M/S. TTI TEAM TELECOM INTERNATIONAL LTD, MUMBAI v. THE DDIT (IT)-2(1), MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL 'L' BENCH MUMBAI BEFORE SHRI D.K. AGARWAL JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH ACCOUNTANT MEMBER ITA NO. 3091/MUM/2007 (ASSESSMENT YEAR: 2003-04) DDIT (INTERNATINAL TAXATION) 2(1) M/S. TTI TEAM TEL ECOM INTERNATIONAL ROOM NO. 120 1ST FLOOR SCINDIA LTD. 2ND FLOOR BALLARD HOUSE HOUSE BALLARD ESTATE N.M. ROAD VS. ADI MARZBAN PATH BALLARD PIER MUMBAI 400020 FORT MUMBAI 400001 PAN - AACCT 6300 M APPELLANT RESPONDENT CO NO. 64/MUM/2008 (ASSESSMENT YEAR: 2003-04) M/S. TTI TEAM TELECOM INTERNATIONAL DDIT (INTERNATINAL TAXATION) 2(1) LTD. 2ND FLOOR BALLARD HOUSE ROOM NO. 120 1ST FLOOR SCINDIA ADI MARZBAN PATH BALLARD PIER VS. HOUSE BALLARD ESTATE N.M. ROAD FORT MUMBAI 400001 MUMBAI 400020 PAN - AACCT 6300 M CROSS OBJECTOR APPELLANT IN APPEAL APPELLANT BY: SHRI. NARENDER SINGH RESPONDENT BY: SHRI P.J. PARDIWALLA & MR. JITENDRA JAIN O R D E R PER B. RAMAKOTAIAH A.M. THIS APPEAL BY THE REVENUE AND CROSS OBJECTION BY T HE ASSESSEE ARE AGAINST THE ORDER OF THE CIT(A) XXXI MUMBAI DATED 13.12.2006. 2. REVENUE HAS RAISED THE FOLLOWING GROUNDS: - (1) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW THE LD. CIT(A) ERRED IN HOLDING THAT THE ASSESSING OFFI CER HAS WRONGLY HELD THAT THE AMOUNT OF RS.15 75 78 477/- RECEIVED BY THE ASSESSEE FOR SUPPLY OF SOFTWARE IS IN THE NATURE OF ROYALTY WHICH IS LIABLE FOR TAXATION IN INDIA. (2) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE LD. CIT(A) FAILED TO APPRECIATE THAT THE PAYMENT FO R OBTAINING COMPUTER SOFTWARE IS IN THE NATURE OF ROYALTY AND THE SAME IS ITA NO. 3091/M/07& CO NO. 64/M/08 M/S. TTI TEAM TELECOM INTERNATIONAL LTD. 2 LIABLE FOR TAXATION IN INDIA WITHIN THE MEANING OF ARTICLE 12(3) OF THE DTAA. 3. BRIEFLY STATED TTI TEAM TELECOM INTERNATIONAL LTD. IS A COMPANY INCORPORATED IN ISRAEL AND IS A TAX RESIDENT OF THA T COUNTRY. THE ASSESSEE HAD FILED TAX RESIDENCE CERTIFICATE BEFORE THE A.O. AND CLAIMED THE BENEFIT OF DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA) BETWEEN INDIA AND ISRAEL. THE ASSESSEE HAD ENTERED INTO A CONTRACT WITH RELIANCE INFOCOMM LTD. (RELIANCE) DATED 17.09.2002 FOR THE SUPPLY AND LICENSE OF SOFT WARE FOR THE WIRELESS NETWORK OF RELIANCE IN INDIA. THE A.O. HAS MENTIONE D THAT TOTAL CONSIDERATION WAS US$ 322 50.180. THE A.O. HAS EXAM INED THE SOFTWARE LICENSE AGREEMENT WHICH PROVIDES THAT THE ASSESSEE HAD GRANTED RELIANCE A PERPETUAL IRREVOCABLE NON-EXCLUSIVE ROYALTY-FREE WORLDWIDE LICENSE TO INSTALL AND OPERATE THE SOFTWARE AND THE DOCUMENTAT ION LICENSED UNDER THE AGREEMENT FOR IMPLEMENTATION OPERATION MANAGEMENT AND MAINTENANCE OF WIRELESS RELIANCE NETWORK WITHIN INDIA. THE ASSESSE E HAD CLAIMED THAT THE PAYMENT RECEIVED FOR SUPPLY OF SOFTWARE WAS BUSINES S INCOME AND IN THE ABSENCE OF PE IN INDIA SUCH BUSINESS PROFIT WAS NOT TAXABLE IN INDIA. THE A.O. HELD THAT THE PAYMENT MADE FOR THE SUPPLY OF S OFTWARE IS ROYALTY WITHIN THE MEANING OF ARTICLE 12 OF THE DTAA AND ALSO SECT ION 9(1)(VI) OF THE I.T. ACT. THE A.O. HELD THAT THE ASSESSEE HAD ONLY GRANTED A LICENSE TO RELIANCE AND HAD NOT SOLD THE INTELLECTUAL PROPERTY. THE A.O. RE FERRED TO CLAUSE 2.1 OF THE AGREEMENT TO DISCUSS THE LICENSE GRANT. THE A.O. RE FERRED TO CLAUSE 4.1 TO HIGHLIGHT THAT THE PAYMENT IS FOR SOFTWARE LICENSE. THE A.O. REFERRED TO CLAUSE 6 TO HIGHLIGHT THAT THE INTELLECTUAL PROPERT Y RIGHTS REMAINS WITH THE ASSESSEE. THE