, as follows:
"Article 13: ROYALTIES AND FEES FOR TECHNICAL SERVICES
1. Royalties and fees for technical services arising in a Contracting
State and paid to a resident of the other Contracting State may be
taxed in that other State.
2. However, such royalties and fees for technical services may also be
taxed in the Contracting State in which they arise and according to
the laws of that State, but if the recipient is the beneficial owner of the
royalties or fees for technical services the tax so charged shall not
exceed 20 per cent. of the gross amount of the royalties or fees for
technical services.
3. The term " royalties " as used in this article means 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
cinematograph films, films or video tapes for use in connection with
television or tapes for use in connection with radio broadcasting, any
patent, trade mark, design or model, plan, secret formula or process,
ITA-904-909/2016 Page 11 of 21
or for the use of, or the right to use, industrial, commercial, or
scientific equipment, or for information concerning industrial,
commercial or scientific experience.
4. The term " fees for technical services " as used in this article means
payments of any kind to any person, other than payments to an
employee of the person making the payments and to any individual for
independent personal services mentioned in article 15, in
consideration for services of a managerial, technical or consultancy
nature, including the provision of services of technical or other
personnel.
5. The provisions of paragraphs 1 and 2 shall not apply if the
beneficial owner of the royalties or fees for technical services, being a
resident of a Contracting State, carries on business in the other
Contracting State in which the royalties or fees for technical services
arise, through a permanent establishment situated therein, or
performs in that other State independent personal services from a
fixed base situated therein, and the right or property or contract in
respect of which the royalties or fees for technical services are paid is
effectively connected with such permanent establishment or fixed base
or with business activities referred to under (c) of paragraph 1 of
article 7. In such case, the provisions of article 7 or article 15, as the
case may be, shall apply."
This court held as follows:
"....We have also held that the supply of equipment in question was in
the nature of supply of goods. Therefore, this issue is to be examined
keeping in view these findings. Moreover, another finding of fact is
recorded by the Tribunal that the Cellular Operator did not acquire
any of the copyrights referred to in Section 14(b) of the Copyright
Act,1957.
ITA-904-909/2016 Page 12 of 21
55. Once we proceed on the basis of aforesaid factual findings, it is
difficult to hold that payment made to the assessee was in the nature
of royalty either under the Income-Tax Act or under the DTAA. We
have to keep in mind what was sold by the assessee to the Indian
customers was a GSM which consisted both of the hardware as well
as the software, therefore, the Tribunal is right in holding that it was
not permissible for the Revenue to assess the same under two different
articles. The software that was loaded on the hardware did not have
any independent existence. The software supply is an integral part of
the GSM mobile telephone system and is used by the cellular operator
for providing the cellular services to its customers. There could not be
any independent use of such software. The software is embodied in the
system and the revenue accepts that it could not be used
independently. This software merely facilitates the functioning of the
equipment and is an integral part thereof. On these facts, it would be
useful to refer to the judgment of the Supreme Court in TATA
Consultancy Services Vs. State of Andhra Pradesh, 271 ITR 401,
wherein the Apex Court held that software which is incorporated on a
media would be goods and, therefore, liable to sales tax. Following
discussion in this behalf is required to be noted:-
In our view, the term "goods" as used in Article 366(12) of the
Constitution of India and as defined under the said Act are very wide
and include all types of movable properties, whether those properties
be tangible or intangible. We are in complete agreement with the
observations made by this Court in Associated Cement Companies
Ltd. (supra). A software programme may consist of various
commands which enable the computer to perform a designated task.
The copyright in that programme may remain with the originator of
the programme. But the moment copies are made and marketed, it
becomes goods, which are susceptible to sales tax. Even intellectual
property, once it is put on to a media, whether it be in the form of
books or canvas (In case of painting) or computer discs or cassettes,
and marketed would become "goods". We see no difference between a
ITA-904-909/2016 Page 13 of 21
sale of a software programme on a CD/floppy disc from a sale of
music on a cassette/CD or a sale of a film on a video cassette/CD. In
all such cases, the intellectual property has been incorporated on a
media for purposes of transfer. Sale is not just of the media which by
itself has very little value. The software and the media cannot be split
up. What the buyer purchases and pays for is not the disc or the CD.
