DCIT, CHENNAI v. M/s. Abaqus Engineering India Pvt. Ltd., CHENNAI

ITA 1701/CHNY/2010 | 2005-2006
Pronouncement Date: 16-09-2011 | Result: Dismissed

Appeal Details

RSA Number 170121714 RSA 2010
Assessee PAN AAACF4457B
Bench Chennai
Appeal Number ITA 1701/CHNY/2010
Duration Of Justice 11 month(s) 5 day(s)
Appellant DCIT, CHENNAI
Respondent M/s. Abaqus Engineering India Pvt. Ltd., CHENNAI
Appeal Type Income Tax Appeal
Pronouncement Date 16-09-2011
Appeal Filed By Department
Order Result Dismissed
Bench Allotted B
Tribunal Order Date 16-09-2011
Date Of Final Hearing 08-09-2011
Next Hearing Date 08-09-2011
Assessment Year 2005-2006
Appeal Filed On 11-10-2010
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL BENCH B CHENNAI BEFORE SHRI N.S. SAINI AM AND SHRI GEORGE MATHAN J.M I.T.A. NO. 1698 TO 1702/MDS/2010 ASSESSMENT YEARS 2002-03 TO 2006-07 THE DY. C.I.T COMPANY CIRCLE 1(1) CHENNAI 600 034. VS. M/S ABAQUS ENGINEERING LTD. PVT. LTD [NOW KNOWN AS DASSAULT SYSTEMS P. LTD 10 TH FLOOR ASV N RAMANAS TOWER 37 & 38 VENKATARAMANA ROAD T. NAGAR CHENNAI 600 017. (PAN NO. AAACF 4457 B) CO NOS. 145 TO 149/MDS/2010 A/O I.T.A. NOS. 1698 TO 1702/MDS/2010 ASSESSMENT YEAR 2002-03 TO 2006-07 M/S DASSAULT SYSTEMS SIMULIA P. LTD VS. DY. C.I.T [EARLIER KNOWN AS ABAQUS ENGINEERING COM PANY CIRCLE 1(1) PVT. LTD 10 TH FLOOR CHENNAI 60 0M 034. ASV N RAMANAS TOWER 37 & 38 VENKATARMANA ROAD T. NAGAR CHENNAI 600 017. (PAN NO. AAACF 4457 B) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI SRIRAM SESHADRI C.A. DEPARTMENT BY : SHRI K.E.B RENGARAJAN JUNIOR STANDING COUNSEL PAGE 2 OF 31 I.T.A. NO 1698 TO 1702/MDS/2010 CO NOS. 145 TO 149/MDS/2010 O R D E R PER BENCH:- THIS IS A BUNCH OF FIVE APPEALS BY THE REVENUE AND FIVE CROSS OBJECTIONS BY THE ASSESSEE ALL DIRECTED AGAINST THE ORDER OF THE LD. CIT(A) - III CHENNAI DATED 22.7.2010 PERTAINING TO ASSESSMENT YEARS 2002-03 AND 2006-07 RESPECTIVELY. SINCE THE ISSUES INVOLVED IN ALL THESE APPEALS AND CROSS OBJECTIONS ARE SAME AND PER TAIN TO SAME ASSESSEE WE ARE DISPOSING THEM OFF BY THIS CONSOLI DATED ORDER FOR THE SAKE OF BREVITY AND CONVENIENCE. 2. THE REVENUE HAS RAISED THREE GROUNDS IN ALL. HO WEVER THE ONLY ISSUE ARISING OUT OF THESE APPEALS IS THAT THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE U/S 40(A)(I) OF THE INCOM E-TAX ACT 1961 [IN SHORT THE ACT] ON THE AMOUNTS PAID TO M/S ABAQ US INC. WITHOUT DEDUCTION OF TAX. 3. BRIEFLY STATED THE FACTS AS NARRATED BY THE LD. CIT(A) IN HIS ORDER ARE THAT THE ASSESSING OFFICER CALLED FOR A COPY OF THE REGIONAL SUPPORT AGREEMENT (RSA) WHICH WAS ENTERED INTO BY THE PAGE 3 OF 31 I.T.A. NO 1698 TO 1702/MDS/2010 CO NOS. 145 TO 149/MDS/2010 APPELLANT WITH ITS PARENT COMPANY FOR THE DISTRIBUT ION OF SOFTWARE PRODUCTS IN INDIA. AFTER PERUSING THE RSA THE AD F OUND THAT I) THE APPELLANT COMPANY WAS APPOINTED A DISTRIBUTOR BY IT S PARENT COMPANY FOR THE SALE OF SOFTWARE PRODUCTS IN INDIA; II) THE SOFTWARE PRODUCTS ARE GENERAL PRODUCTS DEVELOPED BY THE PARE NT COMPANY A LICENSED COPY OF WHICH CAN BE SOLD TO THE END-USERS ; III) WHAT IS SOLD TO THE END-USER IS ONLY A COPY OF THE SOFTWARE PROD UCT; IV) THE END- USER GETS ONLY A LICENSE TO USE THE SOFTWARE PRODUC T FOR A PARTICULAR PERIOD. BASED ON THESE FACTS THE AD CONCLUDED THAT WHAT WAS SOLD WAS ONLY THE RIGHT TO USE THE LICENSED VERSION OF T HE SOFTWARE PRODUCT DEVELOPED BY THE PARENT COMPANY. ACCORDINGL Y HE TREATED THE PAYMENTS AS ROYALTY TO NON-RESIDENT COVERED U/S 9(L)(VI) OF THE ACT AND BROUGHT IT WITHIN THE AMBIT OF TAX DEDUCTIO N U/S 195. THE AD HAD ALSO SOUGHT THE DIRECTIONS OF THE ADDL. CIT U/S 144A AS TO WHETHER THE PAYMENTS ARE TO BE TREATED AS ROYALTY U NDER SECTION 9(1)(VI) OF THE ACT. THE ADDL. CIT ISSUED THE DIREC TIONS VIDE HIS LETTER DATED DECEMBER 4 2008. IN THE SAID LETTER THE ADDL. CIT HAS REFERRED TO CERTAIN CLAUSES OF THE REGIONAL SUPPORT AGREEMENT WHICH ARE REPRODUCED HEREUNDER: DESPONDENT PAGE 4 OF 31 I.T.A. NO 1698 TO 1702/MDS/2010 CO NOS. 145 TO 149/MDS/2010 '3 (D) UPON EXECUTION OF A CUSTOMER AGREEMENT OR EVALUATION AGREEMENT ABAQUS SHALL GENERATE LICENSE KEYS AND E ITHER SEND THEM DIRECTLY TO THE CUSTOMER OR SEND THEM TO DISTRIBUTOR FOR DELIVERY TO THE CUSTOMER. AT ABAQUS'S OPTION ABAQUS MAY ALLOW DISTRIBUTOR TO GENERATE LICENSE KEYS FOR DELIVERY TO CUSTOMERS IN THE TERRITORY. 4(I) AT ABAQUS' OPTION DISTRIBUTOR SHALL PROVIDE SUPPORT S ERVICES IN THE TERRITORY TO THE VENDOR OF A THIRD PARTY PRODUCT AS IF SUCH VENDOR WERE A CUSTOMER. IF ABAQUS REQUESTS SUCH SERVICES AND DISTRIBUTOR PROVIDES SUCH SERVICES DISTRIBUTOR SHA LL RECEIVE A DISTRIBUTOR'S COMMISSION AS DESCRIBED IN SECTIONS 6 AND 7 ON THE REVENUES RECEIVED BY ABAQUS FOR THE LICENSE OF THE THIRD-PARTY PRODUCT IN THE TERRITORY 5(B) - DISTRIBUTOR MAY USE THE TOOLS PROVIDED WITH THE PROGRAMS TO CUSTOMIZE THE PROGRAMS FOR CUSTOMERS. DISTRIBUTOR M AY DEVELOP AND PROVIDE APPLICATION OR UTILITY SOFTWARE FOR CUSTOMERS TO USE FOR THE PROGRAMS .... 