A.O. EXAMINED WHETHER THE COMPUTER SO FTWARE SOLD BY THE ASSESSEE AMOUNTED TO TRANSFER OF ANY COPYRIGHT OR U SE OF COPYRIGHT. THE A.O. ALSO EXAMINED WHETHER SOFTWARE CAN BE HELD AS PATE NT OR INVENTION OR A SECRET FORMULA OR PROCESS. THE A.O. REFERRED TO THE COMMENTARY OF DR. KLAUS VOGEL ON DOUBLE TAXATION CONVENTIONS. THE A.O. HELD THAT THE SOFTWARE CAN BE HELD AS PROCESS. THE A.O. MENTIONED THAT THE ISS UE OF SOFTWARE BEING GOODS HAS NOT BEEN SETTLED AS HON'BLE SUPREME COURT HAD CONSTITUTED A LARGER BENCH IN THE CASE OF TATA CONSULTANCY SERVIC ES. THE A.O. MADE A REFERENCE TO THE DECISION OF HON'BLE AAR IN THE CAS E OF ABC VS. RE (154 CTR ITA NO. 3091/M/07& CO NO. 64/M/08 M/S. TTI TEAM TELECOM INTERNATIONAL LTD. 3 246) AND THE DECISION OF HON'BLE CALCUTTA HIGH COUR T IN THE CASE OF LEONHARDT ANDRA UND PARTNER 249 ITR 418 TO ARGUE TH AT PAYMENT RECEIVED FOR SUPPLY OF SOFTWARE AMOUNTS TO ROYALTY. 4. IT WAS THE SUBMISSION OF THE ASSESSEE THAT THEY HAV E PLACED ORDERS FOR PURCHASE OF THE PRODUCT AND HAS NOT ACQUIRED ANY CO PYRIGHT IN THE USE OF THE PRODUCT AND RELIED ON VARIOUS CASE LAWS TO SUPP ORT THAT SOFTWARE AFTER BEING PLACED ON A MEDIA IS GOODS AND NOT INTELLECTU AL PROPERTY. IT IS FURTHER CONTENDED THAT SUPPLY OF SOFTWARE WITHOUT TRANSFER OF COPYRIGHT ONLY AMOUNTS TO BUSINESS INCOME AND NOT ROYALTY: - I) TATA CONSULTANCY SERVICES VS. STATE OF ANDHRA PRADE SH 271 ITR 401 (SC) II) SONATA INFORMATION TECHNOLOGY LIMITED (ITAT MUMBAI ) ITA NO. 3702/MUM/2004 AND 4789/MUM/2004 III) M/S. ROLTA INDIA LIMITED (CIT(A)-V MUMBAI) IV) SAMSUNG ELECTRONICS CO. LTD. VS. ITO (BANG) 93 TTJ 658 V) LUCENT TECHNOLOGIES HINDUSTAN LTD. VS. ITO I(BANG) 92 ITD 366 VI) HEWLETT-PACKARD (INDIA) (P) LTD. VS. ITO 5 SOT 660 (BANG) VII) LOTUS DEVELOPMENT (ASIA PACIFIC) PVT. LTD. (ITAT DE LHI) VIII) SONATA INFORMATION TECHNOLOGY LTD. VS. ADDL. CIT (I TAT BANG) 5. THE CIT(A) HAS EXAMINED THE AGREEMENT BETWEEN THE A SSESSEE COMPANY AND RELIANCE INFOCOMM LTD. AND NOTICED THAT THERE WAS ONLY A GRANT OF PERPETUAL IRREVOCABLE NON-EXCLUSIVE ROY ALTY-FREE WORLDWIDE LICENSE TO INSTALL USE AND OPERATE AND COPY THE SOFTWARE A ND DOCUMENTATION LICENSED IN THE WORLDWIDE RELIANCE NETWORK. HE ALSO FURTHER FOUND OUT THAT THE AGREEMENT DOES NOT GIVE ANY TITLE TO THE SOFTWA RE OR TO ANY TRADEMARK OR COPYRIGHT IN THEM TO THE RELIANCE. THE RELIANCE ALS O CANNOT REVERSE ENGINEER DECOMPILE OF DISASSEMBLE OR CANNOT REMOVE OBSCURE OR DEFACE ANY PROPERTY LEGEND RELATING TO THE SOFTWARE. IT WAS AL SO FURTHER FOUND THAT THE SOFTWARE LICENSE CANNOT BE SOLD TRANSFERRED ASSIG NED SUBLICENSED OR USED BY ANY OUTSOURCEE OF RELIANCE WITHOUT THE CONSENT O F THE ASSESSEE. IN VIEW OF THESE FINDINGS FOLLOWING VARIOUS CASE LAWS RELIED U PON BY THE ASSESSEE AND ALSO EXAMINATION OF DTAA OF INDO- ISRAEL AND INDO-U S DTAA AND PROVISIONS ITA NO. 3091/M/07& CO NO. 64/M/08 M/S. TTI TEAM TELECOM INTERNATIONAL LTD. 4 OF ARTICLE 12(3) AND AFTER ANALYSING THE PROVISIONS OF COPYRIGHT ACT THE CIT(A) HAS FINALLY CONCLUDED AS UNDER: - 2.33 WITH THE ABOVE DISCUSSION IT IS HELD THAT RE LIANCE UNDER THE SOFTWARE CONTRACT ACQUIRED ONLY A COPY OF SOFTWARE PROGRAMME AND DID NOT ACQUIRE ANY COPYRIGHT OVER SUCH SOFTWARE AS ENV ISAGED BY SECTION-14 OF THE COPYRIGHT ACT. UNDER THESE CIRCUMSTANCES PA YMENT MADE BY THE RELIANCE TO THE APPELLANT CANNOT BE SAID TO BE PAYM ENT FOR THE USE OF OR RIGHT TO USE OF COPYRIGHT. THUS PAYMENT AMOUNTED O NLY FOR PURCHASE OF COPYRIGHTED ARTICLE AND DOES NOT AMOUNT TO ROYALTY WITHIN THE MEANING OF ARTICLE-12(3) OR THE DTAA. ACCORDINGLY IT IS HELD T HAT THE AO HAS WRONGLY HELD THE PAYMENT TO BE ROYALTY. ADDITION MADE BY TH E AO IS THEREFORE DELETED. ACCORDINGLY APPEAL ON GROUNDS APPEAL NO. 1 IS ALLOWED. REVENUE IS AGGRIEVED. 