Digite Inc., USA, Pune v. ADIT, New Delhi

ITA 772/DEL/2014 | 2010-2011
Pronouncement Date: 19-11-2019 | Result: Allowed

Appeal Details

RSA Number 77220114 RSA 2014
Assessee PAN AACCD7140F
Bench Delhi
Appeal Number ITA 772/DEL/2014
Duration Of Justice 5 year(s) 9 month(s) 8 day(s)
Appellant Digite Inc., USA, Pune
Respondent ADIT, New Delhi
Appeal Type Income Tax Appeal
Pronouncement Date 19-11-2019
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted B
Tribunal Order Date 19-11-2019
Date Of Final Hearing 11-07-2017
Next Hearing Date 11-07-2017
First Hearing Date 11-07-2017
Assessment Year 2010-2011
Appeal Filed On 11-02-2014
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH B NEW DELHI BEFORE SH. R. K. PANDA ACCOUNTANT MEMBER AND. SH. KULDIP SINGH JUDICIAL MEMBER ITA NO.4918/DEL/2012 & 2415/DEL/2013 ASSESSMENT YEAR: 2007-08 & 2009-10 DIGITE INC. 82 PIONEER WAY SUIT NO. 102 MOUNTAIN VIEW CALIFORNIA USA 94041 PAN NO.AACCD7140F VS. ADIT CIRCLE- 1 (1) INTERNATIONAL TAXATION NEW DELHI (APPELLANT) (RESPONDENT) ITA NO.772/DEL/2014 ASSESSMENT YEAR : 2010-11 DIGITE INC. C/O. CA KISHOR PHADKE OFICE NO. 1 & 2 1 ST FLOOR LUNAWAT COURT OFF J. M. ROAD SHIVAJINAGAR PUNE 411004 PAN NO. AACCD7140F VS. ADIT CIRCLE- 1 (2) INTERNATIONAL TAXATION NEW DELHI (APPELLANT) (RESPONDENT) ITA NO.987/DEL/2015 ASSESSMENT YEAR : 2011-12 DIGITE INC. C/O. CA KISHOR PHADKE OFICE NO. 1 & 2 1 ST FLOOR LUNAWAT COURT OFF J. M. ROAD SHIVAJINAGAR PUNE 411004 PAN NO. AACCD7140F VS. ADIT CIRCLE- 1 (2) (2) INTERNATIONAL TAXATION NEW DELHI (APPELLANT) (RESPONDENT) PAGE | 2 ITA NO.382/DEL/2016 ASSESSMENT YEAR : 2012-13 DIGITE INC. C/O. CA KISHOR PHADKE OFICE NO. 1 & 2 1 ST FLOOR LUNAWAT COURT OFF J. M. ROAD SHIVAJINAGAR PUNE 411004 PAN NO. AACCD7140F VS. DCIT CIRCLE- 1(2) (2) INTERNATIONAL TAXATION NEW DELHI (APPELLANT) (RESPONDENT) APPELLANT BY SH. KISHOR PHADKE CA RESPONDENT BY SH. G. K. DHALL CIT DR DATE OF HEARING: 22/08/2019 DATE OF PRONOUNCEMENT: 19/11/2019 ORDER PER R.K PANDA AM: THE ABOVE BATCH OF 5 APPEALS FILED BY THE ASSESSEE FOR DIFFERENT ASSESSMENT YEARS ARE DIRECTED AGAINST THE SEPARATE ORDERS OF THE AO/ DRP FOR RESPECTIVE ASSESSMENT YEA RS WHEREIN THE ASSESSEE HAS CHALLENGED THE ADDITION MADE BY TH E AO HOLDING THAT THE AMOUNT RECEIVED BY THE ASSESSEE COMPANY FR OM ITS CUSTOMERS IS IN THE NATURE OF ROYALTY U/S. 91 (VI) OF THE IT ACT 1961 AND AS PER ARTICLE 12 (3) OF THE INDO US DTAA. FOR THE SAKE OF CONVENIENCE THESE APPEALS WERE HEARD TOGETHER AN D ARE BEING DISPOSED OF BY THIS COMMON ORDER. 2. THE GROUNDS RAISED BY THE ASSESSEE FOR THE RESPE CTIVE ASSESSMENT YEARS ARE AS UNDER :- ITA NO.4918/DEL/2012 (A. Y.2007-08) 1. THE LEARNED ASSTT. DIRECTOR OF INCOME-TAX CIRCLE 1 (1) NEW DELHI (AO) ERRED IN PAGE | 3 2. LAW AND ON FACTS IN HOLDING THAT THE AMOUNT OF RS. 2 01 51 292/- RECEIVED BY THE ASSESSEE COMPANY FROM ITS CUSTOMERS IS IN THE NATUR E OF ROYALTY U/S 9(L)(VI) OF THE IT A 1961 AND ALSO AS PER ARTICLE 12(3) OF THE INDO-USA DTAA. THE AO OUGHT TO HAVE APPRECIATED THAT THE SAID AMOUNT IS N ORMAL BUSINESS INCOME OF THE APPELLANT ARISING ON ACCOUNT OF SALE OF COPYRIGHTED PRODUCTS (LICENSES) AND NOT TAXABLE IN INDIA IN THE ABSENCE OF PERMANENT ESTABL ISHMENT (PE) IN INDIA. 3. THE HONORABLE DRP HAS ERRED IN LAW AND ON FACTS IN REJECTING THE OBJECTIONS OF THE APPELLANT TO THE ADDITIONS PROPOSED BY THE LEAR NED AO IN TREATING THE AMOUNT OF RS. 2 01 51 292/- RECEIVED BY THE ASSESSEE COMPA NY AS ROYALTY U/S 9(L)VI) OF THE ITA 1961 AND AS PER ARTICLE 12(3) OF THE INDO- USA DTAA; INSTEAD OF TREATING THE SAME AS CONSIDERATION FOR SALE OF SOFTWARE LICE NSES. 4. THE ASSESSEE COMPANY CRA VES LEAVE TO ADD / MODIFY / DELETE / AMEND ALL / AN Y OF THE GROUNDS OF OBJECTION. ITA NO. 2415/DEL/2013 ( A. Y. 2009-10) 1. THE LEARNED ASSTT. DIRECTOR OF INCOME-TAX CIRCLE 1 (1) INTERNATIONAL TAXATION NEW DELHI (AO) ERRED IN LAW AND ON FACTS IN HOLDING THA T THE AMOUNT OF RS. 3 48 69 783/- RECEIVED BY THE ASSESSEE COMPANY FROM ITS CUSTOMERS IS IN THE NATURE OF ROYALTY U/ S 9(1 )(VI) OF THE ITA 1961 AND FEES FOR TECHNICAL S ERVICES AS PER ARTICLE 13(4)(A) OF THE INDO-USA DTAA. THE AO OUGHT TO HAVE APPRECIATED THAT THE SAID AMOUNT IS NORMAL BUSINESS INCOME OF THE APPELLANT ARISING ON ACCOUNT OF SALE OF COPYRIGHTED PRODUCTS (LICENSES) AND NOT TAXABLE IN INDIA IN THE ABSENCE OF PERMANENT ESTABLISHMENT (PE) IN INDIA. 