Infrasoft Ltd v. Vide Order Dated 20.10.2009, The Following

*IN THE HIGH COURT OF DELHI AT NEW DELHI % Judgment reserved on : 3[rd ]July, 2013 Judgment pronounced on:22[nd ]November, 2013 + ITA 1034/2009 DIRECTOR OF INCOME TAX ..... Appellant Through Mr. Sanjeev Sabharwal, Advocate. Advocate. INFRASOFT LTD. versus Through ..... Respondent Mr. Ajay Vohra with Mr. Somnath Shukla, Advocates. Somnath Shukla, Advocates. CORAM: HON’BLE MR. JUSTICE SANJIV KHANNA HON’BLE MR. JUSTICE SANJEEV SACHDEVA SANJEEV SACHDEVA, J. 1. This is an appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the “Act”) filed by the Revenue impugning order dated 19.12.2008 passed by the Income Tax Appellate Tribunal (hereinafter referred to as “ITAT”) Tax Act, 1961 (hereinafter referred to as the “Act”) filed by the Revenue impugning order dated 19.12.2008 passed by the Income Tax Appellate Tribunal (hereinafter referred to as “ITAT”) 2. Vide order dated 20.10.2009, the following ======================================================================= substantial questions of law were framed: “1) Whether the learned ITAT erred in holding that nature of receipts amounting to Rs. 2,74,00,630/- was business income and not royalty income wherein the meaning of Section 9(1)(vi) read (SIC) with Article 12 of Indo-US-DTAA? 2) Whether supply of software on license is royalty/included services within the meaning of Section 9(1)(vi) / Article of Income Tax Act / Indo-USA-DTAA?” 3. On 03.07.2013, the counsel for the respondent Assessee submitted that he was not relying upon Section 9(1)(vi) of the Income Tax Act and in view of the statement made by the counsel, we on 03.07.2013 held that Explanation 4 to Section 9(1)(vi) of the Income Tax Act, 1961 need not be examined and applied. Reference was also made to the judgment of the Supreme Court in UNION OF INDIA VS.AZADI BACHAO ANDOLAN (2003)263ITR706. In view of what ======================================================================= ITA 1034/2009 transpired on 03.07.2013, with respect to the examination and applicability of Section 4 to Section 9(1)(vi), the second issue framed on 20.10.2009, does not arise for consideration and is thus not dealt with in the present judgment. The substantial Question of law framed on 20.10.2009 was recast as under: “Whether the Income Tax Appellate Tribunal was right in holding that the consideration received by the respondent Assessee on grant of licences for use of software is not royalty within the meaning of Article 12(3) to the Double Taxation Avoidance Agreement between India and the United States of America?” 4. The respondent/Assessee is an international software marketing and development company of an international group. The holding company is based in US being Infrasoft Corporation. 5. The Assessee M/s Infrasoft Ltd. is primarily into the ======================================================================= business of developing and manufacturing civil engineering software. One such software, which is subject matter of the present controversy, is called MX. The said MX software is used for civil engineering work and for design of highways, railways, airports, ports, mines, etc. The said software is used by private consultants. of licences for use of software is not royalty within the meaning of Article 12(3) to the Double Taxation Avoidance Agreement between India and the United States of America?” 4. The respondent/Assessee is an international software marketing and development company of an international group. The holding company is based in US being Infrasoft Corporation. 5. The Assessee M/s Infrasoft Ltd. is primarily into the ======================================================================= business of developing and manufacturing civil engineering software. One such software, which is subject matter of the present controversy, is called MX. The said MX software is used for civil engineering work and for design of highways, railways, airports, ports, mines, etc. The said software is used by private consultants. 6. In view of the market position, the Board of the Assessee Infrasoft Limited opened a branch office in India. The branch in India imports the package in the form of floppy disks or CDs depending on the requirements of their customers. The system is delivered to a client/customer. The delivery of the system entails installation of the system on the computers of the customers and training of the customers for operation of the system. The branch office further undertakes the responsibility of updation and operational training apart from providing support for solving any software issues. The respondent Assessee Infrasoft Limited opened a branch office in India. The branch in India imports the package in the form of floppy disks or CDs depending on the requirements of their customers. The system is delivered to a client/customer. The delivery of the system entails installation of the system on the computers of the customers and training of the customers for operation of the system. The branch office further undertakes the responsibility of updation and operational training apart from providing support for solving any software issues. The respondent ======================================================================= ITA 1034/2009 Page 4 of 174 Assessee develops customized software to be used by the customers for designing highways, railways, airports, ports, mines, etc. The software so customized is then licensed to an Indian customer and the branch office of the Assessee in India perform services involving interface to peripheral installation and training etc. 7. On 28.11.2003, the respondent Assessee vide its return of income, declared a loss of Rs.21,75,246/-. The same was assessed under Section 143(3) of the Act on 31.01.2006. The assessment order was framed by the Assessing Officer (hereinafter referred to as the “AO”) whereby the Assessing Officer taxed the receipts on sale of licensing the software as “royalty” as per Article 13 (Sic Article 12) of Indo-US Double Taxation Avoidance Agreement. Under Section 44D read with Section 115A of the Income Tax Act, the Assessing Officer brought the aggregate amount of Rs.2,85,76,278/-, received by the Assessee during the ======================================================================= ITA 1034/2009 Page 5 of 174 year under consideration to tax at 20%. 