6. WE HAVE HEARD THE LEARNED D.R. WHO REITERATED THE ARGUMENTS OF THE A.O. WHILE THE LEARNED COUNSEL REFERRED TO THE PAPE R BOOK FILED IN THIS REGARD AND VARIOUS CASE LAWS RELIED UPON BY THE ASSESSEE. IT WAS THE SUBMISSION OF THE REVENUE THAT USE OF SOFTWARE COMES WITHIN THE P URVIEW OF ROYALTY WHEREAS THE ASSESSEE COUNSEL SUBMITTED THAT IT WAS BUSINESS INCOME AND NO PART OF IT CAN BE CONSIDERED AS ROYALTY. 7. WE HAVE CONSIDERED THE ISSUE. AS SEEN FROM THE LICE NSE GRANTED IN THIS REGARD AS EXTRACTED BY THE CIT(A) IN PARA 2.5 AND F INDINGS OF THE CIT(A) IN PARAS 2.6 & 2.7 THE ASSESSEE HAS NOT TRANSFERRED AN Y COPYRIGHT OR ANY RIGHT OVER THE SOFTWARE TO RELIANCE EXCEPT ALLOWING THE R ELIANCE TO USE THE SOFTWARE IN THE WIRELESS NETWORK. IT IS THEREFORE APPARENT THAT THE RELIANCE HAS GOT ONLY THE RIGHT TO USE FOR ITS BUSINESS AND HAS NOT OBTAINED ANY OTHER RIGHTS. THIS RIGHT DOES NOT AMOUNT TO ROYALTY WITHI N THE MEANING OF ARTICLE 12(3) OF THE DTAA AND SECTION 9(1)(VI) OF THE IT AC T AS HELD BY THE CIT(A) CORRECTLY. THE CIT(A) CONSIDERED THE ISSUED IN DETA IL AND HELD AS UNDER: - 2.8 THE ISSUE WHETHER SOFTWARE IS GOODS OR INTELLE CTUAL PROPERTY HAS BEEN EXAMINED BY HON'BLE SUPREME COURT IN THE CASE OF TATA CONSULTANCY SERVICES VS. STATE OF ANDHRA PRADESH (2 004) 271 ITR 401. IT WAS ARGUED ON BEHALF OF ANDHRA PRADESH GOVERNMENT T HAT THE COMPUTER SOFTWARE IS AN INTELLECTUAL PROPERTY AND PROVIDING IT TO ANYBODY FOR CONSIDERATION RESULTS IN ROYALTY INCOME BEING GENER ATED TO THE SOFTWARE DEVELOPER. HON'BLE SUPREME COURT EXAMINED THE ISSUE IN DETAIL AND IT WAS HELD THAT SOFTWARE IS AN INTELLECTUAL PROPERTY SO LONG AS IT REMAINS WITH THE SOFTWARE DEVELOPER. AS SOON AS A COPY OF T HE SOFTWARE IS PRODUCED AND IS PLACED ON A MEDIA IT BECOMES GOODS. SOFTWARE ON MEDIA ITA NO. 3091/M/07& CO NO. 64/M/08 M/S. TTI TEAM TELECOM INTERNATIONAL LTD. 5 IS NOT DIFFERENT FROM ANY BOOK OR CANVAS (IN CASE O F PAINTING) OR COMPACT DISCS OR CASSETTES IN RESPECT OF SONGS AND PICTURES . HON'BLE SUPREME COURT HELD THAT THE SOFTWARE AND THE MEDIA CANNOT B E SPLIT UP SINCE THE MEDIA HAS A LITTLE VALUE. HON'BLE SUPREME COURT HAS OBSERVED AS UNDER: A SOFTWARE PROGRAMME MAY CONSIST OF VARIOUS COMMAN DS WHICH ENABLE THE COMPUTER TO PERFORM A DESIGNATED TASK. THE COPYRIGH T IN THAT PROGRAMME MAY REMAIN WITH THE ORIGINATOR OF THE PROGRAMME. BUT TH E MOMENT COPIES ARE MADE AND MARKETED IT BECOMES GOODS WHICH ARE SUSCEPTIB LE 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 DISCS OR C ASSETTES AND MARKETED WOULD BECOME GOODS. WE SEE NO DIFFERENCE BETWEEN A SALE OF A SOFTWARE PROGRAMME ON A CD/FLOPPY DISC FROM A SALE OF MUSIC ON A CASSE TTE/CD OR A SALE OF A FILM ON A VIDEO CASSETTE/CD. IN ALL SUCH CASES THE INTE LLECTUAL PROPERTY HAS BEEN INCORPORATED ON A MEDIA FOR PURPOSES OF TRANSFER. S ALE 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 TH E DISC OR THE CD. AS IN THE CASE OF PAINTINGS OR BOOKS OR MUSIC OR FILMS THE BU YER IS PURCHASING THE INTELLECTUAL PROPERTY AND NOT THE MEDIA I.E. THE PA PER OR CASSETTE OR DISC OR CD. THUS A TRANSACTION OF SALE OF COMPUTER SOFTWARE IS CLEARLY A SALE OF GOODS WITHIN THE MEANING OF THE TERM AS DEFINED IN THE SA ID ACT. 2.9 IT IS THEREFORE NOW ESTABLISHED LAW