5(D) DISTRIBUTOR MAY WITH ABAQUS'S PRIOR WRITTEN A PPROVAL TRANSLATE THE PROGRAMS USER INTERFACE RELATED DOCU MENTATION AND MARKETING MATERIALS INTO A LOCAL LANGUAGE AS MAY BE REQUIRED BY A LOCAL LAW OR TO FACILITATE AND PROMOTE USE OF THE PROGRAMS BY CUSTOMERS IN THE TERRITORY. HOWEVER (I) ABAQUS SHA LL NOT BE OBLIGATED TO COMPENSATE THE DISTRIBUTOR FOR SUCH TRANSLATIONS UN LESS ABAQUS AND THE DISTRIBUTOR SHALL OTHERWISE AGREE ( II) COPIES OF ALL SUCH TRANSLATIONS SHALL BE DELIVERED TO ABAQUS AT THE SAME TIME PAGE 5 OF 31 I.T.A. NO 1698 TO 1702/MDS/2010 CO NOS. 145 TO 149/MDS/2010 THEY ARE PUBLISHED OR DELIVERED TO ANY CUSTOMER AND (III) ALL SUCH TRANSLATIONS (INCLUDING ANY MODIFICATIONS TO THE PROGRAMS OR DOCUMENTATION CREATED IN THE COURSE OF THE TRANSLAT ION) SHALL BE THE EXCLUSIVE PROPERTY OF ABAQUS. ABAQUS RESERVES T HE RIGHT TO REQUIRE THAT ANY TRANSLATION OF ANY OF THE PROGRAMS INTO THE LANGUAGE OF THE TERRITORY BE MADE BY ABAQUS OR UNDER THE SUPERVISION OF ABA QUS. 8(A) DISTRIBUTOR AGREES TO REPRODUCE AFFIX OR HAVE AFFIXED COPYRIGHTS OR OTHER PROPRIETARY NOTICES TO ANY COPIES IN THE FORM SPECIFIED BY ABAQUS 8 (B) DURING THE TERM OF THIS AGREEMENT DISTRIBUTO R SHALL HAVE THE RIGHT TO USE ABAQUS'S TRADEMARKS AND PROGRAM NAMES IN ANY ADVERTISING MARKETING TECHNICAL OR OTHER MATERIAL PRODUCED OR DISTRIBUTED BY THE DISTRIBUTOR IN CONNECTION WITH T HE PROGRAMS. HOWEVER DISTRIBUTOR MUST FIRST OBTAIN ABAQUS APPROVAL: (I) TO USE MATERIALS THAT WERE NOT PROVIDED TO DISTRIBUTOR BY ABAQUS OR (II) TO USE ABAQUS'S TRADEMARK AND PROGRAM NAMES OUTSIDE TH E TERRITORY. 4. ON THE BASIS OF THE ABOVE CLAUSES REPRODUCED IN HIS DIRECTIONS U/S 144A THE ADDL. CIT ARRIVED AT THE FOLLOWING CO NCLUSIONS: I) THE APPELLANT WAS GIVEN THE RIGHT TO USE ABAQUS' TRADEM ARKS AND PROGRAMS IN ITS BUSINESS FOR MARKETING; II) APPELLA NT HAS BEEN GIVEN THE RIGHT TO REPRODUCE AFFIX OR HAVE AFFIXED COPYR IGHTS; III) ABAQUS PAGE 6 OF 31 I.T.A. NO 1698 TO 1702/MDS/2010 CO NOS. 145 TO 149/MDS/2010 INC HAS ALSO ALLOWED THE APPELLANT TO GENERATE LICE NSE KEYS FOR DELIVERY TO CUSTOMERS AND IV) THE APPELLANT IS ALSO ALLOWED TO CUSTOMIZE AND MODIFY THE PROGRAMS FOR ITS BUSINESS. ACCORDINGLY THE ADDL. CIT CONCLUDED THAT IT IS NOT A PURCHASE O F MERE SOFTWARE AND HELD THAT THE PAYMENT MADE WAS A ROYALTY U/S 9( 1)(VI) OF THE ACT. HE HAS ALSO RELIED ON THE DECISION OF CHENNAI BENCH OF THE ITAT IN ZYLOG SYSTEMS LTD WHICH WAS STATED TO BE IDENTICAL ON FACTS. FURTHER HE REFERRED TO THE DECISION OF THE HYDERAB AD BENCH OF ITAT IN CHEMINOR DRUGS LTD (76 ITO 3) WHERE IT WAS HELD THAT THE ASSESSEE CANNOT TAKE AN UNILATERAL DECISION THAT PA YMENTS MADE BY HIM ARE NOT CHARGEABLE TO TAX AND THAT HE HAS TO NE CESSARILY APPROACH THE AD U/S 195(2) TO MAKE ANY PAYMENT TO N ON-RESIDENT WITHOUT DEDUCTION OF TAXES. ACCORDINGLY THE ADDL. CIT CONCLUDED THAT PROVISIONS OF SECTION 195 ARE APPLICABLE TO TH E PAYMENTS MADE BY THE APPELLANT AND THEY ARE LIABLE FOR DEDUCTION OF TAXES AT SOURCE. THE AD HAS MADE THE LETTER OF THE ADDL. CIT A PART OF HIS ORDER AND DISALLOWED THE PAYMENT MADE BY THE APPELL ANT U/S 40(A)(I). PAGE 7 OF 31 I.T.A. NO 1698 TO 1702/MDS/2010 CO NOS. 145 TO 149/MDS/2010 5. IN APPEAL BEFORE THE LD. CIT(A) THE ID. AR HAS VEHEMENTLY ARGUED AGAINST THE ABOVE DISALLOWANCE AND HAS FILED DETAILED WRITTEN SUBMISSIONS. HE HAS ALSO RELIED UPON VARIOU S DECISIONS IN SUPPORT OF HIS CONTENTION. FROM THE SUBMISSIONS MAD E THE STEPS UNDERTAKEN BY THE APPELLANT IN THE COURSE OF THE DI STRIBUTION ARE STATED AS FOLLOWS: ' ITS MARKETING DEPARTMENT INTERACTS WITH VARIOUS COMP ANIES AND WINS CONTRACTS FROM CUSTOMERS FOR LICENSING THE SOFTWARE PRODUCTS TO BE PROCURED FROM ABAQUS INC. ONCE IT HAS BAGGED ORDERS FOR THE PRODUCTS IT PLACES ORDERS ON ABAQUS I NC FOR THE PRODUCT. THE CUSTOMER IS REQUIRED TO SEND VARIOUS MACHINE DETAILS ESPECIALLY MACHINE HOST ID IN WHICH THE SO FTWARE IS TO BE INSTALLED BY THE CUSTOMER. THE SOFTWARE SOLD BY A BAQUS INC IS SPECIFIC TO THE NETWORK OF SYSTEM. THE SOFTWARE IS INSTALLED ON THE MAIN SYSTEM AND CAN BE USED ONLY ON THE MACHINE THAT IS ON THE SAME LAN ('IOCAL AREA NETWORK') I.E IT IS NOT ALLOWED TO BE INSTALLED IN THE SYSTEM OTHER THAN THE ONE OF WHICH THE HOST ID IS PROVIDED TO ABAQUS INC. IN ORDER TO USE THE SOFTWARE OVER LAN THE MAIN MACHINE IN WHICH IT IS INSTALLED SHOULD REMAIN ON. THE SOFTWARE LICENSE AGREEMENT (CLAUSE 4 OF THE LICENSE AGREEMENT) TOO HAS A SPECIFIC RESTRICTION TO THIS EFFECT. THE LICENSE AGREEMENT IS ENTERED INTO BETWEEN THE C USTOMER AND ABAQUS INC AND A LETTER OF ASSURANCE SIGNED BY TH E PAGE 8 OF 31 I.T.A. NO 1698 TO 1702/MDS/2010 CO NOS. 145 TO 149/MDS/2010 CUSTOMER IS SENT TO ABAQUS INC. HAVING SIGNED THE LICENSE AGREEMENT THE APPELLANT REQUESTS ABAQUS INC FOR PROV IDING THE SOFTWARE DOWNLOAD LINKS. THEREAFTER LICENSE KE Y GETS GENERATED (BASED ON THE HOSTID GIVEN BY THE CUSTOMER ) AT ABAQUS'S END AND SUBSEQUENTLY IT IS PROVIDED TO THE AP PELLANT WHICH IN TURN SENDS IT TO THE CUSTOMER TO ENSURE THA T THE APPELLANT CAN MONITOR THE TRANSACTION. THE LICENSE KEYS ARE ONLY A SECURITY DEVICE AS REFERRED TO UNDER THE SOFTWARE LICENSE AGREEMENT (PARA 4 OF CLAUSE 4 OF THE LICENSE AGREEMENT). THE LICENSE KEY AND THE LINKS ARE SENT TO THE CUSTOMER. THE CUSTOMER DOWNLOADS THE SOFTWARE DIRECTL Y FROM THE US SERVER (VIA THE LINKS) AND INSTALLS THE SOFT WARE USING THE LICENSE KEY. THE PROCESS OF GENERATION OF LICEN