2. THE HONORABLE DRP HAS ERRED IN LAW AND ON FACTS IN REJECTING THE OBJECTIONS OF THE APPELLANT TO THE ADDITIONS PROPOSED BY THE LEARNED AO IN TREATING THE AMOUNT OF RS. 3 48 69 783 /- RECEIVED BY THE ASSESSEE COMPANY AS ROYALTY U/S 9(L)(VI) OF THE ITA 1961 AND FEES FOR TECHNICAL SERVICES AS PER ARTICLE 13(4)(A) OF THE INDO-USA DTAA; INSTEAD OF TREATING THE SAME AS CONSIDERATION FOR S ALE OF SOFTWARE LICENSES. 3. THE ASSESSEE COMPANY CRAVES LEAVE TO ADD / MODIFY / DELETE / AMEND ALL / ANY OF THE GROUNDS OF OBJECTION. ITA NO.772/DEL/2014 ( A. Y. 2010-11) 1. THE LEARNED ASSTT. DIRECTOR OF INCOME-TAX CIRCLE 1 (2) INTERNATIONAL TAXATION NEW DELHI (AO) HAS ERRED IN LAW AND ON FACTS IN H OLDING THAT THE AMOUNT OF RS. 2 38 59 363/- RECEIVED BY THE ASSESSEE COMPANY FR OM ITS INDIAN CUSTOMERS IS IN THE NATURE OF ROYALTY AS PER SECTION 9(L)(VI) R.W.S . 115A OF THE ITA 1961 AS WELL AS AS PER ARTICLE 12(3) OF THE INDIA - USADTAA. 2. THE AO OUGHI TO HAVE APPRECIATED THAT THE SAID AMO UNT RECEIVED FROM ASSESSEES INDIAN CUSTOMERS IS NORMAL BUSINESS INCOME OF THE APPELLANT ARISING ON ACCOUNT PAGE | 4 OF SALE OF COPYRIGHTED LICENSED SOFTWARE PRODUCTS A ND NOT TAXABLE IN INDIA IN THE ABSENCE OF PERMANENT ESTABLISHMENT (PE) IN INDIA. 3. THE HONBLE DRP HAS ERRED IN LAW AND ON FACTS IN R EJECTING THE OBJECTIONS OF THE APPELLANT TO THE ADDITIONS PROPOSED BY THE LEARNED AO IN TREATING THE AMOUNT OF RS. 2 38 59 363/- RECEIVED BY THE ASSESSEE COMPANY AS ROYALTY U/S 9(L)(VI) OF THE ITA 1961 AS WELL AS AS PER ARTICLE 12 THE INDIA - USA DTAA; INSTEAD OF TREATING THE SAME AS CONSIDERATION FOR SALE OF COPYRIGHTED S OFTWARE LICENSES. 4. THE LEARNED AO HAS ALSO ERRED IN LAW AND ON FACTS IN NOT GRANTING TDS CREDIT OF RS. 10 52 034/- WHICH WAS DEDUCTED BY THE VARIOUS I NDIAN CUSTOMERS OF THE ASSESSEE BY TAKING EXTREME CONSERVATIVE POSITION OF THE LAW. 5. THE ASSESSEE COMPANY CRAVES LEAVE TO ADD / MODIFY / DELETE / AMEND ALL / ANY OF THE GROUNDS OF OBJECTION. ITA NO.987/DEL/2015 ( A. Y. 2011-12) 1. THE HONBLE DRP-IV DELHI HAS ERRED IN LAW AND ON FA CTS IN UPHOLDING LEARNED AOS ORDER TREATING THE AMOUNT OF RS. 1 40 48 530/- BEING RECEIVED BY THE ASSESSEE COMPANY FOR SALES OF LICENSES AS A TAXABLE ROYALTY U/S 9(L)(VI) OF THE ITA 1961 AND AS PER ARTICLE 12 THE INDIA - USA DTAA; INSTEAD OF TREATING THE SAME AS CONSIDERATION FOR S ALE OF COPYRIGHTED SOFTWARE LICENSES. 2. THE DRP / AO OUGHT TO HAVE APPRECIATED THAT THE SA ID AMOUNT RECEIVED FROM ASSESSEES INDIAN CUSTOMERS IS NORMAL BUSINES S INCOME OF THE APPELLANT ARISING ON ACCOUNT OF SALE OF COPYRIGHTED LICENSED SOFTWARE PRODUCTS AND NOT TAXABLE IN INDIA IN THE ABSENCE OF PERMANENT ESTABLISHMENT (PE) IN INDIA. 3. THE LEARNED AO HAS ALSO ERRED IN LAW AND ON FACTS IN GRANTING SHORT TDS CREDIT OF RS. 10 03 459/- (RS. 14 90 981 - RS.4 87 522) WHICH WAS DEDUCTED BY THE VARIOUS INDIAN CUSTOMERS OF THE ASSESSEE BY TAKING EXTREME CONSERVATIVE POSITION OF THE LAW. 4. ALTERNATIVELY AND WITHOUT PREJUDICE TO THE GROUND NO 1 TO 3 ABOVE LEARNED ASSESSING OFFICER HAS ERRED IN LAW AND ON FACTS IN APPLYING TAXATION RATE OF 15% AS PER DTAA BETWEEN INDIA AND USA INSTEAD OF 10 % RATE GIVEN UNDER SECTION 115A OF INCOME TAX ACT 1961. 5. THE ASSESSEE COMPANY CRAVES LEAVE TO ADD / MODI FY / DELETE / AMEND ALL / ANY OF THE GROUNDS OF OBJECTION. ITA NO.382/ DEL /2016 (A.Y.2012-13) 1. THE HONBLE DRP-IV DELHI HAS ERRED IN LAW AND ON FA CTS IN UPHOLDING LEARNED AOS PAGE | 5 ORDER TREATING THE AMOUNT OF RS. 2 65 00 760/- BEIN G RECEIVED BY THE ASSESSEE COMPANY FOR SALES OF LICENSES AS A TAXABLE ROYALTY U/S 9(L) (VI) OF THE IT A 1961 AND AS PER ARTICLE 12 THE INDIA - USA DTAA; INSTEAD OF TREATIN G THE SAME AS CONSIDERATION FOR SALE OF COPYRIGHTED SOFTWARE LICENSES. 2. THE DRP / AO OUGHT TO HAVE APPRECIATED THAT THE SA ID AMOUNT RECEIVED FROM ASSESSEES INDIAN CUSTOMERS IS NORMAL BUSINESS INCOME OF THE APPELLANT ARISING ON ACCOUNT OF SALE OF COPYRIGHTED LICENSED SOFTWARE PRODUCTS AND NOT T AXABLE IN INDIA IN THE ABSENCE OF PERMANENT ESTABLISHMENT (PE) IN INDIA. 3. THE LEARNED AO HAS ALSO ERRED IN LAW AND ON FACTS IN GRANTING SHORT TDS CREDIT OF RS. 5 88 007/- (RS.30 08 103 ROI- RS.24 20 096 FINAL AO ORDER ) WHICH WAS DEDUCTED BY THE INDIAN CUSTOMERS OF THE ASSESSEE. 