THAT COMPUT ER SOFTWARE AFTER BEING PUT ON TO A MEDIA AND SOLD HAS BECOME GOODS L IKE ANY OTHER AUDIO CASSETTE OR PAINTING ON CANVAS OR A BOOK. THE AO WA S THEREFORE NOT JUSTIFIED IN HOLDING THAT THE COMPUTER SOFTWARE ON A MEDIA CONTINUES TO BE INTELLECTUAL PROPERTY RIGHT. THE ISSUE OF PAYMEN T FOR ACQUISITION OF COPY OF SOFTWARE PROGRAMME HAS BEEN CONSIDERED BY T HE HON'BLE ITAT BANGALORE BENCH IN THE CASE OF LUCENT TECHNOLOGIES HINDUSTAN LTD. VS. ITO (2005) 92 ITD 366. IN THIS CASE THE TAXPAYER HA D PURCHASED FROM US COMPANY AN INTEGRATED EQUIPMENT WHICH CONSISTED OF BOTH HARDWARE AND SOFTWARE AS ONE CANNOT FUNCTION WITHOUT HELP OF OTHER. THE ACQUISITION OF SOFTWARE WAS INEXTRICABLY LINKED TO THE ACQUISITION OF HARDWARE AND ONE COULD NOT FUNCTION WITHOUT THE OTH ER. THE ASSESSEE COMPANY WHICH WAS ENGAGED IN THE BUSINESS OF MANUFA CTURING AND SALE OF ELECTRONIC SWITCHING SYSTEMS REQUIRED FOR THE TE LECOMMUNICATION INDUSTRY DID NOT DEDUCT TAX AT SOURCE WHILE MAKING PAYMENT ON THE GROUND THAT ACQUISITION OF SOFTWARE WAS INEXTRICABL Y LINKED TO THE ACQUISITION OF HARDWARE AND AS THE TRANSFER OF SOFT WARE HAD TAKEN PLACE OUTSIDE INDIA NO PROFIT ACCRUED OR AROSE OR COULD BE DEEMED TO HAVE ACCRUED OR ARISEN IN INDIA. THE AO DIRECTED FOR DED UCTION OF TAX AT SOURCE U/S. 195. HON'BLE ITAT AFTER APPRECIATING THE PROVI SIONS OF ARTICLE-12 OF THE INDO-US DTAA AND THE PROVISIONS OF SECTION 9(1) (VI) OF THE I.T. ACT HAS HELD THAT THE ASSESSEE DID NOT ACQUIRE ANY RIGH T IN THE SOFTWARE. THE ASSESSEE HAD ONLY ACQUIRED INTEGRATED EQUIPMENT BOT H OF HARDWARE AND SOFTW3ARE FROM LUCENT USA. THE ASSESSEE DID NOT AC QUIRE ANY RIGHT TO DUPLICATE THE SOFTWARE IN MAKING USE OF SAME. THE S OFTWARE SUPPLIED BY LUCENT US IS CUSTOMER-SPECIFIC AND CANNOT BE REUSE D OR DUPLICATED IN ANY OTHER EXCHANGE WHERE IDENTICAL ORDERS WERE PLAC ED BY THE DOT. IT WAS HELD THAT THE PAYMENT MADE FOR THE PURCHASE OF SOFTWARE DID NOT PARTAKE THE CHARACTER OF ROYALTY AND AS SUCH THERE WAS NO OBLIGATION TO DEDUCT AT SOURCE. AS PER THE CONTRACT CONDITIONS ME NTIONED IN PARA-2 OF ITA NO. 3091/M/07& CO NO. 64/M/08 M/S. TTI TEAM TELECOM INTERNATIONAL LTD. 6 THE AGREEMENT RELIANCE DID NOT ACQUIRE ANY RIGHT OF DUPLICATION OF SOFTWARE EXCEPT FOR USE IN ITS OWN SYSTEM. ... ... 2.13 APPELLANT IS A TAX RESIDENT OF ISRAEL AND THER EFORE IS ENTITLED TO THE BENEFIT OF DTAA OVER THE PROVISIONS OF THE INCOME-T AX ACT. CONSEQUENTLY IF THE PAYMENT OF SOFTWARE IS NOT COVERED BY THE DE FINITION OF ROYALTY IN ARTICLE-12 IT BEING COVERED BY SECTION 9(1)(VI) WO ULD BE IRRELEVANT. DEFINITION OF ROYALTY IN ARTICLE-12(3) IS IN FOLLOW ING PARTS: A) CONSIDERATION FOR THE USE OF OR THE RIGHT TO US E ANY COPYRIGHT OF A LITERARY ARTISTIC OR SCIENTIFIC WORK. B) CONSIDERATION FOR THE USE OF OR RIGHT TO USE OF ANY PATENT TRADEMARK DESIGN OR MODEL PLAN SECRET FORMULA OR PROCESS. C) CONSIDERATION FOR THE USE OF OR RIGHT TO USE CIN EMATOGRAPH FILM OR WORK ON FILM TAPE OR OTHER MEANS OF REPRODUCTIO N OF THE USE IN CONNECTION WITH RADIO OR TELEVISION BROADCASTING . D) CONSIDERATION FOR THE INFORMATION CONCERNING IND USTRIAL COMMERCIAL OR SCIENTIFIC EXPERIENCE. E) INCLUDING GAINS DERIVED FROM THE ALIENATION OF A NY SUCH RIGHT OR PROPERTY WHICH ARE CONTINGENT ON THE PRODUCTIVITY USE OR DISPOSITION THEREOF. THE COMPUTER SOFTWARE CAN ONLY BE COVERED IN ITEM (A) OR (B) ABOVE. 