SE KEY DOES NOT REQUIRE ANY ENGINEERING KNOWLEDGE AND CAN BE UNDERTAKEN BY ANYONE WHO UNDERSTANDS THE BASIC USE OF COMPUTERS. THE GENERATION OF KEYS IS SIMILAR TO THE PASSWORD FOR RUNNING THE SOFTWARE IN CUSTOMER'S SYSTEM AND AT ANY RATE IT CANNOT BE COMPARED TO 'REPLICATION' OR 'DUPLICATION' OF THE SOFTWARE AS IT ONLY FACILITATES THE INSTALLATION AND ACTIVATION OF THE SOFTWARE WHEN IT IS USED FOR THE FIRST TIME. ONCE THE INSTALLATION IS DONE THE APPELLANT SUBMITS THE INVO ICE FOR PAYMENT TO THE CUSTOMER. ABAQUS INC IN TURN RAISES AN INVOICE ON THE APPELLANT FOR THE PRODUCTS SOLD TO THE APPEL LANT CLEARLY MENTIONING THE NAME OF CUSTOMER TO WHOM THE SOFTWARE IS SOLD BY DISTRIBUTOR. THE INVOICE IS SETT LED PERIODICALLY BY THE APPELLANT RETAINING ITS OWN SHA RE OF AGREED PAGE 9 OF 31 I.T.A. NO 1698 TO 1702/MDS/2010 CO NOS. 145 TO 149/MDS/2010 MARGIN. THE SOFTWARE IS PROCURED AND DISTRIBUTED BY THE APPELLANT ON AGREED MARGIN OF 7/11 OF THE SALES CONSIDERATION. THE SOFTWARE OF ABAQUS INC IS SHRINK WRAP SOFTWARE READY FOR DISTRIBUTION AND DOES NOT REQUIRE ANY CUSTOMIZATION. 6. THE ID. AR FURTHER STATED THAT THE APPELLANT DOE S NOT HAVE ANY RIGHT TO MAKE COPIES EVEN FOR DISTRIBUTION. IN THIS REGARD THE APPELLANT HAS REFERRED TO CLAUSE 5(B) OF THE RSA AN D HAS EXPLAINED THAT EACH TIME WHILE ENTERING INTO A SALE TRANSACTI ON WITH THE CUSTOMER IN INDIA A REQUEST FOR SENDING A SEPARATE DOWNLOAD LINK IS MADE TO ABAQUS INC AND A SEPARATE LICENSE KEY IS GE NERATED SPECIFIC TO THE CUSTOMER. THE APPELLANT NEITHER HAS ANY POSSESSION OF THE SOFTWARE NOR ANY RIGHT TO USE IT NOR ANY RI GHT TO MAKE COPIES OR COMMERCIALLY EXPLOIT THE SOFTWARE. THUS THE APP ELLANT IS A DISTRIBUTOR SIMPLICITER DISTRIBUTING SOFTWARE FOR A MARGIN. THE ID. AR FURTHER SUBMITTED THAT EVERY INVOICE RAISED BY A BAQUS INC ON THE APPELLANT WAS RAISED ON THE LAST DAY OF EVERY MONTH LISTING THE NAMES OF CLIENTS TO WHOM THE LICENSES WERE DISTRIBU TED BY THE APPELLANT DURING THE MONTH. HENCE THE APPELLANT CA NNOT BE SAID TO HAVE ACQUIRED ANY LICENSE OR COPYRIGHT FROM ABAQUS INC AS THE LICENSE AGREEMENT IS ENTERED INTO DIRECTLY BETWEEN THE END CUSTOMER AND ABAQUS INC. THE ID. AR HAS FURTHER REF ERRED TO THE PAGE 10 OF 31 I.T.A. NO 1698 TO 1702/MDS/2010 CO NOS. 145 TO 149/MDS/2010 TERMS OF THE SOFTWARE LICENSE AGREEMENT ENTERED INT O BY ABAQUS INC USA WITH THE END CUSTOMER AND SUBMITTED THAT E VEN THE END CUSTOMER ONLY RECEIVED A NON-TRANSFERABLE AND NON-E XCLUSIVE LICENSE FOR USING THE SOFTWARE FOR A SPECIFIED PERI OD. THE PERMISSION TO USE WAS LIMITED TO THE END CUSTOMER AND ITS EMPL OYEES. THE CUSTOMERS ARE NOT PERMITTED TO MAKE COPIES DISASSE MBLE MODIFY THE SOFTWARE OR REMOVE ANY PROPRIETARY MARKINGS OR LEGEND ON THE SOFTWARE. 7. AS REGARDS THE CLAUSES OF THE RSA REFERRED TO BY THE ADDL. CIT IN HIS DIRECTIONS U/S 144A OF THE ACT THE ID. AR S UBMITTED THAT THE CONCLUSIONS DRAWN ARE CONTRARY TO THE FACTS. WITH R EGARD TO CLAUSE 3(D) OF THE RSA REFERRED TO BY THE ADDL. CIT THE I D. AR SUBMITTED THAT THE APPELLANT WAS ALLOWED TO GENERATE THE LICE NCE KEY ONLY FOR THE PURPOSE OF MONITORING THE TRANSACTION. IT WAS F URTHER SUBMITTED THAT FAR FROM BEING A RIGHT THE GENERATION OF LICE NSE KEYS WAS A RESPONSIBILITY 8THRUST UPON THE ASSESSEE TO GENERAT E THE KEYS WHEN REQUIRED IN ANY CUSTOMER'S CASE. WITH REGARD TO CLA USE 4(I) OF THE RSA HE SUBMITTED THAT THIS WAS ONLY AN OPTION WHIC H WAS NOT ACTUALLY EXERCISED AND HENCE NOT RELEVANT TO THE QU ESTION OF PAGE 11 OF 31 I.T.A. NO 1698 TO 1702/MDS/2010 CO NOS. 145 TO 149/MDS/2010 DETERMINING WHETHER THE PAYMENT IN THIS CASE IS A R OYALTY. WITH REGARD TO CLAUSE 5(B) OF THE RSA HE SUBMITTED THAT THIS CLAUSE CANNOT BE READ IN ISOLATION BUT WHOLLY AND ALONG W ITH CLAUSE 5(A) OF THE RSA. THE RELEVANT PORTIONS WERE REPRODUCED AS B ELOW: 'CLAUSE 5(A) - ABAQUS ENCOURAGES DISTRIBUTOR TO PERFORM CONSULTING AND OTHER SERVICES OUTSIDE THE SCOPE OF SE CTION 4 THAT PROMOTE THE USE OF THE PROGRAMS AND TO RECEIVE COMPENSATION FOR SUCH ADDITIONAL SERVICES FROM CUSTOM ERS AND PROSPECTIVE CUSTOMERS. DISTRIBUTOR SHALL NOT REPRESEN T OR IMPLY THAT SUCH SERVICES ARE BEING PERFORMED BY OR ON BEHA LF OF ABAQUS. CLAUSE 5(B) DISTRIBUTOR MAY USE THE TOOLS PROVIDED WIT H THE PROGRAMS TO CUSTOMIZE THE PROGRAMS FOR CUSTOMERS. DISTRIBUTOR MAY DEVELOP AND PROVIDE APPLICATION OR UTILITY SOFTW ARE FOR CUSTOMERS TO USE FOR THE PROGRAMS. HOWEVER DISTRIBUTO R SHALL NOT MODIFY ANY PROGRAM. BUNDLE ANY SOFTWARE WITH ANY PROGRAM OR DISTRIBUTE OR MAKE ANY NON-PROGRAM SOFTW ARE AVAILABLE AS IF SUCH SOFTWARE WERE A PART OF THE PROGRAM. ' 8. ON THE BASIS OF THE ABOVE THE ID. AR SUBMITTED THAT THESE ARE ONLY 'ADDITIONAL SERVICES' WHICH MAY BE PROVIDED B Y THE ASSESSEE TO THE CUSTOMERS AND IT RECEIVES SEPARATE COMPENSATION FOR SUCH PAGE 12 OF 31 I.T.A. NO 1698 TO 1702/MDS/2010 CO NOS. 145 TO 149/MDS/2010 SERVICES. WITH REGARD TO CLAUSE 5(D) OF THE RSA TH E ID. AR SUBMITTED THAT THE RSA IS A STANDARD DOCUMENT USED GLOBALLY BY ABAQUS INC. THE DOCUMENTATION REFERRED TO IN THE CL AUSE 5(D) IS THE PROGRAM USER INTERFACE RELATED DOCUMENTS OR MARKET ING MATERIAL WHICH IS NORMALLY IN ENGLISH. THE AFORESAID CLAUSE WOULD BE RELEVANT