8. The AO issued a show cause notice to the Assessee company requiring them to show cause as to why the receipts shown by the Assessee company from sale/licensing of software, having referred to the nature of service rendered by the Assessee company, should not be taxed as royalty as per Article 13 (Sic Article 12) of DTAA and Section 44D read with Section 115A of the Act. company requiring them to show cause as to why the receipts shown by the Assessee company from sale/licensing of software, having referred to the nature of service rendered by the Assessee company, should not be taxed as royalty as per Article 13 (Sic Article 12) of DTAA and Section 44D read with Section 115A of the Act. year under consideration to tax at 20%. 8. The AO issued a show cause notice to the Assessee company requiring them to show cause as to why the receipts shown by the Assessee company from sale/licensing of software, having referred to the nature of service rendered by the Assessee company, should not be taxed as royalty as per Article 13 (Sic Article 12) of DTAA and Section 44D read with Section 115A of the Act. company requiring them to show cause as to why the receipts shown by the Assessee company from sale/licensing of software, having referred to the nature of service rendered by the Assessee company, should not be taxed as royalty as per Article 13 (Sic Article 12) of DTAA and Section 44D read with Section 115A of the Act. 9. In reply to the said show cause notice, the Assessee company relying on the judgment of the Supreme Court in the case of TATA CONSULTANCY SERVICES VS.STATE OF ANDHRA PRADESH (2004)271ITR401(SC)(BCAJ)(2005)1SCC308stated that the moment copies of software programmes were made and marketed, the same become goods which were chargeable to sales tax. The Assessee company further contended that when the software were goods company relying on the judgment of the Supreme Court in the case of TATA CONSULTANCY SERVICES VS.STATE OF ANDHRA PRADESH (2004)271ITR401(SC)(BCAJ)(2005)1SCC308stated that the moment copies of software programmes were made and marketed, the same become goods which were chargeable to sales tax. The Assessee company further contended that when the software were goods ======================================================================= as held by the Supreme Court in the said case, the Assessee company would be entitle to deduction of purchase cost of software as well as other expenses incurred and the net profit alone could be taxed as business profit as per Article 7 of DTAA between USA and India. The Assessee company further objected to the show cause notice contending alternatively that even if the receipts were to be treated as royalties or even for technical services, the same having arisen through a permanent establishment in India, it was chargeable to tax as business profit as per the said Article 7 of DTAA. The Assessee further contended before the AO that Section 44D inserted by Finance Act, 2003 w.e.f 01.04.2004, making all the expenditure incurred for earning royalty or fee for technical services allowable, was liable to be given retrospective application to the case of the Assessee for the Assessment Year 2003-04 as that was the legislative intent behind insertion of the said provision. 10. The AO rejected the contention of the Assessee company. With respect to the decision of the Supreme company. With respect to the decision of the Supreme Court in TATA Consultancy Services (supra), the AO distinguished the said judgment holding that the same had been rendered in the context of the Sales Tax Act and was applicable in terms of the definition of “goods” as given in the Sales Tax Act and was in the context of deciding whether the software recorded on the computer disk was covered within the said definition of goods or not. In the context of the facts of the case as per the AO, the said judgment was not applicable.AO distinguished the said judgment holding that the same had been rendered in the context of the Sales Tax Act and was applicable in terms of the definition of “goods” as given in the Sales Tax Act and was in the context of deciding whether the software recorded on the computer disk was covered within the said definition of goods or not. In the context of the facts of the case as per the AO, the said judgment was not applicable. 