As in the case of paintings or books or music or films the buyer is
purchasing the intellectual property and not the media i.e. the paper
or cassette or disc or CD. Thus a transaction sale of computer
software is clearly a sale of "goods" within the meaning of the term as
defined in the said Act. The term "all materials, articles and
commodities" includes both tangible and intangible/incorporeal
property which is capable of abstraction, consumption and use and
which can be transmitted, transferred, delivered, stored, possessed
etc. The software programmes have all these attributes.
xxx
In Advent Systems Ltd. v. Unisys Corpn, 925 F. 2d 670 (3rd Cir.
1991), relied on by Mr. Sorabjee, the court was concerned with
interpretation of uniform civil code which "applied to transactions in
goods". The goods therein were defined as "all things (including
specially manufactured goods) which are moveable at the time of the
identification for sale". It was held:
Computer programs are the product of an intellectual process, but
once implanted in a medium are widely distributed to computer
owners. An analogy can be drawn to a compact disc recording of an
orchestral rendition. The music is produced by the artistry of
musicians and in itself is not a "good," but when transferred to a
laser-readable disc becomes a readily merchantable commodity.
Similarly, when a professor delivers a lecture, it is not a good, but,
when transcribed as a book, it becomes a good.
That a computer program may be copyrightable as intellectual
ITA-904-909/2016 Page 14 of 21
property does not alter the fact that once in the form of a floppy disc
or other medium, the program is tangible, moveable and available in
the marketplace. The fact that some programs may be tailored for
specific purposes need not alter their status as "goods" because the
Code definition includes "specially manufactured goods.
56. A fortiorari when the assessee supplies the software which is
incorporated on a CD, it has supplied tangible property and the
payment made by the cellular operator for acquiring such property
cannot be regarded as a payment by way of royalty.
57. It is also to be borne in mind that the supply contract cannot be
separated into two viz. hardware and software. We would like to refer
the judgment of Supreme Court in CIT Vs. Sundwiger EMFG Co., 266
ITR 110 wherein it was held:
"A plain and cumulative reading of the terms and conditions of
the contract entered into between the principal to principal i.e.,
foreign company and Midhani i.e., preamble of the contract,
Part-I and II of the contract and also the separate agreement,
as referred to above, would clearly show that it was one and
the same transaction. One cannot be read in isolation of the
other. The services rendered by the experts and the payments
made towards the same was part and parcel of the sale
consideration and the same cannot be severed and treated as a
business income of the non-resident company for the services
rendered by them in erection of the machinery in Midhani unit
at Hyderabad. Therefore, the contention of the Revenue that as
the amounts reimbursed by Midhani under a separate contract
for the technical services rendered by a non-resident company,
it must be deemed that there was a "business connection", and
it attracts the provisions of Section 9(1)(vii) of the Income Tax
Act cannot be accepted and the judgments relied upon by the
Revenue are the cases where there was a separate agreement
for the purpose of technical services to be rendered by a
ITA-904-909/2016 Page 15 of 21
foreign company, which is not connected for the fulfillment of
the main contract entered into principal to principal. This is not
one such case and thus the contention of the Revenue cannot be
accepted in the circumstances and nature of the terms of the
contract of this case."
58. No doubt, in an annexure to the Supply Contract the lump sum
price is bifurcated in two components, viz., the consideration for the
supply of the equipment and for the supply of the software. However,
it was argued by the learned counsel for the assessee that this
separate specification of the hardware/software supply was necessary
because of the differential customs duty payable.