2.14 COMPUTER SOFTWARE AS COPYRIGHT ARTICLE-12(3) PROVIDES THAT THE CONSIDERATION FOR THE USE OF ANY COPYRIGHT OR RIGHT TO USE OF ANY COPYRIGHT IS ROYAL TY. DEFINITION OF COPYRIGHT IS NOT PROVIDED IN THE DTA A AND THEREFORE DEFINITION OF COPYRIGHT PROVIDED IN THE COPYRIGHT A CT 1957 IS RELEVANT. SECTION-13 OF THE COPYRIGHT ACT PROVIDES AS UNDER: 13. WORKS IN WHICH COPYRIGHT SUBSISTS. (1) SUBJECT TO THE PROVISIONS OF THIS SECTION AND THE OTHER PROVISIONS OF THIS ACT COPYRIGHT SHALL SUBSIST THROUGHOUT INDIA IN THE FOL LOWING CLASSES OF WORKS THAT IS TO SAY - (A) ORIGINAL LITERARY DRAMATIC MUSICAL AND ARTISTIC W ORKS; (B) CINEMATOGRAPH FILMS; AND (C) SOUND RECORDING. (2) COPYRIGHT SHALL NOT SUBSIST IN ANY WORK SPECIFI ED IN SUB-SECTION (1) OTHER THAN A WORK TO WHICH THE PROVISIONS OF S ECTION 40 OR SECTION 41 APPLY UNLESS - (I) IN THE CASE OF A PUBLISHED WORK THE WORK IS FI RST PUBLISHED IN INDIA OR WHERE THE WORK IS FIRST PUBL ISHED OUTSIDE INDIA THE AUTHOR IS AT THE DATE OF SUCH PU BLICATION ITA NO. 3091/M/07& CO NO. 64/M/08 M/S. TTI TEAM TELECOM INTERNATIONAL LTD. 7 OR IN A CASE WHERE THE AUTHOR WAS DEAD AT THAT DATE WAS AT THE TIME OF HIS DEATH A CITIZEN OF INDIA; (II) IN THE CASE OF AN UNPUBLISHED WORK OTHER THAN A WORK OF ARCHITECTURE THE AUTHOR IS AT THE DATE OF THE MAKI NG OR THE WORK A CITIZEN OF INDIA OR DOMICILED IN INDIA; AND (III) IN THE CASE OF A WORK OF ARCHITECTURE THE WORK IS LOCATED IN INDIA. EXPLANATION. IN THE CASE OF A WORK OF JOINT AUTHORS HIP THE CONDITIONS CONFERRING COPYRIGHT SPECIFIED IN THIS S UB-SECTION SHALL BE SATISFIED BY ALL THE AUTHORS OF THE WORK. (3) COPYRIGHT SHALL NOT SUBSIST- (A) IN ANY CINEMATOGRAPH FILM IF A SUBSTANTIAL PART OF THE FILM IS AN INFRINGEMENT OF THE COPYRIGHT IN ANY OTHER WO RK; (B) IN ANY SOUND RECORDING MADE IN RESPECT OF A LIT ERARY DRAMATIC OR MUSICAL OR MUSICAL WORK IF IN MAKING T HE SOUND RECORDING COPYRIGHT IN SUCH WORK HAS BEEN INFRINGED. (4) THE COPYRIGHT IN A CINEMATOGRAPH FILM OR A SOUN D RECORDING SHALL NOT AFFECT THE SEPARATE COPYRIGHT IN ANY WORK IN RESPECT OF WHICH OR A SUBSTANTIAL PART OF WHICH THE FILM OR AS THE CASE MAY BE THE SOUND RECORDING IS MADE. (5) IN THE CASE OF A WORK OR ARCHITECTURE COPYRIGH T SHALL SUBSIST ONLY IN THE ARTISTIC CHARACTER AND DESIGN AND SHALL NOT EXTEND TO PROCESSES OR METHODS OF CONSTRUCTION 2.15 SECTION-13 THEREFORE CLEARLY PROVIDES THAT THE COPYRIGHT SHALL SUBSIST ONLY IN RESPECT OF ORIGINAL LITERACY DRAMA TIC MUSICAL AND ARTISTIC WORKS CINEMATOGRAPH FILMS AND SOUND RECORDING. IT IS THEREFORE CLEAR THAT THE COPYRIGHT IS DIFFERENT FROM THE WORK. COPY RIGHT ABOUT WORK IS NOT SYNONYMOUS WITH THAT WORK. COPY RIGHT IS AN INCORPO REAL PROPERTY IN A WORK (A COPY PROPERTY). 2.16 SECTION-14 OF THE COPYRIGHT ACT PROVIDES THE D EFINITION OF COPYRIGHT WHICH READS AS UNDER: 14. MEANING OF COPYRIGHT. FOR THE PURPOSE OF THIS ACT COPYRIGHT MEANS THE EXCLUSIVE RIGHT SUBJECT TO TH E 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 AND NOT BEING COPIES ALREADY IN CIRCULATION; ITA NO. 3091/M/07& CO NO. 64/M/08 M/S. TTI TEAM TELECOM INTERNATIONAL LTD. 8 (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 ANY 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: 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. 2.17 THE DEFINITION OF COPYRIGHT IN SECTION-14 IS E XHAUSTIVE DEFINITION SINCE THE WORDS USED ARE COPYRIGHT MEANS. COPYRIG HT IS A BUNDLE OF RIGHTS MENTIONED IN SECTION -14 ABOVE. THIS RIGHT C ONSISTS OF RIGHT TO REPRODUCE THE WORK ISSUES OF COPIES OF THE WORK IN PUBLIC PERFORMANCE OF THE WORK IN PUBLIC MAKING TRANSLATION ADAPTATI ON ETC. IN RESPECT OF COMPUTER PROGRAMME RELEVANT FOR THE ISSUE UNDER CON SIDERATION COPYRIGHT MAINLY CONSISTS OF FOLLOWING RIGHTS: (A) TO REPRODUCE THE WORK IN ANY MATERIAL FORM. (B) TO ISSUE COPIES OF THE WORK TO THE PUBLIC. (C) TO SELL OR GIVE ON COMMERCIAL RENTAL OR FOR SAL E OR FOR COMMERCIAL RENTAL ANY COPY OF COMPUTER PROGRAMME. 