IN TERRITORIES WHERE OTHER LANGUAGES SUCH AS SPANIS H OR FRENCH IS PREVALENT RATHER THAN ENGLISH AS IN SUCH COUNTRIES TRANSLATION OF THE DOCUMENTATION WOULD BE NECESSARY. THE ID. AR SU BMITTED THAT APPELLANT'S CASE THE NEED FOR TRANSLATION INTO LOCA L LANGUAGE NEVER AROSE. WITH REGARD TO CLAUSE 8(A) OF THE RSA THE I D. AR SUBMITTED THAT THE WHOLE CLAUSE 8(A) HAD TO BE READ WHICH RE ADS AS FOLLOWS: 'CLAUSE 8(A) DISTRIBUTOR AGREES THAT DURING AND AFTER THE TERM OF THIS AGREEMENT THE PROGRAMS AND ALL RELATED MAT ERIALS INFORMATION AND TECHNOLOGY PROVIDED BY ABAQUS ARE T HE EXCLUSIVE PROPERTY OF ABAQUS. UPON TERMINATION OF TH IS AGREEMENT DISTRIBUTOR WILL RETURN ( AND DELETE FROM ANY MEDIA STORAGE RETAINED BY THE DISTRIBUTOR) ALL COPIES OF T HE PROGRAMS OR ANY PART OF THEM AND ANY OTHER INFORM ATION OR TECHNOLOGY FURNISHED BY ABAQUS. DISTRIBUTOR AGREES T O KEEP CONFIDENTIAL AND TO UTILIZE ITS BEST EFFORTS TO PREV ENT AND PROTECT THE PROGRAMS AND ANY PART OF THEM ' FROM UNAUTHORISED DISCLOSURE BY DISTRIBUTOR AND DISTRIBUTORS PAGE 13 OF 31 I.T.A. NO 1698 TO 1702/MDS/2010 CO NOS. 145 TO 149/MDS/2010 REPRESENTATIVE EMPLOYEES OR CUSTOMERS. DISTRIBUTOR A GREES TO TREAT ALL INFORMATION CONCERNING THE PROGRAMS AS IT TREATS ITS OWN SOFTWARE AND PROPRIETY INFORMATION REQUIRING MA XIMUM PROTECTION AGAINST UNAUTHORISED ACCESS OR USE. DISTRIB UTOR AGREES THAT IT WILL NOT MAKE OR PERMIT TO BE MADE ANY MORE COPIES OF THE PROGRAMS THAN ARE NECESSARY FOR THE US E PERMITTED IN THIS AGREEMENT BY THE DISTRIBUTOR. DIST RIBUTOR AGREES TO REPRODUCE- AFFIX- OR HAVE AFFIXED COPYRIG HTS OR OTHER PROPRIETARY NOTICES TO ANY COPIES IN THE FORM SPECIFIED BY ABAQUS . DISTRIBUTOR AGREES THAT A COPYRIGHT NOTICE IS NOT ENOUGH TO TREAT A PROGRAM AS A PUBLISHED WORK. WITHOUT ABAQUS'S CONSENT DISTRIBUTOR SHALL NOT REGISTER DI SCONTINUE ANY REGISTRATION OR ENTER INTO ANY AGREEMENT AFFECTING ANY TRADEMARK OR ANY COPYRIGHT COVERING MATERIAL USED O R TO BE USED IN CONNECTION WITH THE PROGRAMS. ' 9. BASED ON THE ABOVE THE ID. AR SUBMITTED THAT IT IS A DUTY CAST UPON THE APPELLANT FAR FROM BEING A RIGHT TO MERE LY REPRODUCE AND AFFIX COPYRIGHT NOTICES OR OTHER PROPRIETARY NOTICE S TO THE COPIES OF THE PRODUCTS AS SPECIFIED BY ABAQUS INC. HE STATED THAT THIS IS MERELY A CLERICAL ROUTINE TO BE CARRIED OUT BY THE ASSESSEE TO SAFEGUARD THE INTERESTS OF ABAQUS INC. WITH REGARD TO CLAUSE 8(B) OF THE RSA THE APPELLANT SUBMITTED THAT THE WHOLE CLA USE 8(B) HAD TO BE READ WHICH IS REPRODUCED AS FOLLOWS: PAGE 14 OF 31 I.T.A. NO 1698 TO 1702/MDS/2010 CO NOS. 145 TO 149/MDS/2010 'DURING THE TERM OF THIS AGREEMENT DISTRIBUTOR SHA LL HAVE THE RIGHT TO USE ABAQUS'S TRADEMARKS AND PROGRAM NAMES IN ANY AD VERTISING MARKETING TECHNICAL OR OTHER MATERIAL PRODUCED OR DISTRIBUTED BY THE DISTRIBUTOR IN CONNECTION WITH THE PROGRAMS. HO WEVER DISTRIBUTOR MUST FIRST OBTAIN ABAQUS APPROVAL: (I) TO USE MATERIALS THAT WERE NOT PROVIDED TO DISTRIBUTOR BY ABAQUS OR (II) TO USE ABAQUS'S TRADEMARK AND PROGRAM NAMES OUTSIDE THE TERRITORY. IN USING ABAQUS'S TRADEMARK AND PROGRAM NAMES DISTRIB UTOR SHALL CLEARLY INDICATE ABAQUS'S RIGHT TO THOSE TRADEMARKS OR TRADE NAMES. DISTRIBUTOR SHALL ACQUIRE NO RIGHTS IN OR TO ANY SUCH TRADEMARK OR PROGRAM NAME BY VIRTUE OF USE AND SHALL IMMEDIATELY CEASE SUCH USE UPON TERMINATION OF THIS AGREEMENT' 10. IN THIS REGARD THE ID. AR SUBMITTED THAT BEING A DISTRIBUTOR OF ABAQUS INC'S PRODUCTS THE APPELLANT COMPANY WAS BO UND TO USE THE BRAND NAME OF ABAQUS WHILE MARKETING ITS PRODUCTS WHICH COULD NOT BE EQUATED WITH THE USE OF TRADEMARK OR COPYRIG HT. FURTHER ON THE DECISION OF THE ITAT CHENNAI IN ZYLOG SYSTEMS LTD REFERRED TO BY THE ADD!. CIT IN HIS DIRECTIONS THE ID. AR SUBM ITTED THAT THE CASE WAS DISTINGUISHABLE ON FACTS. IT WAS SUBMITTED THAT ZYLOG SYSTEMS LIMITED WAS INVOLVED IN THE DEVELOPMENT OF SOFTWARE WHICH INVOLVED THE USAGE OF THE SOFTWARE LICENSED F ROM A FOREIGN COMPANY FOR DEVELOPING ITS OWN COMMERCIAL SOFTWARE AND PAGE 15 OF 31 I.T.A. NO 1698 TO 1702/MDS/2010 CO NOS. 145 TO 149/MDS/2010 MARKETING THE SAME UNDER THE LOGO AND TRADEMARK OF A FOREIGN COMPANY. FURTHER ZYLOG SYSTEMS LIMITED WAS ALSO PE RMITTED TO COPY THE SOFTWARE. HOWEVER THE CASE OF THE APPELLA NT STANDS ON A DIFFERENT DIFFICULT FOOTING FOR THE REASONS DISCUSS ED ABOVE. 11. THE ID. AR HAS ALSO RELIED ON VARIOUS DECISIONS IN SUPPORT OF HIS CONTENTION THAT DISALLOWANCE U/S 40(A)(I) OF TH E PAYMENT TO PARENT COMPANY AT USA TOWARDS THE PURCHASE OF SOFTW ARE IS NOT JUSTIFIED AND IS NOT IN ACCORDANCE WITH THE PROVISI ONS OF THE ACT DTAA OR ARE CONTRARY TO THE RATIOS OF VARIOUS JUDIC IAL AUTHORITIES. THE SUPREME COURT IN THE CASE OF BHARAT SANCHAR NIG AM LTD AND ANR VS. UOI AND ORS (45 STC 91) HAS HELD THAT TO CONSTI TUTE A TRANSACTION FOR THE TRANSFER OF THE RIGHT TO USE TH E GOODS THE TRANSFEREE SHOULD HAVE AN EXCLUSIVE LEGAL RIGHT TO USE THE GOODS AND NOT MERELY A LICENCE TO USE THE GOODS AND THE TRANS FEROR CANNOT AGAIN TRANSFER THE SAME RIGHTS TO OTHERS DURING THE PERIOD OF RIGHT TO USE THE GOODS BY THE TRANSFEREE. THE SUPREME COU RT IN CASE OF TATA CONSULTANCY SERVICES VS STATE OF ANDHRA PRADES H (1 SCC 308) AND HELD THAT SOFTWARE IS TO