4. ALTERNATIVELY AND WITHOUT PREJUDICE TO THE GROUND NO 1 TO 3 ABOVE LEARNED ASSESSING OFFICER HAS ERRED IN LAW AND ON FACTS IN APPLYING T AXATION RATE OF 15% AS PER DTAA BETWEEN INDIA AND USA INSTEAD OF 10% RATE GIVEN UND ER SECTION 115A OF INCOME TAX ACT 1961. 5. THE ASSESSEE COMPANY CRAVES LEAVE TO ADD / MODIFY / DELETE / AMEND ALL / ANY OF THE GROUNDS OF OBJECTION. 3. THERE IS A DELAY OF ABOUT 174 DAYS IN FILING OF THE APPEAL FOR A. Y. 2007-08 AND DELAY OF 82 DAYS IN FILING OF THE APPEAL FOR A. Y. 2009-10. 4. THE LD. COUNSEL FOR THE ASSESSEE REFERRING TO TH E CONTENTS OF THE CONDONATION APPLICATION FILED ALONGWITH THE AFFIDAVIT OF THE ASSESSEE SUBMITTED THAT THE ASSESSEE IS A FOREIGN C OMPANY AND INCORPORATE IN USA. IT IS ENGAGED INTO DEVELOPMENT AND SALE OF PROJECT MANAGEMENT SOFTWARE (PMS) PRODUCTS TO VARIO US CUSTOMERS ALL OVER THE WORLD. DURING THE RELEVANT A SSESSMENT YEAR THE COMPANY HAS SOLD SOME COPYRIGHTED SOFTWAR E LICENCES TO INDIAN COMPANIES. WHILE MAKING PAYMENT THE INDIAN COMPANIES DEDUCTED TDS BY TREATING THE TRANSACTION OF SALE OF COPY RIGHTED SOFTWARE LICENSES AS ROYALTY. HE SUBMITTED THAT TH E COMPANY WAS OF THE BELIEF THAT THE SAID SALE OF SOFTWARE LICENS E IS NOT A ROYALTY PAGE | 6 BUT A NORMAL BUSINESS RECEIPT NOT LIABLE FOR TDS. S INCE THE COMPANY DOES NOT HAVE ANY PE IN INDIA THE COMPANY CLAIMED THE TDS REFUND OF RS. 25 35 599/- BY FILING RETURN OF I NCOME FOR A.Y.2007-08 ON 29.03.2008. SIMILARLY THE RETURN FO R A.Y.2009-10 WAS FILED ON 16.03.2011 CLAIMING REFUND OF RS.33958 3/-. THE RETURNS WERE SUBJECTED TO SCRUTINY PROCEEDINGS FOR BOTH THE ASSESSMENT YEAR AND DRAFT ASSESSMENT ORDER WAS PASS ED BY THE AO ON 31.12.2009 FOR A.Y. 2007-08 AND ON 23.12.2011 FOR A.Y.2009-10. THE OBJECTION OF THE ASSESSEE WAS REJ ECTED BY THE DRP AND THE AO PASSED THE FINAL ORDER ON 31.12.2009 FOR A.Y.2007-08 AND ON 26.10.2012 FOR A.Y.2009-10. THE ASSESSEE COMPANY FILED APPEAL BEFORE THE TRIBUNAL AGAINST TH E ORDER OF THE AO FOR A.Y.2007-08 WHICH WAS SET ASIDE BY THE TRIBU NAL VIDE ORDER DATED 09.02.2011 TO THE FILE OF THE DRP FOR P ASSING A FRESH ORDER FOR A.Y.2007-08. THE DRP VIDE ORDER DATED 23 .12.2011 PASSED THE ORDER DISMISSING THE OBJECTIONS OF THE A SSESSEE COMPANY AND CONSEQUENTLY THE FINAL ORDER WAS PASSED BY THE AO ON 27.12.2011 WHICH WAS RECEIVED BY THE US COMPANY ON 27.01.2012 FOR A.Y.2007-08. SIMILARLY THE ORDER F OR A.Y.2009-10 PASSED BY THE AO ON 26.10.2012 WAS RECEIVED BY THE US OFFICE ON 04.12.2012. HE SUBMITTED THAT IN VIEW OF THE PASSIN G OF THE FINANCE BILL 2012 WHICH WAS DECLARED ON 28.02.2012 MANY RETROSPECTIVE AMENDMENTS TO SECTIONS RELATING TO R OYALTY WERE PROPOSED. THE SAID AMENDMENTS WERE SUBJECT MATTER O F MULTIPLE AND CONFLICTING VIEWS IN MANY PROFESSIONAL CIRCLES AND THERE WAS TOTAL CONFUSION AT ASSESSEES END REGARDING IMPACT OF THE SAID AMENDMENT. ON FURTHER CONSULTATION THE ASSESSEE WA S ADVISED PAGE | 7 BY CERTAIN SENIOR COUNSELS THAT THERE IS A MERIT IN FILING OF THE APPEAL DESPITE THE RETROSPECTIVE AMENDMENTS FOR WHI CH THE COMPANY FILED THE APPEAL. BUT IN THE MEANTIME SINC E THE PAPERS WERE REQUIRED TO BE SENT TO USA FOR SIGNATURE ETC T HERE WAS SOME DELAY IN FILING OF THE APPEAL FOR A. Y. 2007-08. 5. SO FAR AS A. Y. 2009-10 IS CONCERNED IT HAS BEEN STATED THAT THE MAIN FINANCE PERSON MR. JYOTIWARDHAN PATIL OF T HE COMPANY LEFT THE ORGANIZATION IN THE MONTH OF NOVEMBER 2012 AND RESPONSIBLE DIRECTORS WERE ALSO TRAVELLING OUT OF U SA FOR WHICH THE ORDER U/S. 143 (3) R.W.S.144 C (13) REMAINED UNATTE NDED. IT WAS ONLY IN THE MONTH OF MARCH 2013 THE DIRECTORS CAME TO KNOW ABOUT THE SAID ORDER WHEN THEY RETURNED FROM THEIR BUSINESS TOUR BY THE END OF FEBRUARY 2013. SINCE THE COMPAN Y OPERATES FROM USA AND THE TAX COUNSELS HAIL FROM PUNE AND TH E APPEALS ARE REQUIRED TO BE FILED AT DELHI IT TOOK CONSIDERA BLE TIME FOR MOVEMENT OF THE SIGNED PAPERS FROM ONE PLACE TO ANO THER FOR WHICH THE DELAY OF ABOUT 82 DAYS OCCURRED. RELYING ON VARIOUS DECISIONS HE SUBMITTED THAT IN THE INTEREST OF JUST ICE THE DELAY IN FILING OF THE APPEALS SHOULD BE CONDONED AND THE AP PEALS FOR THOSE TWO YEARS BE ADMITTED FOR ADJUDICATION. 