2.18 EXAMINATION OF THE AGREEMENT OF THE APPELLANT WITH RELIANCE REVEALS THAT PARA-2 OF THE AGREEMENT QUOTED EARLIER FORBIDS THE RELIANCE FROM TRANSFERRING ASSIGNING SUBLICENSING OR USING BY OUTSOURCING THE SOFTWARE. THE AGREEMENT ALSO FORBIDS THE RELIANCE F ROM DECOMPILING REVERSE ENGINEERING DISASSEMBLING OR DECODING THE SOFTWARE. PARA-2 ALSO CONTEMPLATES THAT ALL COPIES OF THE SOFTWARE P ROVIDED BY THE APPELLANT ARE THE COPYRIGHT OF APPELLANT. THESE COP IES SHALL BE HELD SECRET AND SOFTWARE SHALL NOT BE DISCLOSED TO ANYBO DY ELSE. AGREEMENT PROVIDES THAT ALL COPIES OF SOFTWARE SHALL BE RETUR NED TO APPELLANT UPON TERMINATION OR CANCELLATION OF THE AGREEMENT. AGREE MENT ALSO PROVIDES THAT RELIANCE SHALL USE THE SOFTWARE ONLY FOR THE O PERATION OF WIRELESS RELIANCE NETWORK AND SHALL NOT SUBLICENSE OR MODIFY THE SOFTWARE. THE PERUSAL OF PARA-2 OF THE AGREEMENT CLEARLY REVEALS THAT RELIANCE HAS GOT A COPY OF SOFTWARE FOR BEING USED IN ITS TELECOM NE TWORK. THE RELIANCE HAS GOT NO RIGHT AS ENVISAGED IN SECTION-14 OF THE COPYRIGHT ACT TO ITA NO. 3091/M/07& CO NO. 64/M/08 M/S. TTI TEAM TELECOM INTERNATIONAL LTD. 9 DUPLICATE THE SOFTWARE TO ISSUE COPIES OF SOFTWARE IN PUBLIC OR TO GIVE COPIES OF SOFTWARE IN RENT OR EVEN TO REVERSE ENGIN EER DECOMPILE OR MODIFY THE SOFTWARE. THE SUM TOTAL OF THE CONDITION S MENTIONED IN THE PARA-2 IS THAT APPELLANT HAS GIVEN NO PART OF COPYR IGHT AS ENVISAGED IN SECTION-14 OF THE COPYRIGHT TO THE APPELLANT. THUS SALE OF SOFTWARE BY THE APPELLANT TO RELIANCE CANNOT BE SAID TO BE THE TRAN SFER OF THE COPYRIGHT TO RELIANCE EITHER IN PART OR IN WHOLE. THUS CONSIDER ATION PAID BY THE RELIANCE TO APPELLANT FOR ACQUIRING COPY OF SOFTWAR E IS NOT FOR THE USE OF COPYRIGHT OR TRANSFER OF RIGHT TO USE OF COPYRIGHT. AS MENTIONED ABOVE COPYRIGHT IS DIFFERENT FROM THE WORK IN RESPECT OF WHICH COPYRIGHT SUBSIST. RELIANCE HAS ONLY GOT A COPY OF SOFTWARE WITHOUT AN Y PART OF THE COPYRIGHT OF THE SOFTWARE. THUS PAYMENT BY THE REL IANCE FOR ACQUIRING COPY OF SOFTWARE DOES NOT AMOUNT TO ROYALTY WITHIN THE DEFINITION OF ARTICLE-12(3) OF THE DTAA. THUS HE GAVE A FACTUAL FINDING ABOUT PURCHASE OF S OFTWARE. 8. THE CIT(A) ALSO CONSIDERED THE ISSUE ON LEGAL PRINC IPLES AS WELL. 2.19 SIMILAR ISSUE OF WHETHER THE SUPPLY OF A COPY OF SOFTWARE PROGRAMME WITHOUT TRANSFER OF ANY PART OF COPYRIGHT AMOUNTS TO ROYALTY OR NOT HAS BEEN CONSIDERED BY VARIOUS BENCHES OF IT AT RECENTLY. HON'BLE ITAT BANGALOREBENCH IN THE CASE OF SAMSUNG ELECTRO NICS CO. LTD. VS. ITO 93 TTJ 658 276 ITR (AT) 1 HAS HAD AN OCCASION TO CONSIDER THE SIMILAR CASE. IT WAS HELD IN THE CASE THAT THE DEFI NITION OF ROYALTY U/S. 9(1)(VI) IS WIDER THAN THE DEFINITION OF ROYALTY IN VARIOUS DTAA. SINCE THE PROVISIONS IN THE DTAA HAVE TO BE FOLLOWED IF THEY ARE MORE BENEFICIAL TO THE TAXPAYER THEN THE DEFINITION OF ROYALTY IN DTAA HAS TO BE CONSIDERED. HON'BLE ITAT HAD OBSERVED THAT AS PER THE AGREEMENT BETWEEN THE PARTIES IN THIS CASE THE TAXPAYER HAD ACQUIRED ONLY A COPY OF THE SOFTWARE OR THE COPYRIGHTED ARTICLE WHEREAS THE COP YRIGHT REMAINED WITH THE OWNER I.E. FOREIGN PARTY. IT WAS HELD THAT UPON THE SALE OF COPYRIGHTED ARTICLE INCORPOREAL RIGHT TO SOFTWARE I.E. COPYRIGH T WAS NOT TRANSFERRED TO THE ASSESSEE. IT WAS HELD THAT RIGHT TO USE OF A CO PYRIGHT IS TOTALLY DIFFERENT FROM RIGHT TO USE THE PROGRAMME EMBEDDED IN THE CASSETTE OR CD OR IT MAY BE A SOFTWARE. IT WAS HELD THAT THE SA LE OF COPY OR COPYRIGHTED ARTICLE CALLED SOFTWARE DID NOT AMOUNT TO ROYALTY WITHIN THE DEFINITION OF ARTICLE-12(3) OF THE INDO-US DTAA. RE LIANCE WAS PLACED ON THE DECISION OF HON'BLE SUPREME COURT IN THE CASE O F TATA CONSULTANCY SERVICES 271 ITR 401. 