BE TREATED AS GOODS EV EN AS PER THE ARTICLE 366(12) OF THE CONSTITUTION OF INDIA WHETH ER IT IS TANGIBLE OR PAGE 16 OF 31 I.T.A. NO 1698 TO 1702/MDS/2010 CO NOS. 145 TO 149/MDS/2010 INTANGIBLE THE SPECIAL BENCH OF THE DELHI TRIBUNAL IN CASE OF MOTOROLA INC. VS DCIT (95 ITD 269) HAS ELABORATELY DISCUSSED AND HELD THAT IF THE PAYMENT IS TOWARDS PURCHASE OF A C OPYRIGHTED ARTICLE AND NOT THE COPYRIGHT ITSELF THEN THE PAYME NT CANNOT BE TERMED AS 'ROYALTY' UNDER THE ACT. THE ID. AR FURTH ER SUBMITTED THAT THE AAR IN A RECENT RULING IN THE CASE OF ITS OWN GROUP COMPANY NAMELY DASSAULT SYSTEMS KK JAPAN V. DIT (AAR NO 821/2009) HAS HELD THAT PAYMENTS BY DISTRIBUTORS IN INDIA TO DASSAULT SYSTEMS KK FOR PURCHASE OF SOFTWARE CANNOT BE TREATED AS ROYALTY UNDER SECTION 9(1)(VI) OF THE ACT. THE AAR HELD THAT NO RIGHTS IN RELATION TO COPYRIGHT WERE TRANSFERRED NO R ANY RIGHT OF USING THE COPYRIGHT AS SUCH WAS CONFERRED ON THE LI CENSEE. THE ID. AR ACCORDINGLY SUBMITTED THAT THE FACTS OF THE CASE ARE IDENTICAL TO THE APPELLANT'S CASE AND INVOLVES THE PRODUCT LIFE- CYCLE MANAGEMENT SOFTWARE SOLUTIONS WHICH ARE SIMILAR TO THE PRODUCTS DISTRIBUTED BY THE APPELLANT. THE ID. AR ALSO SUBMI TTED THAT THE PAYMENT DOES NOT FIT WITHIN THE MEANING OF ROYALTY UNDER SECTION 14 OF THE COPYRIGHT ACT 1957 AND HENCE CANNOT BE T REATED AS ROYALTY UNDER SECTION 9(1)(VI) OF THE ACT. THIS WAS UPHELD BY THE ITAT SPECIAL BENCH DECISION IN MOTOROLA INC (SUPRA ) AND THE AAR PAGE 17 OF 31 I.T.A. NO 1698 TO 1702/MDS/2010 CO NOS. 145 TO 149/MDS/2010 RULING IN DASSAULT SYSTEMS KK (SUPRA). THE ID. AR H AS FURTHER RELIED UPON VARIOUS DECISIONS OF THE TRIBUNAL WHICH RELAT E TO SIMILAR PAYMENTS OF SOFTWARE PURCHASE WHERE IT WAS HELD TH AT THE PAYMENTS CANNOT BE TREATED AS ROYALTY UNDER THE ACT . AT THE TIME OF FINAL HEARING HE HAS PLACED RELIANCE ON SOME RE CENT DECISIONS I.E. ITO (IT) V. PRASAD PRODUCTIONS LTD [2010TIO L182 ITATMADSB] VAN OORD ACZ INDIA (P) LTD V. CIT [2 010-TIOL187- HC-DELIT] AND VELANKANI MAURITUS LTD V. DDIT (IT) [2010TII- 64ITATBANGINTL]. 12. THE ID. AR IN THE ALTERNATIVE HAS TAKEN THE COURSE TO THE NON DISCRIMINATION CLAUSE UNDER THE DTAA BETWEEN IN DIA AND USA. HE ARGUED THAT EVEN IF THE PAYMENTS ARE CONSIDERED TO BE ROYALTY THEY CANNOT BE DISALLOWED U/S 40(A)(I) OF THE ACT B Y VIRTUE OF ARTICLE 26(3) OF THE DTAA WHICH DEALS WITH NON-DISCRIMINAT ION. IT WAS POINTED OUT THAT PRIOR TO THE INSERTION OF THE WORD S 'RENT ROYALTY' U/S 40(A)(IA) OF THE ACT BY THE FINANCE ACT 2006 W ITH RETROSPECTIVE EFFECT FROM APRIL 1 2006 THERE WAS NO PROVISION FO R DISALLOWANCE OF ROYALTY PAYMENTS IF TAX WAS NOT DEDUCTED AT SOURCE WHILE MAKING PAYMENTS TO A RESIDENT WHEREAS SECTION 40(A)(I) OF THE ACT PROVIDES PAGE 18 OF 31 I.T.A. NO 1698 TO 1702/MDS/2010 CO NOS. 145 TO 149/MDS/2010 FOR DISALLOWANCE IF THE SAME PAYMENT IS MADE TO NON -RESIDENT. IT WAS ALSO POINTED OUT THAT THE APPLICABILITY OF AMEN DED SECTION 40(A)(IA) WAS POSTPONED TO AY 2007-08 BY CIRCULAR 1 OF 2007 DATED APRIL 27 2007. HENCE FOR THE AY 2006-07 FOR WHICH THE APPELLANT IS IN APPEAL AT PRESENT THERE WAS NO PROVISION IN THE ACT REQUIRING DEDUCTION OF TAX ON PAYMENTS MADE TO RESIDENTS. FOR THIS PROPOSITION THE ID. AR RELIED UPON THE DECISIONS O F THE ITAT DELHI IN THE CASES OF HERBALIFE INTERNATIONAL INDIA PRIVA TE LIMITED V. ACIT 101 ITD 450 AND MILLENNIUM INFOCOM TECHNOLOGIES LTD V. ACIT 117 ITD 114 WHEREIN IT WAS HELD THAT THE PROVISIONS OF SECTION 40(A)(I) OF THE ACT CANNOT BE INVOKED IF IT AMOUNTS TO DISCR IMINATION AGAINST THE NON-RESIDENTS. 13. THE LD. CIT(A) AFTER CONSIDERING THE SUBMISSIO NS OF THE LD. A.R. OF THE ASSESSEE HELD AS UNDER: I HAVE CONSIDERED THE RIVAL SUBMISSIONS AND THE MAT ERIAL ON RECORD. I HAVE ALSO CAREFULLY PERUSED THE DECISIONS R ELIED UPON BY THE AO AND THE ID. AR. I FIND THAT THE AO H IMSELF IN HIS ORDER U/S 143(3) HAS STATED THAT THE WHAT WAS SO LD BY THE APPELLANT WAS ONLY A COPY OF THE SOFTWARE PRODUCT AN D THAT PAGE 19 OF 31 I.T.A. NO 1698 TO 1702/MDS/2010 CO NOS. 145 TO 149/MDS/2010 THE END USER GETS ONLY A LICENSE TO USE THE SOFTWARE PRODUCT FOR A PARTICULAR PERIOD. HENCE IT IS NOT IN DISPUTE THAT THERE WAS NO TRANSFER OF A COPYRIGHT BUT ONLY A SALE OF A COPYRIGHTED PRODUCT. THE AO HAS SUBSEQUENTLY REFERRED TO THE DIRECTIONS ISSUED BY THE ADDL. CIT UNDER SECTION 144A WHILE PASSING THE ASSESSMENT ORDER. HE HAS ALSO ENC LOSED COPY OF THE DIRECTION WITH THE ASSESSMENT ORDER. THE DIR ECTION OF THE ADDL. CIT HAS REFERRED TO VARIOUS CLAUSES OF THE RSA BASED ON WHICH THE ADDL. ACIT CONCLUDED THAT THE APP ELLANT HAD THE RIGHT TO REPRODUCE AFFIX OR HAVE AFFIXED C OPYRIGHTS GENERATE LICENSE KEYS ETC. HOWEVER ON A PERUSAL OF THE TERMS OF THE AGREEMENT I FIND THAT THE RELEVANT CLAUSES H AVE NOT BEEN CONSIDERED IN THEIR TOTALITY AND CONTEXT. THIS ASPECT HAS BEEN EXPLAINED IN DETAIL BY THE ID. AR IN THE EARLI ER PART OF THIS ORDER WITH WHICH I AM IN AGREEMENT. FOR INSTAN CE THE CONCLUSION AS TO REPRODUCTION OF COPYRIGHTS HAS BEEN TAKEN OUT OF THE CONTEXT FROM THE RSA WHEREAS THE RELEVAN T CLAUSE MERELY REFERRED TO A DUTY ON THE APPELLANT AND NOT ITS RIGHT TO ENSURE THAT LABELS ARE AFFIXED ETC. FURTHER THE GENERATION OF