6. THE LD. DR ON THE OTHER HAND STRONGLY OPPOSED TH E ADMISSION OF THE APPEALS DUE TO DELAY IN FILING OF THE APPEALS. HE SUBMITTED THAT THE AFFIDAVITS FILED BY THE ASSESSEE ARE NOT IN ORDER AND THERE ARE SERIOUS INFIRMITIES IN THE AFFIDAVITS SO FILED. FURTHER THERE IS NO REASONABLE CAUSE FOR THE CONDO NATION OF DELAY AND THEREFORE THE APPEALS FOR A. Y. 2007-08 AND 2 009-10 SHOULD BE REJECTED ON ACCOUNT OF DELAY IN FILING OF THE AP PEALS. PAGE | 8 7. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY B OTH THE SIDES AND PERUSED THE RECORD. AFTER CONSIDERING THE TOTALITY OF THE FACTS OF THE CASE WE ARE OF THE CONSIDERED OPINION THAT THERE WAS A REASONABLE CAUSE FOR DELAY IN FILING OF THE APPEALS . THE HONBLE APEX COURT IN COLLECTOR LAND ACQUISITION VS. MST K ATIJI & OTHERS REPORTED IN 167 ITR 471 HAS HELD THAT WHEN SUBSTANT IAL JUSTICE AND TECHNICAL CONSIDERATION ARE PITTED AGAINST EACH OTHER THE CAUSE OF SUBSTANTIAL JUSTICE DESERVES TO BE PREFERR ED FOR THE OTHER SIDE CANNOT CLAIM TO HAVE VESTED RIGHT INJUSTICE BE ING DONE BECAUSE OF A NON-DELIBERATE DELAY. THERE IS NO PRES UMPTION THAT DELAY IS OCCASIONED DELIBERATELY OR ON ACCOUNT OF C ULPABLE NEGLIGENCE OR ON ACCOUNT OF MALAFIDES. THE LITIGAN T DOES NOT STAND TO BENEFIT BY RESORTING TO DELAY IN FACT HE RUNS A SERIOUS RISK. 8. THE HONBLE SUPREME COURT IN THE CASE OF VEDABAI ALIAS VAIJAYANTA BAI BABURAO PATIL VS. SHANTARAM BABURAO PATIL REPORTED IN 122 TAXMANN 114 HAS HELD THAT THE COURT SHOULD ADOPT PRAGMATIC APPROACH. THE DISTINCTION MUST BE M ADE BETWEEN A CASE WHERE THERE IS INORDINATE DELAY AND A CASE WHERE THE DELAY IS OF A FEW DAYS. IN THE FORMER CASE THE CONSIDERATION OF PREJUDICE TO THE OTHER PARTY WILL BE A RELEVANT FAC TOR SO THE CASE CALLS FOR MORE CAUTIOUS APPROACH BUT IN THE LATER C ASE NO SUCH CONSIDERATION MAY ARISE AND SUCH A CASE DESERVES A LIBERAL APPROACH NO HARD AND FAST RULE CAN BE LAID DOWN IN THIS REGARD. THE COURT HAS TO EXERCISE THE DISCRETION OF THE FAC TS OF EACH CASE KEEPING IN MIND THAT IN CONSTRUING THE EXPRESSION ' SUFFICIENT PAGE | 9 CAUSE' THE PRINCIPLE OF ADVANCING SUBSTANTIAL JUST ICE IS OF PRIME IMPORTANCE. 9. THE HON'BLE SUPREME COURT IN B. MADHURI GOUD V. B. DAMODAR REDDY (2012) 12 SCC 693 BY REFERRING TO VA RIOUS EARLIER DECISIONS HELD THAT THE FOLLOWING PRINCIPLES MUST B E KEPT IN MIND WHILE CONSIDERING THE APPLICATION FOR CONDONATION O F DELAY; (I) THERE SHOULD BE A LIBERAL PRAGMATIC JUSTICE ORIENTED NON-PEDANTIC APPROACH WHILE DEALING WITH AN APPLICATION FOR CONDONATION OF DELAY FOR THE COURTS ARE NOT SUPPOSED TO LEGALISE INJUSTICE BUT ARE OBLIGED TO REMOVE INJUSTICE. (II) THE TERMS 'SUFFICIENT CAUSE' SHOULD BE UNDERSTOOD IN THEIR PROPER SPIRIT PHILOSOPHY AND PURPOSE REGARD BEING HAD TO THE FACT THAT THESE TERMS ARE BASICALLY ELASTIC AND ARE TO BE APPLIED IN PROPER PERSPECTIVE TO THE OBTAINING FACT-SITUATION. (III) SUBSTANTIAL JUSTICE BEING PARAMOUNT AND PIVOTAL THE TECHNICAL CONSIDERATIONS SHOULD NOT BE GIVEN UNDUE AND UNCALLED FOR EMPHASIS. (IV) NO PRESUMPTION CAN BE ATTACHED TO DELIBERATE CAUSE OF DELAY BUT GROSS NEGLIGENCE ON THE PART OF THE COUNSEL OR LITIGANT IS TO BE TAKEN NOTE OF. PAGE | 10 (V) LACK OF BONA FIDES IMPUTABLE TO A PARTY SEEKING CONDONATION OF DELAY IS A SIGNIFICANT AND RELEVANT FACT. (VI) IT IS TO BE KEPT IN MIND THAT ADHERENCE TO STRICT PROOF SHOULD NOT AFFECT PUBLIC JUSTICE AND CAUSE PUBLIC MISCHIEF BECAUSE THE COURTS ARE REQUIRED TO BE VIGILANT SO THAT IN THE ULTIMATE EVENTUATE THERE IS NO REAL FAILURE OF JUSTICE. (VII) THE CONCEPT OF LIBERAL APPROACH HAS TO ENCAPSULATE THE CONCEPTION OF REASONABLENESS AND IT CANNOT BE ALLOWED A TOTALLY UNFETTERED FREE PLAY. (VIII) THERE IS A DISTINCTION BETWEEN INORDINATE DELAY AND A DELAY OF SHORT DURATION OR FEW DAYS FOR TO THE FORMER DOCTRINE OF PREJUDICE IS ATTRACTED WHEREAS TO THE LATTER IT MAY NOT BE ATTRACTED. THAT APART THE FIRST ONE WARRANTS STRICT APPROACH WHEREAS THE SECOND CALLS FOR A LIBERAL DELINEATION. (IX) THE CONDUCT BEHAVIOUR AND ATTITUDE OF A PARTY RELATING TO ITS INACTION OR NEGLIGENCE ARE RELEVANT FACTORS TO BE TAKEN INTO CONSIDERATION. IT IS SO AS THE FUNDAMENTAL PAGE | 11 PRINCIPLE IS THAT THE COURTS ARE REQUIRED TO WEIGH THE SCALE OF BALANCE OF JUSTICE IN RESPECT OF BOTH PARTIES AND THE SAID PRINCIPLE CANNOT BE GIVEN A TOTAL GO BY IN THE NAME OF LIBERAL APPROACH. (X) IF