11. With regard to the definition of royalty as given in Section 9 (1) (vi) of the Act as well as Article 12 of the DTAA, the AO came to the conclusion that the amount received by the Assessee company from sales/licensing of the software was royalty in terms of the said definition. The reasoning of the AO to arrive at this conclusion is as under:-Section 9 (1) (vi) of the Act as well as Article 12 of the DTAA, the AO came to the conclusion that the amount received by the Assessee company from sales/licensing of the software was royalty in terms of the said definition. The reasoning of the AO to arrive at this conclusion is as under:- ======================================================================= “(i) The software is licensed not sold. The copyright of the software remains with the Assessee however it allows the use of copyright to the person making payment to it. As per the Indian Copyright Act 1957 as amended in 1994 software are entitled to copyright protection. The Assessee possesses Copyright in the software, which it can enforce in India if any violation of such right is notices by it. Further the Indian Copyright Act recognizes ‘copyright’ as doing or authorizing the doing of any of the following acts in respect of a work or any substantial part thereof namely, - in case of a computer programme to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer program. It is therefore clear that the Assessee has authorized to use of the copyright of the customer in India. (ii) The software owned by the Assessee is patented software. Consideration for allowing the use of the patented article falls within the definition or royalty payment. Even if it is ======================================================================= considered that the software owned has not been patent, there is no denial of the fact that it is essentially an invention. The development of such software requires highly technical manpower, with highly sophisticated infrastructure and huge investments. Similarly, the software can also be considered as a scientific work. Therefore, the software can also be said to be information developed out of scientific experience. (iii) The payment is also qualified for the use of secret formula or process. The software developed by Infrasoft when installed in a computer responds to every instruction in a specific way. It recognizes the command and as per its programming yields the desired result and reflects the same on the output devices. This argument is further strengthen from the fact that cost of the medium viz. computer discs, floppy etc., on which the program is written is negligible as compared to the overall price of software. Had it not been a secret programming, anybody could have written ======================================================================= these types of programs and sold it at a very low price as compared to the price of the original software. (iv) The software developed by infrasoft is customizing software which are used for specific purposes like design of highways, railways, airport, port, mines etc. This software are purchased by private consultant or end users and they further exploits for commercial purposes. This clearly falls under definition of ‘royalty’.” ======================================================================= these types of programs and sold it at a very low price as compared to the price of the original software. (iv) The software developed by infrasoft is customizing software which are used for specific purposes like design of highways, railways, airport, port, mines etc. This software are purchased by private consultant or end users and they further exploits for commercial purposes. This clearly falls under definition of ‘royalty’.” 12. In view of the above reasoning, the AO treated the entire amount received by the Assessee Company for transfer of software as well as other incidental services towards installation of software, imparting of training etc. in the nature of royalty. He further held that since the royalty income had accrued/arisen to the Assessee Company through its PE in the form of branch office in India, the same was chargeable to tax in India as per Article 13 (vi) (Sic Article 12 (vi))of the entire amount received by the Assessee Company for transfer of software as well as other incidental services towards installation of software, imparting of training etc. in the nature of royalty. He further held that since the royalty income had accrued/arisen to the Assessee Company through its PE in the form of branch office in India, the same was chargeable to tax in India as per Article 13 (vi) (Sic Article 12 (vi))of the ======================================================================= DTAA. He held that though the royalty income was liable to be taxed as business profit under Article 7 of DTAA, the expenses incurred for earning the said income were to be allowed as per domestic law and as per him, since Section 44D was applicable to the Assessment Year 2003-04 specifically prohibited any allowance for such expenditure, the entire amount received by the Assessee as royalty was thus chargeable to tax @ 20% of the gross receipts as per the provisions of Section 44D read with Section 115A of the Act. The AO thus brought the aggregate amount of Rs.2,85,76,278/- received by the Assessee during the year under consideration to tax @ 20%. The AO thus framed the assessment under Section 143(3) vide his order dated 31.01.2006. 