LICENSE KEYS WAS MORE A DUTY ON THE APPELLANT AND NOT A RIGHT GRANTED. THE CLAUSE RELATING TO THE RIGHT TO US E TRADEMARK IS MORE LINKED WITH THE NORMAL ACTIVITY O F DISTRIBUTION OF THE US COMPANY'S PRODUCTS BY WAY OF S ALE IN INDIA. FURTHER THE RSA DOES NOT PERMIT THE APPELLAN T TO MAKE ANY COPY OR MODIFY THE SOFTWARE. BASED ON THE INVOICE SUBMITTED BY THE ID. AR WHICH WERE ALSO BEFORE THE AO AT PAGE 20 OF 31 I.T.A. NO 1698 TO 1702/MDS/2010 CO NOS. 145 TO 149/MDS/2010 THE TIME OF ASSESSMENT I FIND THAT THE PURCHASE OF SOFTWARE PRODUCTS BY THE APPELLANT WAS DIRECTLY RELATED TO TH E SALE OF THE PRODUCT TO THE ULTIMATE CUSTOMERS. FROM A CAREFUL PERUSAL OF THE ACTUAL TERMS OF THE RSA IT IS FOUND TH AT THE CONCLUSIONS DRAWN ARE NOT FULLY SUPPORTED BY THE FACT S. FURTHER THE ACTIVITIES CARRIED OUT BY THE APPELLANT AS EXPLAINED IN ITS SUBMISSIONS AND REPRODUCED EARLIER ALSO INDICATE THAT THE SOFTWARE PRODUCT IS NOT EVEN PHYSI CALLY DELIVERED TO THE APPELLANT. IT IS DIRECTLY DOWNLOAD ED BY THE END-CUSTOMER WHO ENTERS INTO A SOFTWARE LICENSING AGREEMENT DIRECTLY WITH THE US COMPANY AND RECEIVES THE RELEVANT PASSWORD FOR DOWNLOADING THE SOFTWARE FROM THE US COMPANY. 6.1.2 THERE IS NO DOUBT SOME CONTROVERSY AS TO THE LIABILITY ON SALE OF SOFTWARE WHETHER IT IS A MERE SALE OF G OODS OR WHETHER IT COULD BE INFERRED AS ROYALTY WHERE THE C OPYRIGHT IS RETAINED BY THE SUPPLIER. THE HON'BLE SUPREME CO URT HAS REPEATEDLY HELD SOFTWARE AS GOODS WHETHER IT IS ON CO FLOPPY DISKETTES PAPERS OR ANY OTHER MEDIA OR WHE THER IT IS CANNED OR UNCANNED OR LICENSED OR UNLICENSED BRANDE D OR UNBRANDED TANGIBLE OR INTANGIBLE BEING A COMMODITY CAPABLE OF BEING TRANSMITTED TRANSFERRED DELIVERED STORE D PROCESSED ETC. AS DECIDED IN TATA CONSULTANCY SERVIC ES V. STATE OF ANDHRA PRADESH 2711TR 401(SC). THE SAME VI EW WAS TAKEN BY THE HON'BLE SUPREME COURT IN BHARAT SANCHA R NIGAM LTD. V. UOI 282 ITR 273 AND SPRINT RPG INDIA LTD. V . PAGE 21 OF 31 I.T.A. NO 1698 TO 1702/MDS/2010 CO NOS. 145 TO 149/MDS/2010 COMMISSIONER OF CUSTOMS 2SCC 486(SC). THESE DECISION S SHOULD HAVE EQUAL APPLICATION FOR INCOME TAX PURPOSE A S WELL. MOREOVER I FIND THAT UNDER SIMILAR SET OF FACTS CON CERNING THE APPELLANT'S GROUP COMPANY THE HON'BLE AAR HAD HELD THAT THE PAYMENTS BY DISTRIBUTORS TO DASSAULT SYSTEMS KK (SUPR A) CANNOT BE TREATED AS ROYALTY UNDER THE ACT. BASED ON THE FACTS OF THE ABOVE CASE I FIND THAT THE IMPUGNED P AYMENT DOES NOT FIT WITHIN THE MEANING OF ROYALTY. THE SPE CIAL BENCH IN MOTOROLA INC (SUPRA) HAS HELD THAT PURCHASE OF SO FTWARE WHICH WAS ONLY A PURCHASE OF A COPYRIGHTED PRODUCT A ND NOT THE COPYRIGHT ITSELF CANNOT BE TREATED AS ROYALTY P AYMENT. THE HON'BLE ITAT BANGALORE IN ITS RECENT DECISION IN THE CASE OF M/S VELANKANI MAURITUS LTD V. DCIT (IT) BANGALORE [2010- TII-64-ITATBANGINTL] DEALT WITH A SIMILAR ISSUE. T HE QUESTION WAS WHETHER THE INCOME CAN BE TREATED AS RO YALTY EITHER UNDER IT ACT OR THE DTAAS. THE ASSESSEE HAD SUPPLIED OFF-THE-SHELF SHRINK WRAPPED SOFTWARE TO INFOSYS TE CHNOLOGIES LTD. THE HON'BLE ITAT DISTINGUISHED THE CASE OF CIT & ORS V. SAMSUNG ELECTRONICS CO. LTD. 320 ITR 209 (KARN) AND FOLLOWED THE CASES OF MOTORALA INC V. DCIT 95 ITD 269 (DEL)( SB) AIRPORTS AUTHORITY OF INDIA [2010T10L-19AARIT] AN D TATA CONSULTANCY SERVICES V. STATE OF AP 271 ITR 401 (SC) AND HELD 'THE SALE OF SOFTWARE CANNOT BE TREATED AS INCOME FROM ROYALTY EITHER UNDER THE IT ACT OR UNDER THE TERMS O F DTAA'. FURTHER THE SPECIAL BENCH OF ITAT CHENNAI IN THE C ASE OF PRASAD PRODUCTIONS LTD (SUPRA) AFTER CONSIDERING VA RIOUS PAGE 22 OF 31 I.T.A. NO 1698 TO 1702/MDS/2010 CO NOS. 145 TO 149/MDS/2010 DECISIONS INCLUDING THAT OF FRONTIER OFFSHORE EXPLOR ATION (INDIA) LTD ITA NO.2037/MDS/2006 TRANSMISSION COR PORATION OF AP LTD V. CIT 239 ITR 587 (SC) CIT V. ELI LILLY & CO (INDIA) (P) LTD 178 TAXMAN 505 (SC) CIT V. SAMSUNG ELECTRON ICS CO. LTD 320 ITR 209 (KAR) VAN OORD ACZ INDIA (P) LTD V . CIT 189 TAXMAN 232 (DEL) ETC. HAS HELD THAT WHEN THE PAYER HAS A BONA FIDE BELIEF THAT THE INCOME IS NOT CHARGEABLE TO TAX AT ALL THERE IS NO APPLICATION OF THE SECTION 195 AT ALL AND THERE IS NO LIABILITY ON THE PAYER TO FOLLOW ITS PROVISIO NS WHEN MAKING PAYMENT TO NON-RESIDENTS. AS A CONSEQUENCE A LL THE PROCEEDINGS AS A RESULT OF NON-COMPLIANCE THEREOF WO ULD BE OTIOSE. IN VIEW OF THE ABOVE FACTUAL POSITION AND LE GAL AUTHORITIES I AM OF THE CONSIDERED OPINION THAT THE PAYMENTS CANNOT BE TREATED AS ROYALTY U/S 9(1)(VI) OF THE ACT . 6.1.3 I ALSO FIND MERIT IN THE ALTERNATE GROUND (GRO UND NO.6) RAISED BY THE APPELLANT IN RESPECT OF THE NON-DISCR IMINATION CLAUSE UNDER THE DTAA BETWEEN INDIA AND USA. THE ARTI CLE 26(3) OF THE DTAA IS CLEARLY AGAINST ANY DISCRIMINA TION AGAINST THE NONRESIDENT WHEREBY ANY PAYMENT TO THE NON-RES IDENT IS NOT ALLOWED AS A DEDUCTION IN COMPUTING THE INCOME OF THE RESIDENT PAYER. THE DECISIONS OF THE DELHI BENCH OF THE ITAT IN HERBALIFE INTERNATIONAL (SUPRA) AND MILLENIUM INF OCOM (SUPRA) ALSO SUPPORT THE APPELLANT'S CASE. SINCE S IMILAR PAYMENTS WITHOUT DEDUCTION OF TAX TO RESIDENTS WOULD NOT INVITE DISALLOWANCE U/S 40(A)(IA) IN THE AY 200607 WHICH IS THE SUBJECT ASSESSMENT YEAR BEFORE ME I AGREE THAT THE PAGE 23 OF 31 I.T.A. NO 1698 TO 1702/MDS/2010 CO NOS. 145 TO 149/MDS/2010 DISALLOWANCE IN THE PRESENT CASE U/S 40(A)(I) OF THE PAYMENTS TO THE NON-RESIDENTS WOULD AMOUNT TO DISCRIMINATION A GAINST THE NON-RESIDENT WHICH IS NOT PERMITTED. HENCE FO R THIS REASON AS WELL IT IS HELD THAT THERE COULD NOT BE A NY DISALLOWANCE U/S 40(A)(I) OF THE PAYMENTS MADE BY TH E APPELLANT. 