59. Be as it may, in order to qualify as royalty payment, within the
meaning of Section 9(1)(vi) and particularly clause (v) of
Explanation-II thereto, it is necessary to establish that there is
transfer of all or any rights (including the granting of any license) in
respect of copy right of a literary, artistic or scientific work. Section
2(o) of the Copyright Act makes it clear that a computer programme
is to be regarded as a 'literary work'. Thus, in order to treat the
consideration paid by the cellular operator as royalty, it is to be
established that the cellular operator, by making such payment,
obtains all or any of the copyright rights of such literary work. In the
present case, this has not been established. It is not even the case of
the Revenue that any right contemplated under Section 14 of the
Copyright Act,1957 stood vested in this cellular operator as a
consequence of Article 20 of the Supply Contract. Distinction has to
be made between the acquisition of a "copyright right" and a
"copyrighted article".
This ruling was followed in Alcatel Lucent Canada (supra).
20. The misconception that the revenue harbors stems from its flawed
appreciation of a copyright license. True, "copyright" is not defined; yet
what works are capable of copyright protection is spelt out in the Copyright
ITA-904-909/2016 Page 16 of 21
Act. Sections 13 and 14 of the Copyright Act flesh out the essential
ingredients that make copyright a property right. More particularly, Section
14 states 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:
ITA-904-909/2016 Page 17 of 21
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 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;
ITA-904-909/2016 Page 18 of 21
(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."
Thus, Section 14 categorically provides that copyright "means the exclusive
right to do or authorizing the doing of any of the acts mentioned in
Section 14 (a) to (e) or any substantial part thereof". The content of
copyright in respect of computer programmes is spelt out in Section 14 (b).
A joint reading of the controlling provisions of the earlier part of Section 14
with clause (b) implies that in the case of computer programs, copyright
would mean the doing or authorizing the doing- in respect of work (i.e. the
programme) or any substantial part thereof
(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.
21. The reference to clause (a) and (b) means that all the rights which are
in literary works i.e."(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
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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)"
inhere in the owner of copyright of a computer programme. Therefore, the
copyright owner's rights are spelt out comprehensively by this provision. In
the context of the facts of this case, the assessee is the copyright proprietor;
it made available, through one time license fee, the software to its
customers; this software without the hardware which was sold, is useless.
Conversely the hardware sold by the assessee to its customers is also
valueless and cannot be used without such software. This analysis is to show
that what was conveyed to its customers by the assessee bears a close
resemblance to goods- significantly enough, Section 14 (1) talks of sale or
rental of a "copy". The question of conveying or parting with copyright in
the software itself would mean that the copyright proprietor has to assign it,
divesting itself of the title implying that it has divested itself of all the rights
under Section 14. This would mean an outright sale of the copyright or
assignment, under Section 18 of the Act. Section 16 of the Copyright Act
enacts that there cannot be any other kind of right termed as "copyright".
22. In the present case, the facts are closely similar to Ericson. The
supplies made (of the software) enabled the use of the hardware sold. It was
not disputed that without the software, hardware use was not possible. The
mere fact that separate invoicing was done for purchase and other
transactions did not imply that it was royalty payment. In such cases, the
nomenclature (of license or some other fee) is indeterminate of the true
nature. Nor is the circumstance that updates of the software are routinely
given to the assessee's customers. These facts do not detract from the nature
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of the transaction, which was supply of software, in the nature of articles or
goods. This court is also not persuaded with the submission that the
payments, if not royalty, amounted to payments for the use of machinery or
equipment. Such a submission was never advanced before any of the lower
tax authorities; moreover, even in Ericson (supra), a similar provision
existed in the DTAA between India and Sweden.
23. As far as the question of interest payments and Section 234B is
concerned, the court is of the opinion that the issue is covered by GE
Packaging (supra). This question of law too is answered against the
revenue, and in favour of the assessee.
24. In the light of the foregoing discussion, the two questions framed are
answered against the revenue and in favour of the assessee. The revenue's
appeals are therefore, dismissed.
S. RAVINDRA BHAT
(JUDGE)
NAJMI WAZIRI
(JUDGE)
JANUARY 24, 2017
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