13. Aggrieved by the order of the AO, the Assessee filed an appeal before the Commissioner of Income Tax (Appeals) (hereinafter referred to as the „CIT (A)‟). The ======================================================================= main grounds raised by the Assessee company against the said order were as under:- (i)The programme software was goods in terms of the judgment in the case of TATACONSULTANCY SERVICES (SUPRA); (ii)The payment received by the Assessee company was payment for copyrighted article and not copyrighted right and thus could not be assessed as royalty under Article 13 (Sic Article 12) of DTAA; (iii)The provision of DTAA override the provision of Income Tax; (iv)The right to use a copyright was totally different from the right to use a programme embedded in a software; (v)There was no transfer of right in a copyrighted article; (vi)The Assessee company carried on business in India through a permanent establishment and thus Article 13(vi) of the ======================================================================= Indo-UK Convention was not applicable but in fact Article 7 was applicable; (vii)Section 115A could not be applied as the receipts were not royalty and since the receipts were not taxable as royalty and fee for technical services, the same could not be subjected to tax under Section 44D read with Section 115A. (iii)The provision of DTAA override the provision of Income Tax; (iv)The right to use a copyright was totally different from the right to use a programme embedded in a software; (v)There was no transfer of right in a copyrighted article; (vi)The Assessee company carried on business in India through a permanent establishment and thus Article 13(vi) of the ======================================================================= Indo-UK Convention was not applicable but in fact Article 7 was applicable; (vii)Section 115A could not be applied as the receipts were not royalty and since the receipts were not taxable as royalty and fee for technical services, the same could not be subjected to tax under Section 44D read with Section 115A. 14. The CIT(A) vide the order dated 10.01.2008, rejected the submissions of the Assessee company. The CIT(A) in his order noted that the Assessee company was engaged in licensing of MX software which is an engineering friendly tool for designing all types of road projects to Indian customers. He noted the clarification on behalf of the Assessee company that the standard MX software needed to be customized depending on the country-wise, project-wise and customer specific requirements and that the software was supplied by the Assessee company to customers in India only after such customization to include Indian standard of road the submissions of the Assessee company. The CIT(A) in his order noted that the Assessee company was engaged in licensing of MX software which is an engineering friendly tool for designing all types of road projects to Indian customers. He noted the clarification on behalf of the Assessee company that the standard MX software needed to be customized depending on the country-wise, project-wise and customer specific requirements and that the software was supplied by the Assessee company to customers in India only after such customization to include Indian standard of road ======================================================================= ITA 1034/2009 Page 14 of 174 construction and project specific requirements of the Indian customers. On the issue of the Assessee company having PE in India in the form of a branch office, the CIT(A) noted that there was no dispute that the branch office of the Assessee company had been opened in terms of the approval granted by the Reserve Bank of India and constituted a PE in India. 15. The CIT(A) examined a sample representative agreement between the Assessee company and one of its Indian customers for software licensing and maintenance to ascertain the exact nature and character of income received by the Assessee company in India on account of supply of software, annual maintenance charges and training fee amounting to Rs.2,74,00,630/-, Rs.9,25,648/- and Rs.2,50,000/- respectively. After referring to the relevant terms and conditions of the said agreement, the CIT(A) came to the conclusion that the Assessee company had transferred certain rights to the Indian agreement between the Assessee company and one of its Indian customers for software licensing and maintenance to ascertain the exact nature and character of income received by the Assessee company in India on account of supply of software, annual maintenance charges and training fee amounting to Rs.2,74,00,630/-, Rs.9,25,648/- and Rs.2,50,000/- respectively. After referring to the relevant terms and conditions of the said agreement, the CIT(A) came to the conclusion that the Assessee company had transferred certain rights to the Indian ======================================================================= ITA 1034/2009 customers to use software at certain locations for fixed licence fee. The CIT(A) noted that the amounts received by the Assessee company were in lieu of the following services rendered by it: “(a) that appellant had transferred certain right in respect of copyright of software to Indian customers. ======================================================================= ITA 1034/2009 customers to use software at certain locations for fixed licence fee. The CIT(A) noted that the amounts received by the Assessee company were in lieu of the following services rendered by it: “(a) that appellant had transferred certain right in respect of copyright of software to Indian customers. (b) that appellant had charged ‘Licence Fee’ for supply of software as evident from terms and conditions of ‘Licence fee’ agreement. It is pertinent to mention here that no where under the agreement words ‘sale consideration’ were used. (c) that appellant had granted licence to Indian customer to use the software in lieu of the payment. (d) that appellant had also received payment in lieu of software maintenance service which included provisions of updates and user support services to customers. (e) that appellant had also received payment in lieu of training services rendered to Indian customers.” 