THE EXPLANATION OFFERED IS CONCOCTED OR THE GROUNDS URGED IN THE APPLICATION ARE FANCIFUL THE COURTS SHOULD BE VIGILANT NOT TO EXPOSE THE OTHER SIDE UNNECESSARILY TO FACE SUCH LITIGATION. (XI) IT IS TO BE BORNE IN MIND THAT NO ONE GETS AWAY WITH FRAUD MISREPRESENTATION OR INTERPOLATION BY TAKING RECOURSE TO THE TECHNICALITIES OF LAW OF LIMITATION. (XII) THE ENTIRE GAMUT OF FACTS ARE TO BE CAREFULLY SCRUTINIZED AND THE APPROACH SHOULD BE BASED ON THE PARADIGM OF JUDICIAL DISCRETION WHICH IS FOUNDED ON OBJECTIVE REASONING AND NOT ON INDIVIDUAL PERCEPTION. (XIII) THE STATE OR A PUBLIC BODY OR AN ENTITY REPRESENTING A COLLECTIVE CAUSE SHOULD BE GIVEN SOME ACCEPTABLE LATITUDE.' 10. RESPECTFULLY FOLLOWING THE RATIO LAID BY THE HO NBLE APEX COURT IN THE DECISIONS CITED (SUPRA) WE CONDONE THE DELAY IN FILING PAGE | 12 OF THE APPEAL FOR ASSESSEES A. Y. 2007-08 AND 2009 -10 AND THESE APPEALS ARE ADMITTED FOR ADJUDICATION. 11. NOW WE TAKE UP THE ITA NO. 4918/DEL/2010 FOR A .Y. 2007- 08 AS THE LEAD CASE. 11.1 FACTS OF THE CASE IN BRIEF ARE THAT THE ASSE SSEE FILED ITS RETURN OF INCOME ON 01.04.2008 DECLARING TOTAL INCO ME NIL. REGARDING BACKGROUND AND BUSINESS OF THE ASSESSEE C OMPANY THE ASSESSEE HAD SUBMITTED THE FOLLOWING :- THE COMPANY IS ENGAGED INTO DEVELOPMENT AND SALES OF PROJECT MANAGEMENT SOFTWARE LICENSES TO VARIOUS CUSTOMERS ALL OVER THE WORLD. THE COMPANY HAS DEVELOPED THE VARIOUS VERS IONS OF ITS PMS SYSTEM AND IS PROVIDING LICENSED COPYRIGHT PR ODUCTS ON A SALE BASIS. ALL THE NECESSARY AND ESSENTIAL PROGRA MS ARE OWN CREATIONS OF THE COMPANY. THE COMPANY PROVIDES AND SELLS LARGE QUANTITIES OF TH E LICENSED SOFTWARES THROUGH INTERNET BY PROVIDING KEY OR PASS WORDS ETC. THE SOFTWARES ARE DOWNLOADED FROM THE NET AND PROTECTE D THROUGH THE LICENSES EXTENDED WITH THE SAME. AS THE SALES OF COPYRIGHTED SOFTWARES IS CARRIED OUT THROUGH THE INTERNET PROTOCOL AND OUR COMPANY DOES NOT HAVE ANY PE IN INDIA THE COMPANYS INCOME EMBEDDED IN THE SALES TO INDIAN COMPANIES DOES NOT ACCRUE IN INDIA. KINDLY APPRECI ATE ARTICLE- 5 AND ARTICLE 7 OF THE DTA BETWEEN INDIA AND USA. A COPY OF THE SAID DTA IS ENCLOSED HEREWITH. PAGE | 13 HOWEVER THE INDIAN COMPANIES HAVE TAKEN A VERY EXT REME CONSERVATIVE POSITION AND EFFECTED A TDS ON THE SAID AMOUNTS PAID FOR SALE OF SOFTWARE LICENSES. CONSIDERING THE CLEAR POSITION OF LAW IN THIS RESPEC T OUR COMPANY HAS FILED THE TAX RETURN FOR A. Y. 2007-08 A ND REQUESTED FOR REFUND OF THE SAID TDS. DURING THIS YEAR OUR COMPANY HAS SOLD SOFTWARE LICE NSES TO TWO COMPANIES I.E. INFOSYS TECHNOLOGIES LIMITED AND HCL TECHNOLOGIES LIMITED. REGULAR CONTRACTS ARE ENTERED I NTO WITH THE CUSTOMERS BEFORE EFFECTING THE SALES. COPY OF THE CONTRACT FOR SALES TO INFOSYS IS ENCLOSED HEREWITH. THE OTHER CONTRACT WERE ALMOST ON SIMILAR LINES. 12. SUBSEQUENTLY ON BEING CALLED BY THE AO THE ASS ESSEE FILED CERTAIN ADDITIONAL DETAILS. IT WAS ARGUED THAT SEC TION 5 OF THE MASTER LICENSE AGREEMENT (MLA) CONTAINS THE TERMS O F PAYMENT. THE MLA HAS SPECIFICALLY MADE THE BIFURCATION BETWE EN LICENSE FEES AND SERVICE FEES. AS PER THE AGREEMENT THE LIC ENSE FEES IS TO BE PAYABLE IN THE NON-REFUNDABLE INSTALLMENTS WHICH ARE REQUIRED TO BE PAID ON THE COMPLETION OF EACH P HASE OF SOFTWARE DEVELOPMEN T. HOWEVER SERVICE FEES WILL BE CHARGED FOR THE FU RTHER MAINTENANCE OF THE SOFTWARE IF REQUIRED. SERVICE F EES WILL NOT BE CHARGED FOR THE FIRST TWELVE MONTHS FROM THE COMPLE TION OF CONTRACT AND THEREAFTER MAINTENANCE FEES WILL BE CH ARGED AS PER THE TERMS AND CONDITIONS GIVEN IN THE AGREEMENT. IT WAS SUBMITTED THAT THE SERVICES ARE REQUIRED TO BE REND ERED FOR CUSTOMIZATION OF THE SAID SOFTWARE FOR THE USE AND FACILITATION OF PAGE | 14 ANY CUSTOMER. AS THE SOFTWARES ARE STANDARD FORMS THE CUSTOMIZATION IS NECESSARY CONSIDERING THE DIVERSE SITUATIONS. ALSO A REGULAR BACKUP OF TROUBLE SHOOTING IS NECES SARY IF THERE ARE ANY UNINTENDED BUGS / PROBLEMS. THE ASSESSEE CO MPANY AIMS AT TROUBLE SHOOTING FROM THE USA ESTABLISHMENT. FOR THIS PURPOSE IT HAS A READY SUPPORT SERVICES ON A 24 X 7 BASIS. THE PROBLEMS OF THE CLIENTS ARE AIMED AT BEING SORTED OUT ON AN OFF LINE BASIS. HOWEVER IN CASE OF NECESSITY THE EXECUTIVES ARE R EQUIRED TO VISIT THE CLIENTS ESTABLISHMENTS AND FIX THE PROBLEMS. FO R ALL THESE JOBS SEPARATE SERVICE CHARGES ARE LEVIED. 