6.2 BEFORE CONCLUDING IT MAY BE STATED THAT REFEREN CE TO SOME CASES IN THE ORDER IS AVOIDED EITHER DUE TO THE IR IRRELEVANCE OR TO RELIEVE THE ORDER FROM THE BURDEN OF REPETITIVE RATIO DECIDENDI LAID DOWN IN SUCH DECISIO NS. 14. BEFORE US THE LD. D.R. VEHEMENTLY ARGUED IN SUP PORT OF THE ORDER OF THE ASSESSING OFFICER WHEREAS THE LD. A.R. OF THE ASSESSEE SUPPORTED THE ORDER OF THE LD. CIT(A). 15. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIAL AVAILABLE ON RECORD. IN THE INSTANT CASE WE FIND THAT NO SPECIFIC ERROR IN THE ORDER OF THE LD. CIT(A) COULD BE POINTED OUT BY THE LD. D.R. WE FIN D THAT THE LD. CIT(A) HAS FOLLOWED THE DECISION OF THE DELHI SPECI AL BENCH OF THE TRIBUNAL IN THE CASE OF MOTORALA INC. VS. DCIT 95 I TD 269. WE FIND PAGE 24 OF 31 I.T.A. NO 1698 TO 1702/MDS/2010 CO NOS. 145 TO 149/MDS/2010 THAT FOLLOWING THE ABOVE DECISION OF THE MUMBAI E BENCH OF THE TRIBUNAL IN THE CASE OF ADIT VS. TII TEAM TELECOM I NTERNATIONAL ITA NOS. 3939/MUM/2010 ORDER DATED 26.8.2011 HAS HELD A S UNDER: 17. IT IS NOT EVEN REVENUE'S CASE THAT ANY OF THESE RIGHTS HAVE BEEN TRANSFERRED BY THE ASSESSEE ON TH E FACTS OF THIS CASE AND FOR THIS REASON THE PAYME NT FOR SOFTWARE CANNOT BE TREATED AS PAYMENT FOR USE OF COPYRIGHT IN THE SOFTWARE. AS WE HOLD SO WE MAY MENTION THAT IN THE CASE OF GRACEMAC (SUPRA) A CONTRARY VIEW HAS BEEN TAKEN BUT THAT CONCLUSION IS ARRIVED AT IN THE LIGHT OF THE PROVISIONS OF CLAUSE (V) IN EXPLANATION 2 TO SECTION 9(1)(VI) WHICH ALSO COVERS CONSIDERATION FOR 'TRANSFER OF ALL OR ANY RIGHTS (I NCLUDING THE GRANTING OF A LICENCE) IN RESPECT OF ANY COPYRI GHT LITERARY ARTISTIC OR SCIENTIFIC WORK' - A PROVISIO N WHICH IS CLEARLY LARGER IN SCOPE THAN THE PROVISION OF AR TICLE 12(3) OF THE INDO ISRAEL TAX TREATY. THE WORD 'OF' BETWEEN 'COPYRIGHT' AND 'LITERARY ARTISTIC OR SCIE NTIFIC WORK' IS ALSO MISSING IN THE STATUTORY PROVISION. TH E TREATY PROVISION THAT WE ARE DEALING WITH ARE THUS CERTAINLY NOT IN PARI MATERIA WITH THIS STATUTORY PROVISION AND BY THE VIRTUE OF SECTION 90(2) OF TH E ACT THE PROVISIONS OF INDIA ISRAEL TAX TREATY CLEARLY O VERRIDE THIS STATUTORY PROVISION. IN GRACEMAC DECISION (SUPR A) PAGE 25 OF 31 I.T.A. NO 1698 TO 1702/MDS/2010 CO NOS. 145 TO 149/MDS/2010 THE COORDINATE BENCH WAS OF THE VIEW THAT THE PROVISIONS OF THE APPLICABLE TAX TREATY AND THE INC OME TAX ACT ARE 'IDENTICAL' - A POSITION WHICH DOES NOT PREVAIL IN THE SITUATION BEFORE US. WE THEREFORE SE E NO REASONS TO BE GUIDED BY GRACEMAC DECISION (SUPRA). T HE NEXT ISSUE THAT WE NEED TO CONSIDER IS WHETHER A PAYMENT FOR SOFTWARE CAN BE SAID TO BE A PAYMENT FO R 'PROCESS' AS A COMPUTER PROGRAM IS A NOTHING BUT A SE T OF INSTRUCTION LYING IN THE PASSIVE STATE AND THIS EXECUTION OF INSTRUCTIONS IS' A PROCESS' OR' A SERIES OF PROCESSES'. NO DOUBT IN TERMS OF THE PROVISIONS OF SECTION 2 (FFC) OF THE INDIAN COPYRIGHT ACT 1957 A COMPUTER PROGRAM I.E. SOFTWARE HAS BEEN DEFINED AS 'A SET OF INSTRUCTIONS EXPRESSED IN WORDS CODES SCHEM ES OR IN ANY OTHER FORM INCLUDING A MACHINE READABLE MEDIUM CAPABLE OF CAUSING A COMPUTER TO PERFORM A PARTICULAR TASK OR ACHIEVE A PARTICULAR RESULT' BUT TH E MOOT QUESTION IS AS TO WHAT IS THAT A CUSTOMER PAYS FOR WHEN HE BUYS OR TO PUT IT IN TECHNICAL TERMS 'OBTAIN S LICENCE TO USE THE SOFTWARE FOR THE PROCESS OF EXECUT ING THE INSTRUCTIONS IN THE SOFTWARE OR FOR THE RESULTS ACHIEVED ON ACCOUNT OF USE OF THE SOFTWARE. TO DRAW AN ANALOGY IT IS AKIN TO A SITUATION IN WHICH A PERSON HIRES A VEHICLE AND THE QUESTION COULD BE AS TO WHAT DOES HE PAY FOR - FOR THE USE OF THE TECHNICAL KNOWHOW ON TH E BASIS OF WHICH VEHICLE OPERATES OR FOR THE USE OF A PAGE 26 OF 31 I.T.A. NO 1698 TO 1702/MDS/2010 CO NOS. 145 TO 149/MDS/2010 PRODUCT WHICH CARRIES PASSENGERS OR GOODS FROM ONE PLACE TO ANOTHER. THE ANSWER IS OBVIOUS. WHEN YOU PAY FOR USE OF VEHICLE YOU ACTUALLY PAY FOR A PRODUCT WHIC H CARRIES THE PASSENGERS OR GOODS FROM ONE PLACE TO ANOTHER AND NOT THE TECHNICAL KNOWHOW ON THE BASIS OF WHICH SUCH A PRODUCT OPERATES. SAME IS THE CASE WITH THE SOFTWARE WHEN SOMEONE PAYS FOR THE SOFTWARE H E ACTUALLY PAYS FOR A PRODUCT WHICH GIVES CERTAIN RESULT S AND NOT THE PROCESS OF EXECUTION OF INSTRUCTIONS EMBEDDED THEREIN. AS A MATTER OF FACT UNDER STANDAR D TERMS AND CONDITIONS FOR SALE OF SOFTWARE THE BUYER OF SOFTWARE IS NOT EVEN ALLOWED TO TINKER WITH THE PRO CESS ON THE BASIS OF WHICH SUCH SOFTWARE RUNS OR TO EVEN WORK AROUND THE TECHNICAL LIMITATIONS OF THE SOFTWAR E. IN ASIA SATELLITE TELECOMMUNICATIONS LTD VS DCIT (78 TTJ 489) A COORDINATE BENCH OF THIS TRIBUNAL DID T AKE THE VIEW THAT WHEN AN ASSESSEE PAYS FOR TRANSPONDER HIRE HE ACTUALLY PAYS FOR THE A PROCESS INASMUCH AS TRANSPONDER AMPLIFIES AND SHIFTS THE FREQUENCY OF EA CH SIGNAL AND THEREFORE PAYMENT FOR USE OF TRANSPOND ER