16. The CIT(A) held that what was taxed as royalty was the amount received as consideration for the use or right to use and not outright purchase of the right to use an asset. He held that the royalty was a consideration including a lump sum consideration for transfer of all or any right (including the granting of a licence) in respect of a copyright, patent, trademark, design and modal or secret formula etc. According to the CIT(A), there are two types of transfers, one is transfer of “right in the property” and transfer of “right in respect of property”. He held that these two transfers were distinct and had different legal effects. In one, right for purchase while in other, no purchase is involved. He relied on the decision of the Calcutta High Court in the case of CIT VS.DAVY ASHMORE INDIA LTD.(1991)190ITR626, wherein it was held that the amount received as consideration for the use or right to use and not outright purchase of the right to use an asset. He held that the royalty was a consideration including a lump sum consideration for transfer of all or any right (including the granting of a licence) in respect of a copyright, patent, trademark, design and modal or secret formula etc. According to the CIT(A), there are two types of transfers, one is transfer of “right in the property” and transfer of “right in respect of property”. He held that these two transfers were distinct and had different legal effects. In one, right for purchase while in other, no purchase is involved. He relied on the decision of the Calcutta High Court in the case of CIT VS.DAVY ASHMORE INDIA LTD.(1991)190ITR626, wherein it was held that ======================================================================= ITA 1034/2009 Page 17 of 174 where a transferee retains the property rights in a design, secret formula etc. and allows the use of such rights, the consideration received for such user was in the nature of royalty and where there is an outright sale or purchase, the consideration is for transfer of such design, secret formula etc. and could not be treated as royalty. The CIT(A) finally held that the amount received by the Assessee Company from its Indian customers under software licence agreement was in the nature of royalty and same was chargeable to tax in India as per Explanation 2 to Section 9(1)(vi). The CIT(A) rejected the plea of the Assessee company wherein the Assessee company had relied on the revised OECD commentary to contend that only transfer that enabled a transferee to commercially exploit a software copyright gave rise to royalty income and as only limited right to use the software had been transferred, the amount received for such limited use was not royalty income. The CIT(A) rejected the contention of the Assessee company holding that OECD had given a very conservative interpretation of the word “used” and the same was not applicable in the facts of the case of the Assessee company. The CIT(A) noted that the said revised OECD commentary on software payment had not been accepted even by some of the OECD member countries and was not applicable in India since India was not even a member of OECD and specially when the Indian High Powered Committee had expressed its reservation in characterization of the software payment in the said country. With regard to the reliance of the Assessee company on the judgment of the Supreme Court in the case of TATACONSULTANCY SERVICES (SUPRA), the CIT(A) held that though the transfer of right to use a good was not sale in its traditional sense but the same was held to be sale on the expanded definition given in the relevant Sales Tax Act, wherein such transfer was treated as deemed sale. He held that different statutes or different phraseologies treat the same transaction differently and thus it was not permissible to import the meaning assigned in one statute into the different statues. 17. The CIT(A) rejected the contention of the Assessee company and held the receipts to be royalty income and concluded as under:- “4.8.1 As per provisions of section 9(1)(vi) the royalty income should satisfy twin conditions that there has to be consideration, and this consideration should be for transfer of all or any right (including the granting of the licence) in respect of the copyright, patent, invention, design, secret formula or process, scientific work. In this case the payment under software license agreement has fulfilled both the conditions and the income from software license was taxable in India as royalty. 4.8.2 As per provision of section 9 the payment made for import of software are ======================================================================= royalty payment and the only exception provided is in the form of second proviso to section 9(1)(vi) of the Act which excludes such royalty income from purview of section 9(1)(vi) only when the computer software is supplied by a non-resident manufacturer along with computer or computer based equipment under any scheme approved under the policy of computer software export, software development and training 1986 of the Government of India. However, this exception is not applicable to the facts of this case where appellant had granted software licence to various Indian customers. 4.8.3 The characterization taxability of income from import of software has been made amply clear in the Income Tax Act through section 115A of the Act which specifically refers to cases where royalties are paid to non—resident for the transfer of all or any right (including the granting of the license) in respect of any computer software to a person resident in India. ======================================================================= 4.8.4 A copy of software supplied by the appellant did not amount to a sale but it is a licence to use the software. This is because software is an intellectual property right (IPR) which can be licensed to one use and can be given further to any number of user. In other words the IPR in software still remain intact with the supplier. Thus effectively the consideration paid is only for license use. It is pertinent to mention here that the Finance Act, 2004 has inserted Category No.55B to include intellectual property services” to mean. “(a) transferring whether permanent or otherwise or (b) permitting use or enjoyment of any intellectual property right” for levy of service tax. This amendment has been noticed by the CESTAT in Araco Corporation v. CCE [2005] (180) ELT 91 (Tri-Bang). 