2.20 HON'BLE SPECIAL BENCH ITAT DELHI HAD AGAIN AN OCCASION TO CONSIDER THE SIMILAR ISSUE IN THE CASE OF MOTOROLA INC. (2005) 270 ITR(AT) 62 96 TTJ 01. IN THIS CASE THE HON'BLE ITAT HAD DI SCUSSED THE PROVISIONS OF THE COPYRIGHT ACT. THEY EXAMINED THE CONDITIONS IN THE NON- EXCLUSIVE RESTRICTED LICENSE OF THE SOFTWARE AND FO UND THAT THE SUPPLIER OF SOFTWARE HAD ONLY TRANSFERRED A COPY OF THE SOFTWAR E OR COPYRIGHTED ARTICLE BUT HAD NOT TRANSFERRED ANY OF THE COPYRIGH T. UNDER THESE ITA NO. 3091/M/07& CO NO. 64/M/08 M/S. TTI TEAM TELECOM INTERNATIONAL LTD. 10 CIRCUMSTANCES CONSIDERATION RECEIVED FOR THE SALE OF COPYRIGHTED ARTICLE NAMELY SOFTWARE WAS HELD NOT TO BE ROYALTY. IT WAS ALSO HELD THAT COPYRIGHT IS DIFFERENT FROM THE COPYRIGHTED ARTICLE . IN THIS CASE THE ISSUE OF SOFTWARE PROVIDED TO THE CELLULAR OPERATOR FOR S ETTING UP THE CELLULAR TELEPHONE NETWORK WAS COVERED. IT WAS HELD THAT THE SOFTWARE WHICH IS PROVIDED BY THE SUPPLIER FOR THE USE IN THE CELLULA R NETWORK DOES NOT INVOLVE TRANSFER OF ANY PART OF COPYRIGHT OF THE SO FTWARE BUT ONLY AMOUNTS TO SALE OF A COPYRIGHTED ARTICLE NAMELY THE COPY OF COMPUTER PROGRAMME. COPYRIGHT CONTINUE TO REMAIN WITH THE SUPPLIER OF T HE COMPUTER PROGRAMME. 2.21 THE HON'BLE DELHI BENCH OF ITAT IN THE CASE OF LOTUS ASIA SPECIFIC ITA NO. 564 TO 566/DEL/05 ORDER DATED 28.0 4.2006 HAVE ALSO EXAMINED THE SAME ISSUE AND HAVE HELD THAT IN THE C ASE OF A SALE OF SHRINK-WRAP SOFTWARE BEING A COPYRIGHTED ARTICLE C ONSIDERATION RECEIVED DOES NOT AMOUNT TO ROYALTY AS THERE IS NO TRANSFER OF ANY PART OF COPYRIGHT IN THE COMPUTED PROGRAMME WHICH CONTINUES TO REMAIN WITH THE SOFTWARE SUPPLIER. 2.22 THE HON'BLE ITAT BANGALORE BENCH IN THE CASE O F SONATA INFORMATION TECHNOLOGIES LTD. ITA NO. 1561 TO 1580/ BANG/2004 DATED 31.01.2006 HAVE CONSIDERED THE ISSUE OF PAYMENT REC EIVED ON SALE OF COMPUTER SOFTWARE WITHOUT TRANSFER OF ANY COPYRIGHT . HON'BLE ITAT HAD EXAMINED THE ISSUE OF ROYALTY WITHIN THE MEANING OF SECTION 9(1)(VI) AND AS PROVIDED IN THE DTAA. HON'BLE ITAT HAD EXAMINED IN DETAIL THE ISSUE OF ROYALTY IN RESPECT OF SALE OF SHRINK-WRAP SOFTWA RE. THEY ALSO EXAMINED THE COPYRIGHT N RESPECT OF COMPUTER PROGRAMME BEING THE RIGHT TO SELL OR GIVEN A COMMERCIAL RENTAL ANY COPY OF SOFTWARE PROG RAMMES. THE ITAT EXAMINED THE GENESIS OF ADDITIONAL COPYRIGHT GIVEN IN RESPECT OF COMPUTER PROGRAMME IN SECTION 14(B)(II) OR THE COPY RIGHT ACT. THE HON'BLE ITAT REFERRED TO BERNE CONVENTION ROME CONVENTION WIPO COPY RIGHT TREATY TRIPS . IT WAS HELD THAT THE COPYRIGHT IN THE SOFTWARE IS DIFFERENT FROM ANY RIGHT IN THE PHYSICAL MANIFESTATION OF THE SOFTWARE CONTAINED IN A CD FLOPPY OR ON A HARD DISC IN WHICH THE SOFTWAR E IS DOWNLOADED. IT WAS HELD THAT WHEN A DISTRIBUTOR OF MICROSOFT ACQUI RES THE COPIES OF SOFTWARE HE DOES NOT ACQUIRES THE DISTRIBUTOR RIGH T WHICH IS A COPYRIGHT WITHIN THE MEANING OF SECTION-14(A)(II) OR THE RIGH T TO SELL OR TO GIVE ON COMMERCIAL RENTAL A RIGHT UNDER SECTION 14(B)(II). THE DISTRIBUTOR MERELY OBTAINED THE RIGHT TO DISTRIBUTE THE COPYRIGHTED MA TERIAL WHICH IS A PROPERTY DIFFERENT FROM THE PROPERTY IN THE COPYRIG HT IN THE SOFTWARE. THE PROPERTY CONTAINED IN COPYRIGHTED MATERIAL AND THE PROPERTY CONTAINED IN THE COPYRIGHT TO SOFTWARE ARE TWO DIFFERENT RIGHTS AND WHEN A PERSON ACTS AS A DISTRIBUTOR FOR THE COPYRIGHTED MATERIAL HE HAS NOT ACQUIRED THE DISTRIBUTION RIGHTS WITHIN THE MEANING OF SECTION-1 4(A)(II) R.W.S. 14(B)(II). 