IS INFACT A PAYMENT FOR PROCESS LIABLE TO BE TREATE D AS 'ROYALTY' WITHIN MEANINGS OF THAT EXPRESSION UNDER EXPLANATION 2 TO SECTION 9 (L)(VI) OF THE INCOME TA X ACT. HOWEVER WHEN THIS DECISION CAME UP FOR SCRUTINY OF HON'BLE DELHI HIGH COURT IN THE CASE REPORTED AS AS IA SATELLITE TELECOMMUNICATIONS CO LTD VS DIT (332 ITR PAGE 27 OF 31 I.T.A. NO 1698 TO 1702/MDS/2010 CO NOS. 145 TO 149/MDS/2010 340) THEIR LORDSHIPS AFTER A VERY ERUDITE AND DETA ILED DISCUSSION CONCLUDED THAT 'WE ARE UNABLE TO SUBSCRIBE TO THE VIEW TAKEN BY THE TRIBUNAL IN THE IMPUGNED JUDGMENT ON THE INTERPRETATION OF SECTION 9(1)(VI) O F THE ACT'. IT CANNOT THEREFORE BE OPEN TO US TO APP ROVE THE STAND OF THE REVENUE TO THE EFFECT THAT THE PAYM ENT FOR SOFTWARE IS DE FACTO A PAYMENT FOR PROCESS. THA T IS A HYPER TECHNICAL APPROACH TOTALLY DIVORCED FROM THE GROUND BUSINESS REALITIES. IT IS ALSO IMPORTANT TO B EAR IN MIND THE FACT THAT THE EXPRESSION 'PROCESS' APPEARS IMMEDIATELY AFTER AND IN THE COMPANY OF EXPRESSIO NS 'ANY PATENT TRADE MARK DESIGN OR MODEL PLAN SEC RET FORMULA OR PROCESS'. WE FIND THAT THESE EXPRESSIONS ARE USED TOGETHER IN THE TREATY AND AS IT IS WELL SETTLE D AS NOTED BY MAXWELL IN INTERPRETATION OF STATUTES AND WHILE ELABORATING ON THE PRINCIPLE OF NOSCITUR A SO CIIS THAT WHEN TWO OR MORE WORDS WHICH ARE SUSCEPTIBLE TO ANALOGOUS MEANING ARE USED TOGETHER THEY ARE DEEMED TO BE USED IN THEIR COGNATE SENSE. THEY TAKE AS IT WERE THEIR COLOURS FROM EACH OTHER THE MEANING OF MORE GENERAL BEING RESTRICTED TO A SENSE ANALOGOUS TO THA T OF LESS GENERAL. THIS PRINCIPLE OF INTERPRETATION OF STATUTES IN OUR CONSIDERED VIEW HOLDS EQUALLY GOOD F OR INTERPRETATION OF A TREATY PROVISION. EXPLAINING TH IS PRINCIPLE IN MORE GENERAL TERMS A VERY DISTINGUISHE D FORMER COLLEAGUE OF OURS HON'BLE SHRI M.K. CHATURVEDI PAGE 28 OF 31 I.T.A. NO 1698 TO 1702/MDS/2010 CO NOS. 145 TO 149/MDS/2010 HAD IN AN ARTICLE 'INTERPRETATION OF TAXING STATUTE S' (AIFTP JOURNAL: VOL. 4 NO.7 JULY 2002 AT P. 7) PUT IT IN HIS INIMITABLE WORDS AS FOLLOWS: 'LAW IS NOT A BROODING OMNIPOTENCE IN THE SKY. IT IS A PRAGMATIC TOOL OF THE SOCIAL ORDER. THE TENETS OF LAW BEING ENACTED ON THE BASIS OF PRAGMATISM. SIMILARLY THE RULES RELATING TO INTERPRETATION ARE ALSO BASED ON COMMON- SENSE APPROACH. SUPPOSE A MAN TELLS HIS WIFE TO GO OUT AND BUY BREAD MILK OR ANYTHING ELSE-SHE NEEDS HE WILL NOT NORMALLY BE UNDERSTOOD TO INCLUDE IN THE TERMS 'ANYTHING ELSE SHE NEEDS' A NEW CAR OR AN ITEM OF JEWELLERY. THE DICTUM OF EJUSDEM GENERIS REFERS TO SIMILAR SITUATION. IT MEANS OF THE SAME KIND CLASS OR NATURE. THE RULE IS THAT WHEN GENERAL WORDS FOLLOW PARTICULAR AND SPECIFIC WORDS OF THE SAME NATURE THE GENERAL WORDS MUST BE CONFINED TO THE THINGS OF SAME KIND AS SPECIFIED. NOSCITUR A SOCIIS IS A BROADER VERSION OF THE MAXIM EJUSDEM GENERIS. A MAN MAY BE KNOWN BY THE COMPANY HE KEEPS AND A WORD MAY BE INTERPRETED WITH REFERENCE TO THE ACCOMPANYING WORDS. WORDS DERIVE COLOUR FROM THE SURROUNDING WORDS.' PAGE 29 OF 31 I.T.A. NO 1698 TO 1702/MDS/2010 CO NOS. 145 TO 149/MDS/2010 16. IN THE INSTANT CASE WE FIND THAT THE ASSESSEE SOLD COPY RIGHTED SOFTWARE AND NOT COPYRIGHT IN THE SOFTWARE. THEREFORE WE DO NOT FIND ANY GOOD REASON TO INTERFERE WITH THE O RDER OF THE LD. CIT(A). IT IS CONFIRMED. GROUNDS OF APPEAL TAKEN BY THE REVENUE ARE DISMISSED. 17. THE ASSESSEE HAS FILED CROSS OBJECTIONS FOR ASS ESSMENT YEARS 2002-03 TO 2005-06 WHEREIN THE FOLLOWING COMMON GRO UNDS HAVE BEEN TAKEN: 1. THE LD. CIT(A) HAS ERRED IN NOT CONSIDERING THE CONTENTION OF THE ASSESSEE AGAINST THE VALIDITY OF REOPENING OF THE ASSESSMENT BY STATING THAT IT IS ACADEMIC IN NATURE. 2. THE LD. CIT(A) HAS ERRED IN NOT CONSIDERING THAT THE ASSESSING OFFICER COULD NOT HAVE HAD REASON TO BELIE VE THAT THE INCOME OF THE ASSESSEE ESCAPED ASSESSMENT WHEN THERE WERE BINDING PRECEDENTS IN FAVOUR OF THE ASSESSEE. PAGE 30 OF 31 I.T.A. NO 1698 TO 1702/MDS/2010 CO NOS. 145 TO 149/MDS/2010 18. IN THE CROSS OBJECTIONS FOR ASSESSMENT YEAR 2006-07 THE FOLLOWING GROUND OF CROSS OBJECTION HAS BEEN TAKEN: THE LD. CIT(A) HAS ERRED IN NOT UPHOLDING THE PLEA OF THE ASSESSEE THAT THE DIRECTIONS ISSUED BY THE ADDITION AL COMMISSIONER OF INCOME-TAX WERE BEYOND THE SCOPE OF HIS POWERS U/S 144A OF THE ACT AS THE ADDL. CIT HAD CONC LUDE THE ISSUE WHEREAS HE WAS EMPOWERED ONLY TO PROVIDE MERE GUIDANCE. 18. AS THE ONLY ADDITION MADE IN THE REASSESSMENT W AS FOUND TO BE UNSUSTAINABLE NO GRIEVANCE REMAINS TO THE ASSES SEE. THE LD. A.R. OF THE ASSESSEE CONCEDED THAT IF THE ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE THE GROUNDS TAKEN IN CROSS OBJECTI ONS WOULD BECOME INFRUCTUOUS AND ONLY ACADEMIC IN NATURE AND WOULD REQUIRE NO SEPARATE ADJUDICATION. THEREFORE THE CROSS OBJ ECTIONS ARE DISMISSED. PAGE 31 OF 31 I.T.A. NO 1698 TO 1702/MDS/2010 CO NOS. 145 TO 149/MDS/2010 19. IN THE RESULT THE APPEALS OF THE REVENUE AS WE LL AS THE CROSS OBJECTIONS OF THE ASSESSEE ALL ARE DISMISSED. ORDER PRONOUNCED IN THE COURT ON 16 TH SEPTEMBER 2011. SD/- SD/- (GEORGE MATHAN ) (N.S. SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI DATED THE 16 TH SEPTEMBER 2011. VL COPY TO: ASSESSEE/AO/CIT (A)/CIT/D.R./GUARD FILE