4.8.5 By the expedient of “deeming ======================================================================= “(a) transferring whether permanent or otherwise or (b) permitting use or enjoyment of any intellectual property right” for levy of service tax. This amendment has been noticed by the CESTAT in Araco Corporation v. CCE [2005] (180) ELT 91 (Tri-Bang). 4.8.5 By the expedient of “deeming ======================================================================= fiction” or inclusive definition” Parliament and State Legislatures are competent to give a specific definition to a particular transaction. Such definition is confined to the specific statute only. Such definition cannot be imported into a different statue which defines the same transaction differently. The necessary corollary is that “sales treatment: of computer software under sales tax law, does not, per se, influence income-tax treatment of software transactions, as income-tax law defines this transaction differently. 4.8.6 OECD recommendations remain mere recommendations unless they are incorporated into domestic law and/or DTAAs. The distinction between “copyright right” and “program copy” recommended by the OECD has been dissented from even by several member of the OECD. Indian laws and India’s DTAA recognize only two types of transactions in respect of computer software sale and licence (letting). No further dissection of licensing (on the lines of the OECD ======================================================================= commentary) is permitted under the Indian Copyright Act, Income-tax Act and Indian DTAAs. Therefore, notwithstanding attractive phraseology and nomenclature, any computer software licence fees, where the vendor retains ownership and grants user rights only to the licensee are, without an iota of doubt, taxable as royalties having an Indian source.” 18. On the basis of the findings/observations recorded by him, the CIT(A) held the income earned by the Assessee company from software licence is in the nature of royalty both under the domestic law and the DTAA and thus upheld the order of the AO holding the Income from software licence chargeable to tax in India as royalty under Section 9(1)(vi) of the Income him, the CIT(A) held the income earned by the Assessee company from software licence is in the nature of royalty both under the domestic law and the DTAA and thus upheld the order of the AO holding the Income from software licence chargeable to tax in India as royalty under Section 9(1)(vi) of the Income Tax Act, 1961 read with Article 13 (Sic Article 12) of the DTAA. DTAA. 19. Aggrieved by the order of the AO as confirmed by the CIT(A), the Assessee Company filed an appeal before CIT(A), the Assessee Company filed an appeal before the Income Tax Appellate Tribunal (ITAT for Short). ======================================================================= ITA 1034/2009 The ITAT noted that the amount received by the Assessee company had been treated as royalty income by the AO and the CIT(A) on the basis of Explanation 2 to Section 9(1)(vi) of the Act holding that there was transfer of some rights (including the granting of a licence) in respect of the copyright. The ITAT noted the stand of the Assessee company that there was no transfer of any right in respect of copyright by the Assessee and it was a case of mere transfer of a copyrighted article. The ITAT noted that if the payment received by the Assessee Company was for a copyright then it would classify as royalty both under the Income Tax Act, 1961 and under the DTAA. However, if the payment was for a copyrighted article then it would represent the purchase price of an article and could not be considered as royalty either under the Act or under the DTAA. The Tribunal noted the decision of a Special Bench of ITAT in the case of MOTOROLA INC.,ERICSON RADIO SYSTEM ABANDNOKIA NETWORKS OY VS.DEPUTY CIT(2005)147TAXMAN39(DEL.). The Tribunal noted that the Special Bench of ITAT referring to the definition of “copyright”, as given in Section 14 of the Copyright Act, 1957, had noted that the right mentioned in sub-clause (ii) of clause (b) of Section 14 was available only to a computer programme and if the licensees did not have any of such rights, as mentioned in clauses (a) and (b) of Section 14, it would mean that they did not have any right in the copyright and in such cases, the payments made to them could not be characterized as royalty under the Act for DTAA. The ITAT noted that the Special Bench of the Tribunal in the case of MOTOROLA INC.(SUPRA), had held that since the licensees were not allowed to exploit the computer software commercially, they had acquired under licence agreement, only the copy righted software which by itself was an article and not any copyright therein. The ITAT relying on the judgment in the case of MOTOROLA INC.