2.24 THE HON'BLE ITAT BANGALORE BENCH IN THE CASE OF HEWLETT PACKARD INDIA (P) LTD. (2006) 5 SOT 660 (BANG) HA S ALSO CONSIDERED A SIMILAR CASE. IN THIS CASE INDIAN COMPANY WAS ENGAG ED IN THE BUSINESS OF PROVIDING NETWORK SOLUTION TO IT CUSTOMERS. THIS ACTIVITY INCLUDES SALE OF SOFTWARE PACKAGES TO CUSTOMERS. FOR THIS PURPOSE THE INDIAN COMPANY HAD IMPORTED READYMADE SOFTWARE PACKAGES FROM HEWLE TT PACKARD USA. ITA NO. 3091/M/07& CO NO. 64/M/08 M/S. TTI TEAM TELECOM INTERNATIONAL LTD. 11 THE INDIAN COMPANY SOLD THESE SOFTWARE PACKAGES TO ITS CUSTOMERS IN THE PACKED CONDITIONS. HON'BLE ITAT HELD THAT THE C ONSIDERATION RECEIVED BY THE FOREIGN COMPANY FOR THE SALE OF SOFTWARE PAC KAGES TO THE INDIAN COMPANY DID NOT AMOUNT TO ROYALTY WITHIN THE MEANIN G OF ARTICLE-12(3) OF THE INDO-US DTAA. IT WAS HELD THAT THE SALE OF COPY RIGHTED ARTICLE IS DIFFERENT FROM THE TRANSFER OF THE COPYRIGHT IN THE COMPUTER SOFTWARE. 2.25 IT IS THEREFORE VERY APPARENT FROM SEVERAL DEC ISIONS OF THE HON'BLE ITAT THAT THE CASE OF SALE OF COPYRIGHTED A RTICLE NAMELY A COPY OF COMPUTER PROGRAMME PAYMENT RECEIVED IS NOT ROYA LTY IF THERE IS NO TRANSFER OF COPYRIGHT PARTLY OR WHOLLY. FACTS OBTAI NING IN THE CASE OF APPELLANT CLEARLY POINT THAT NO PART OF THE COPYRIG HT AS ENVISAGED BY SECTION-14 OF THE COPYRIGHT ACT HAS BEEN TRANSFERRE D BY THE APPELLANT TO RELIANCE. THEREFORE THE PAYMENT FOR PURPOSE OF SOFT WARE CANNOT AMOUNT TO ROYALTY WITHIN THE MEANING OF ARTICLE-12(3). 9. AS CAN BE SEEN FROM THE ABOVE DISCUSSION OF THE CIT (A) THE FACTUAL POSITION AS PER THE AGREEMENTS AND THE LEGAL POSITI ON WITH REFERENCE TO THE SUPPLY OF SOFTWARE FOR USE WAS ANALYSED IN DETAIL. VARIOUS COORDINATE BENCHES HAVE ALREADY ANALYSED AND NOTED THE DIFFERE NCE BETWEEN THE PURCHASE OF COPYRIGHTED ARTICLE AND TRANSFER OF COP Y RIGHTS. WE ARE IN AGREEMENT WITH THE FINDINGS OF THE CIT(A) WHO HAS CORRECTLY CAME TO THE CONCLUSION THAT THE SUPPLY OF SOFTWARE TO RELIANCE DOES NOT AMOUNT TO ANY TRANSFER OF COPYRIGHT AND PAYMENT CAN BE ONLY FOR P URCHASE OF COPYRIGHTED ARTICLE AND DOES NOT AMOUNT TO ROYALTY WITHIN THE M EANING OF ARTICLE 12(3) OF THE DTAA. CONSEQUENTLY THE ORDER OF THE CIT(A) IS U PHELD. REVENUE APPEAL IS DISMISSED. 10. ASSESSEE HAS FILED CO NO. 64/MUM/2008 IN SUPPORT OF THE CIT(A)S ORDER. SINCE THE REVENUE APPEAL IS DISMISSED THE CR OSS OBJECTION BECOMES ACADEMIC IN NATURE. ACCORDINGLY CO IS ALSO DISMISSE D. 11. IN THE RESULT BOTH THE APPEAL AND CROSS OBJECTION ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 13 TH APRIL 2010. SD. SD. (D.K. AGARWAL) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI DATED: 13 TH APRIL 2010 ITA NO. 3091/M/07& CO NO. 64/M/08 M/S. TTI TEAM TELECOM INTERNATIONAL LTD. 12 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) XXXI MUMBAI 4. THE DIT (INTERNATIONAL TAXATION) MUMBAI 5. THE DR L BENCH ITAT MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT MUMBAI BENCHES MUMBAI N.P. ITA NO. 3091/M/07& CO NO. 64/M/08 M/S. TTI TEAM TELECOM INTERNATIONAL LTD. 13