13. SOME OF THE DETAILS REGARDING THE SOFTWARE AND SOLUTIONS PROVIDED BY THE ASSESSEE WERE OBTAINED BY THE AO FR OM THE WEBSITE. HE NOTED THAT THE SOFTWARE IS DELIVERED A T THE SITE OF THE END CUSTOMER. THERE IS A SPECIFIC ROLL OUT PLAN AND INSTALLATION AND IMPLEMENTATION PROGRAMME. DURING THE SAME THE E MPLOYEES OF THE CUSTOMER ARE GIVEN TRAINING ON HOW TO USE TH E SAME. THE SERVICES INCLUDING UPDATES MAINTENANCE SUPPORT ET C. ARE PART & PARCEL OF THE CONTRACT. THE SAME IS ALSO VERIFIABLE FROM THE NATURE OF RECEIPTS OF THE ASSESSEE: ONCE THE LICENSE IS GRANTED THE ASSESSEE IS RESPONS IBLE TO MAINTAIN IT AS IT IS THEIR PROPRIETARY PRODUCT. AFT ER THE GRANT OF LICENSE THE ASSESSEE KEEPS ON BILLING THE CUSTOMERS . THERE ARE PAGE | 15 NUMBER OF SOFTWARE AND SOLUTIONS ON THE WEBSITE OF THE ASSESSEE. THEN IN EACH PRODUCT / SOLUTION NUMBER OF MODULES A RE INTEGRATED. THE ASSESSEE HAS FILED ONLY ONE CONTRAC T DURING THE PROCEEDINGS. THIS CONTRACT IS WITH INFOSYS AND IS I N RELATION TO THE PROJECT MANAGEMENT SOFTWARE THAT IS WHY ONLY THE DE TAILS OF PROJECT MANAGEMENT SOFTWARE HAVE BEEN DESCRIBED ABO VE. 14. THE AO THEREFORE ASKED THE ASSESSEE TO EXPLAI N AS TO WHY THE CONSIDERATION SHOULD NOT BE TAXED AS ROYALTY IN COME. FROM THE VARIOUS CLAUSES OF THE AGREEMENT AND NATURE OF SOFTWARE PROVIDED BY THE ASSESSEE THE AO DREW THE FOLLOWING INFERENCES AS PER PARA 4.1 OF HIS ORDER:- 4.1 A COMBINE READING OF THE AFOREMENTIONED CLAUSES & AGREEMENT & NATURE OF SOFTWARE CONCLUDES THE FOLLOWI NG PROPOSITIONS INTER-ALIA : A) SUBJECT MATTER OF TRANSFER IS A LICENSE TO USE THE LICENSE OF SOFTWARE; B) THE SOFTWARE IS NOT A SAME FOR ALL' SOFTWARE. SUPPLIER WILL PROVIDE DELIVERABLES AND SERVICES AS SPECIFIED IN TH E RELEVANT SOWS ONLY WHEN ORDERED. SUPPLIER WILL BEGIN WORK ONLY AFTER RECEIVING ORDER FROM BUYER. BUYER MAY PROPOSE CHANG ES TO A SOW AND SUPPLIER WILL SUBMIT TO BUYER THE IMPACT OF SUCH CHANGES. C) THE SUPPLIER I.E. ASSESSEE START WORKING / SOFTWARE CODING AS PER THE REQUEST OF PAGE | 16 THE CUSTOMER & ITS REQUIREMENTS.THIS COULD BE THE PO SSIBLE REASONS WHY THERE IS A CONCEPT OF WORK ORDER / 'ST ATEMENT OF WORK AND NOT 'SALE. D) THE SOFTWARE FOR WHICH LICENSE IS GRANTED IS NOT A ' SAME FOR ALL CUSTOMERS' SOFTWARE IS ALSO CONFIRMED FROM THE FACT THAT THERE ARE DETAILED ACCEPTANCE PROCEDURES SET OUT. THE RE SHOULD BE NO QUESTION OF ACCEPTANCE / REJECTION IN CASE OF A STANDARD SOFTWARE. THE SOFTWARE IS RUN IN THE PREMISES OF TH E CUSTOMER FOR THE CUSTOMER TO SEE WHETHER IT MEETS ITS CRITER IONS. E) CUSTOMER CAN EVEN GO FOR CERTAIN ENHANCEMENTS AS DESIRED. F) THE SUPPLIER IS REQUIRED TO KEEP THE SOFTWARE FOR W HICH LICENSE IS GIVEN UPDATED & MAINTAINED TO BE ABLE TO KEEP ON CARRYING OUT THE PROCESSES AS DESIRED BY THE CUSTOME R. G) IT IS RECOGNIZED THAT THE TRAINING IS NEEDED TO SUPP ORT THE BASIC SALES IMPLEMENTATION AND SUPPORT OF SOFTWARE. H) NOT ONLY LICENSE BUT LICENSE DOCUMENTATION SERVICE S TRAINING UPDATES ARE PROVIDED. THE CONFIGURATION I S ALSO TO BE DONE. I) THE SOFTWARE LICENSE PROVIDED BY THE ASSESSEE ARE UPGRADABLE AND AS CLAIMED FUTURE READY. UNLIKE SALE THE SOFTWARE IS NOT STAND ALONE AND THE ASSESSEE KEEPS IN CONTINUOUS TOUCH WITH ITS CUSTOMER. J) THE SOFTWARE ARE HEAVILY PRICED VIS-A-VIS A NORMA L COMPUTER / SYSTEM. THE SOFTWARE ARE FEATURE RICH AND ARE CAPABL E OF CARRYING OUT VARIOUS ACTIVITIES-. THESE CAN CARRY O UT THE PAGE | 17 ACTIVITIES WHICH MANY PERSON TOGETHER WILL NOT BE A BLE TO DO. MOREOVER THE SPEED OF CARRYING OUT THE PROCESSES IS REAL TIME I.E. THE PROCESS IS CARRIED OUT AS AND WHEN THE ACTIV ITY HAPPENS. K) THE CUSTOMER GIVES ITS OWN IP PRODUCTS TO THE ASS ESSEE SO THAT THE SOFTWARE DEVELOPED BY THE ASSESSEE IS COMPLIANT TO THEM. THAT IS WHY THERE IS A CLAUSE OF INFOSYS IP. I) THE ASSESSEE IS REQUIRED TO PROTECT THOSE IP. A L ONG LIST CONTAINING THOSE IP OF INFOSYS ARE PROVIDED IN THE A GREEMENT ITSELF. THE LIST RUNS INTO NUMBER OF PAGES AND IS HI GHLY TECHNICAL. THE ASSESSEE HAS TO MAKE SURE THAT THE S OFTWARE DEVELOPED TALKS TO THOSE MODULES OF FUTURE USER IN A S EAMLESS MANNER AND THE ASSESSEE HAS TO INTEGRATE ITS OWN SOF TWARE INTO THE ALREADY RUNNING SYSTEM OF THE CLIENT. M) THE SOFTWARE DEVELOPED FOR