(SUPRA), noted that in the case of the Assessee company, the licensee to whom the Assessee company had sold/licensed to the software was allowed to make only one copy of the software and associated support information for backup purposes with a condition that such copyright shall include Infrasoft copyright and all copies of the software shall be exclusive properties of Infrasoft. Licensees was allowed to use the software only for its own business as specifically identified and was not permitted to loan/rent/sale/sub-licence or transfer the copy of software to any third party without the consent of Infrasoft. The licensee had been prohibited from copying, de-compiling, de-assembling, or reverse engineering the software without the written consent of Infrasoft. The ITAT further noted that the licence agreement between the Assessee Company and its customers stipulated that all copyrights and intellectual property rights in the software and copies made by the licensee were owned by Infrasoft and only Infrasoft had the power to grant licence rights for use of the software. The ITAT further noted that the licence agreement stipulated that upon termination of the agreement for any reason, the licencee shall return the software including supporting information and licence authorization device to Infrasoft. 20. The ITAT further noted that the CIT(A) had distinguished the judgment in the case of MOTOROLA INC.(SUPRA) on the basis that the Assessee had purchased an integrated electronic switches system consisting of both hardware as well as software whereas in the present case, there was a licence of only the software without there being any sale of integrated hardware. The ITAT further noted that the CIT(A) had not dealt with the aspect of the rights granted to the licensees as had been specifically noted in the case of MOTOROLA INC.(SUPRA).distinguished the judgment in the case of MOTOROLA INC.(SUPRA) on the basis that the Assessee had purchased an integrated electronic switches system consisting of both hardware as well as software whereas in the present case, there was a licence of only the software without there being any sale of integrated hardware. The ITAT further noted that the CIT(A) had not dealt with the aspect of the rights granted to the licensees as had been specifically noted in the case of MOTOROLA INC.(SUPRA). ======================================================================= 21. The ITAT further noted the decision of the ITAT Bangalore Bench in the case of SAMSUNG ELECTRONIC Bangalore Bench in the case of SAMSUNG ELECTRONIC ======================================================================= 21. The ITAT further noted the decision of the ITAT Bangalore Bench in the case of SAMSUNG ELECTRONIC Bangalore Bench in the case of SAMSUNG ELECTRONIC COMPANIES LTD. VS.INCOME TAX OFFICER (2005)276ITR PAGE 1(BANGALORE),wherein the Tribunal came to the conclusion that the incorporeal right to the software i.e. copyright had remained with the owner and the same was not transferred to the Assessee. The Tribunal in the case of SAMSUNG ELECTRONICS (SUPRA)had held that the right to use of a copyright is totally different from the right to use a programme embedded in a cassette or a CD which may be a software and the payment made for the same could not be said to be received as consideration for the use of or right to use of any copyright to bring it within the definition of royalty as given in the DTAA. It was held that what the Assessee had acquired was only a copy of the copyrighted articles whereas the copyright remained with the owner and the Assessee had acquired a computer programme for being used in its ITR PAGE 1(BANGALORE),wherein the Tribunal came to the conclusion that the incorporeal right to the software i.e. copyright had remained with the owner and the same was not transferred to the Assessee. The Tribunal in the case of SAMSUNG ELECTRONICS (SUPRA)had held that the right to use of a copyright is totally different from the right to use a programme embedded in a cassette or a CD which may be a software and the payment made for the same could not be said to be received as consideration for the use of or right to use of any copyright to bring it within the definition of royalty as given in the DTAA. It was held that what the Assessee had acquired was only a copy of the copyrighted articles whereas the copyright remained with the owner and the Assessee had acquired a computer programme for being used in its business and no right was granted to the Assessee to utilize the copyright of a computer programme and thus it was held that the payment for the same was not in the nature of royalty. 22. The ITAT noted that the CIT(A) had distinguished the case of SAMSUNG ELECTRONICS (SUPRA)on the basis that the software licenced by the Assessee in the case of SAMSUNG ELECTRONICS (SUPRA) was off the shelf software whereas the software in the case of the Assessee Company required to be customized to meet the needs of an Indian customer. The ITAT held that the customization of the concerned software or the professional services rendered by the Assessee company for such customization had not resulted in any material change in the terms and conditions of the licence agreement or in the relationship between the Assessee as an owner of the software and a licensee to whom the right to use the said software was given by the Assessee company. The ITAT noted that the case of SAMSUNG ELECTRONICS (SUPRA)on the basis that the software licenced by the Assessee in the case of SAMSUNG ELECTRONICS (SUPRA) was off the shelf software whereas the software in the case of the Assessee Company required to be customized to meet the needs of an Indian customer. The ITAT held that the customization of the concerned software or the professional services rendered by the Assessee company for such customization had not resulted in any material change in the terms