ONE CLIENT CAN NOT BE LICENSED TO ANY OTHER CLIENT BECAUSE THE IP & INTERNAL SYSTEM I NFRASTRUCTURE IS UNIQUE TO EVERY ORGANIZATION AND ALSO THE IP OF T HE CLIENTS ARE TO BE PROTECTED. N)THE SOFTWARE FOR WHICH LICENSE HAS BEEN GRANTED EQUIP THE USER/ ENABLE THE USER TO CARRYOUT HIGH LEVEL TECHNI CAL TASKS WITH PRECISION. THESE SOFTWARE ARE NOT THE ONES FOR RUNNING SMALL MACHINES. THESE SITS OVER THE OVER A STANDARD SERVER / COMPUTER AND CARRY OUT THE PROCESSES. THEIR PRICE IS MANY TIMES THE SERVER ON WHICH THESE ARE INSTALLED FOR TO BE USED AND ARE IN REAL SENSE EQUIPMENTS OF MULTIPLE CAPABI LITIES. O)THE WORD EQUIPMENT IS DERIVED FROM EQUIP + MENT. TH E ORIGIN OF THE WORD EQUIP IS FROM MODIFICATION OF ANGLO-FR ENCH ESKIPER' ' ESCHIPER' TO LOAD ON BOARD A SHIP EMBARK OUTFIT PAGE | 18 MAN OF GERMANIC ORIGIN; AKIN TO OLD ENGLISH S CIPIAN EQUIP A SHIP. 15. REJECTING THE VARIOUS EXPLANATION GIVEN BY THE ASSESSEE AND RELYING ON VARIOUS DECISIONS THE AO HELD THAT T HE CONSIDERATION RECEIVED BY THE ASSESSEE FALLS IN THE CATEGORY OF ROYALTY BOTH UNDER THE ACT AS PER SECTION 9 (1) ( VI) CLAUSE (I) CLAUSE (III) CLAUSE (IVA) AND CLAUSE (V) OF EXPLAN ATION 2 AND ARTICLE 12 (3) (A) & 12 (3) (B) OF INDO-USA DTAA. T HE CONSIDERATION RECEIVED FOR SERVICES LIKE DESIGNS TRAINING (INCLU DING TRAINING THE TRAINERS ETC). IS ALSO TAXABLE AS FEES FOR TECHNICA L SERVICE. 16. ACCORDINGLY SUM OF USD 464 123 EQUIVALENT TO R S. 2 01 51 292 (1 USD= INR 43.4180) SHOWN AS SOFTWARE CONSIDERATION WAS HELD BY THE AO TO BE ROYALTY. HE FURTHER HELD THAT AS PER ARTICLE 13 (4) (A) OF THE DTAA THE SERV ICES IN CONNECTION ARE TAXABLE AS FEES FOR TECHNICAL SERVIC ES. THE RATE OF TAX FOR ROYALTIES UNDER THE DTAA IS 15%. HE ACCORD INGLY DETERMINED THE TOTAL INCOME AT RS. 2 01 51 292 WHI CH IS TAXABLE @ 10% + SURCHARGE + EDUCATION CESS AS PER SECTION 1 15A OF THE ACT AS THE AGREEMENT IS ENTERED AFTER 01.06.2005. 17. THE ASSESSEE APPROACHED THE DRP WHO PASSED THE DIRECTION ON 30.08.2010 U/S. 144 C OF THE IT ACT. AGAINST THE ORDER OF THE DRP THE ASSESSEE FILED APPEAL BEFORE T HE TRIBUNAL WHO VIDE ORDER DATED 09.02.2011 SET ASIDE THE CASE OF THE ASSESSEE AND REMITTED IT TO THE FILE OF THE DRP TO CONSIDER THE PAGE | 19 SAME ONCE AGAIN. SUBSEQUENTLY THE DRP VIDE ORDER D ATED 23.12.2011 PASSED CERTAIN DIRECTIONS WHEREIN THEY U PHELD THE ACTION OF THE AO IN HOLDING THAT THE PAYMENT MADE B Y M/S. INFOSYS AND HCL TO THE ASSESSEE IS COVERED WITHIN T HE DEFINITION OF ROYALTY U/S. 9 (1) (VI) OF THE IT ACT AND/ OR ARTIC LE 12 OF THE INDO US DTAA. WHILE HOLDING SO THEY RELIED ON THE DECIS ION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF SAMSUNG ELECTRONICS COMPANY LIMITED AND THE DECISION OF AAR IN THE CASE OF MILLENNIUM IT SOFTWARE LIMITED. 18. THE AO THEREAFTER PASSED THE ORDER U/S. 143 (3) / 144 C ON 27.12.2011 TREATING THE SOFTWARE CONSIDERATION OF RS.2 01 51 292/-AS ROYALTY WHICH IS TAXABLE AT THE RATE OF 15%. HE FURTHER HELD THAT THE SERVICES IN CONNECTION ARE TAXABLE AS FTS AS PER ARTICLE 13 (4) (A) OF THE INDO US DTAA. 19. AGGRIEVED WITH SUCH ORDER OF THE DRP/ AO THE AS SESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 20. THE LD. COUNSEL FOR THE ASSESSEE WHILE STRONGLY CHALLENGING THE ORDER OF THE AO/ DRP FILED THE FOLLOWING WRITTE N SYNOPSIS :- PART-SI- REGARDING MERITS OF THE APPEALS 2.1 - KEY ISSUE INVOLVED IN ALL THE FOUR (4) APPEALS THE KEY ISSUE INVOLVED IS CHARACTERISATION OF PAYMENTS MADE TO THE APPELLANT BY ITS CUSTOMERS FOR SALE OF SOFTWARE PRODUCTS / LICENSES WHETHER ROYALTY AS PER ITA 1961 READ WITH DTAA BETWEEN USA AND PAGE | 20 INDIA; OR NOT. LEARNED AO HAS TREATED THE PAYMENTS AS ROYALTY AND TAXED THE SAME AT APPLICABLE RATE OF TAX. APPELLANT HAS PREPARED A CHART OF SUMMARISED GROUNDS O F APPEAL INVOLVED IN ALL THE ABOVE APPEALS. THE SAME I S GIVEN AT PAGE NO. 452. 2.2 -PRODUCT SOLD BY THE APPELLANT APPELLANT IS ENGAGED IN SALE OF LICENCES OF ITS SOFT WARE PRODUCT CALLED AS PMS (I.E PROJECT MANAGEMENT SOFTWARE). PMS IS CONSIDERED AS A B1 TOOL (I.E BUSINESS INTELLIGENCE TO OL). PMS ASSISTS THE USERS IN REGULATING AND EFFECTIVELY UTIL ISING PROGRAMMERS' TIME ON A COLLECTIVE BASIS WITH EFFIC IENCY. IN ALL THE SOFTWARE COMPANIES USE OF PMS IS A VERY TYPICAL NORMAL USUAL AND (RATHER) ESSENTIAL FEATURE. NOW THE MARKE T FOR PMS SOFTWARE IS VERY COMPETITIVE. MANY VENDORS SELL THE PMS SOFTWARES AND HENCE THE SALE-RATES OF PMS ARE UNDER H EAVY PRESSURE. 