and conditions of the licence agreement or in the relationship between the Assessee as an owner of the software and a licensee to whom the right to use the said software was given by the Assessee company. The ITAT noted that the ======================================================================= ITA 1034/2009 Page 30 of 174 software provided by the Assessee Company was basically a standard software and the customization so done to the limited extent as per the specific requirements of the customers did not bring about any change in the nature of the software or the licence granted to the customers. ======================================================================= ITA 1034/2009 Page 30 of 174 software provided by the Assessee Company was basically a standard software and the customization so done to the limited extent as per the specific requirements of the customers did not bring about any change in the nature of the software or the licence granted to the customers. 23. The ITAT further held that the case of the Assessee Company was clearly covered by the decisions of the Tribunal in the case of MOTOROLA INC.(SUPRA) AND SAMSUNG ELECTRONICS (SUPRA). Following the said decisions, the ITAT held that the amount received by the Assessee under the licence agreement for allowing the use of the software was not royalty either under the Income Tax Act or under the DTAA. The ITAT set aside the order of the CIT(A) and restored the matter to the file of the AO with a direction to reframe the assessment in terms of the said decision. Company was clearly covered by the decisions of the Tribunal in the case of MOTOROLA INC.(SUPRA) AND SAMSUNG ELECTRONICS (SUPRA). Following the said decisions, the ITAT held that the amount received by the Assessee under the licence agreement for allowing the use of the software was not royalty either under the Income Tax Act or under the DTAA. The ITAT set aside the order of the CIT(A) and restored the matter to the file of the AO with a direction to reframe the assessment in terms of the said decision. ======================================================================= 24. Aggrieved by the decision of the ITAT dated 19.12.2008, the Revenue has filed the present appeal. 19.12.2008, the Revenue has filed the present appeal. 25. Learned counsel for the appellant/revenue has submitted that the Assessee Company had received amounts under the software licence agreement and the said amounts were in the nature of royalty and were chargeable to tax in terms of Section 9(1)(vi) of the Act. He further contended that the right to use of software under the software licence agreement resulted in earning of royalty income and was thus chargeable to tax in the hands of the Assessee company as royalty income under Article 12 of the relevant DTAA. He further contended that in the present case, there was no sale of the software but it was mere licence to use the software and as such, the receipt from such a sale was receipt towards royalty. Learned counsel for the appellant/Revenue further contended that royalty was defined in Explanation 2 to Section 9(i)(vi) to include consideration for transfer of submitted that the Assessee Company had received amounts under the software licence agreement and the said amounts were in the nature of royalty and were chargeable to tax in terms of Section 9(1)(vi) of the Act. He further contended that the right to use of software under the software licence agreement resulted in earning of royalty income and was thus chargeable to tax in the hands of the Assessee company as royalty income under Article 12 of the relevant DTAA. He further contended that in the present case, there was no sale of the software but it was mere licence to use the software and as such, the receipt from such a sale was receipt towards royalty. Learned counsel for the appellant/Revenue further contended that royalty was defined in Explanation 2 to Section 9(i)(vi) to include consideration for transfer of ======================================================================= either one or more intellectual property rights mentioned therein and as such, there was no scope for an argument that computer software was not fully covered within the meaning of royalty. He further contended that computer software was one of the intellectual property referred to in the Explanation 2 and transfer of rights therein by the licensor would give right to royalty income. 26. Learned Counsel for the Revenue relied upon the decision of the Andhra Pradesh High Court in the case of COMMISSIONER OF INCOME TAX VS SAMSUNG ======================================================================= either one or more intellectual property rights mentioned therein and as such, there was no scope for an argument that computer software was not fully covered within the meaning of royalty. He further contended that computer software was one of the intellectual property referred to in the Explanation 2 and transfer of rights therein by the licensor would give right to royalty income. 26. Learned Counsel for the Revenue relied upon the decision of the Andhra Pradesh High Court in the case of COMMISSIONER OF INCOME TAX VS SAMSUNG ELECTRONICS CO.LTD (2012)345ITR494(KARN) to contend that right to make a copy of the software and storing the same in the hard disk of the designated computer and taking backup copy would amount to copyright work under section 14(1) of the Copyright Act and the payment made for the grant of the licence for the said purpose would constitute royalty. ======================================================================= 27. Contradicting the stand of the appellant/Revenue, learne