2.3 - AGREEMENTS WITH CUSTOMERS APPELLANT BEING A USA COMPANY ENTERS INTO UNDERSTANDING WITH THE CUSTOMER S FOR SALE OF LICENSES. TYPICALLY AGREEMENTS ARE ENTERED INTO BETWEEN THE CUSTOMERS AND THE APPELLANT. COPIES OF S AMPLE AGREEMENTS (FOR EACH INVOLVED APPEALS REFERRED ABOVE) ARE ENCLOSED IN PAPER-BOOK-ILL SUBMITTED ON 24 TH AUGUST 2015. 2.4 - KEY CLAUSES IN THE AGREEMENTS WITH CUSTOMERS PERUSAL OF THE AGREEMENTS WITH CUSTOMERS (SUCH AS I NFOSYS SONY TECH MAHINDRA ETC.) WILL REVEAL THAT APPELLAN T RETAINS ALL OWNERSHIP OF INTELLECTUAL PROPERTY RIGHTS RELAT ING TO THE SOFTWARE LICENSES SOLD TO CUSTOMERS. APPELLANT PERMI TS THE CUSTOMERS TO MERELY USE THE SOFTWARE LICENSES FOR T HEIR PAGE | 21 BUSINESS NEEDS. APPELLANT FURTHER RESTRICTS THESE CU STOMERS FROM DUPLICATING / COPYING / ADAPTING ETC. THE SOFT WARE PRODUCTS. APPELLANT HAS PREPARED A COMPARATIVE CHART OF VARIOUS KEY CLAUSES OF THE AGREEMENTS WITH CUSTOMER S. THE SAME IS GIVEN AT PAGE NO. 453 TO 454. IT IS THE SUB MISSION OF THE APPELLANT THAT THE MOMENT RESTRICTIONS ARE PUT REGARDING COPYING / DUPLICATING / REPRODUCING ETC. A COPYRIGH T GETS CONVERTED INTO A COPYRIGHTED PRODUCT. FROM THE SAID CHA RT IT WILL REVEAL THAT THE APPELLANT DOES NOT PART WITH A NY COPYRIGHT TO THE CUSTOMERS. ON THE CONTRARY APPELLANT MERELY EXTENDS A COPYRIGHTED PRODUCT TO THE CUSTOMERS. 2.5. MEANING OF 'COPYRIGHT' AS PER INDIAN COPYRIGHT ACT. 1957 SECTION 14 OF THE INDIAN COPYRIGHT ACT 1957 DEFINES THE TERM 'COPYRIGHT'. THE SAME IS DEFINED AS THE EXCLUSIVE RI GHT TO DO OR AUTHORISE DOING THE FOLLOWING ACTS IN RESPECT OF A WORK- FOLLOWING ACTS IN RESPECT OF A WORK- RIGHT SECTION 14(A) SECTION 14(B) SECTION 14(C) SECTION 14(D) SECTION 14(E) LITERARY DRAMATIC OR MUSICAL WORK COMPUTER PROGRAMME ARTISTIC WORK CINEMATOGRAPH FILM SOUND RECORDING TO REPRODUCE Y Y Y X X TO ISSUE COPIES Y Y Y Y X TO PERFORM WORK IN PUBLIC/ TO COMMUNICATE TO PUBLIC Y Y Y Y Y TO MAKE FILM Y Y Y X X TO TRANSLATE Y Y X X X TO MAKE ADAPTION Y Y Y X X TO SELL OR COMMERCIALLY RENT X Y X Y Y TO SOUND RECORD . X X X X Y PAGE | 22 COPY OF THE INDIAN COPYRIGHT ACT 1957 IS GIVEN FRO M PAGE NO. 455 TO 503. VARIOUS CATEGORIES (..FAMILIES..) OF SU CH ARTISTIC EXPRESSIONS ARE APTLY CATEGORISED INTO VARIOUS SUB-S ECTIONS OF SECTION 14 OF THE COPYRIGHT ACT. FROM A CLOSE READI NG OF SECTION- 14 OF THE SAID ACT IT TRANSPIRES THAT; LIKELY LOSS ES ARISING FROM DUPLICATION / COPYING / ILLEGAL EXPLOITATION ETC. A RE PROTECTED FOR VARIOUS LIMBS OF ARTISTIC EXPRESSIONS; DEPENDING UP ON THE NATURE OF SUCH ARTISTIC EXPRESSIONS. FOR EXAMPLE (A) FOR ARTISTIC WORKS THERE IS NO PROTECTION FROM TR ANSLATION CONSIDERING UNLIKELINESS OF SUCH AN EVENT (B) FOR A CINEMATOGRAPH FILM THERE IS NO PROTECTION F OR (SAY) MAKING A FILM (C) .... IT IS SUBMITTED UNLESS AND UNTIL A RIGHT PROTECTED U NDER THE COPYRIGHT ACT IS NOT EXTENDED / SHARED WITH A PARTY A ND UNLESS CONSIDERATION IS RECEIVED FOR SUCH A RIGHT T HERE IS NO ANY CASE OF ROYALTY FOR L-T PURPOSE. IT IS SUBMITTE D THE LIMB FOR SALE / COMMERCIALLY RENT AS SO MADE APPLICABLE FOR SOFTWARE IN FACT ASCRIBES COPYRIGHT PROTECTION EVEN IN MAKI NG OF SUCH USE-PURPOSE COPIES. IN OTHER WORDS THE ENHANCED KITT Y OF PAGE | 23 COPYRIGHT PROTECTIONS FOR SOFTWARE ELEVATES THE SO FTWARE FAMILY AND MAKES THE SAME HIGHLY PROTECTED FROM INFRINGEMEN TS. NOW AS PER FACTS ASSESSEE HAS NOT TRANSFERRED ANY RIGHT S FOR COPYING THE SOFTWARES FOR COMMERCIAL EXPLOITATION. 2.6 - MEANING OF 'ROYALTY' AS PER DTAA BETWEEN INDIA A ND USA THE COPY OF INDIA- USA DTAA IS GIVEN FROM PAGE NO . 504 TO 525. IF ONE GOES BY THE DTAA MEANING THERE IS NO S COPE TO CONSTRUE THAT PAYMENTS RECEIVED BY THE APPELLANT CO ULD BE DESCRIBED AS ROYALTY. IN OTHER WORDS THE PRESENT SUBJ ECT MATTER IS OUTSIDE THE POSSIBLE SCOPE OF ROYALTY AS P ER THE DTAA. IT IS A TRITE-LAW THAT A SUBJECT MATTER WHIC H IS NOT TAXABLE IN ACCORDANCE WITH DTAA CAN'T BECOME TAXAB LE SUBJECT. 2.7 - COVERED ISSUE BY THE DECISION OF HONOURABLE DELHI HIGH COURT THE VERY SAME ISSUE WHETHER A SOFTWARE WITH RESTRI CTIONS OF COPYING ETC. IS A COPYRIGHT OR A COPYRIGHTED PRODUCT HAS BEEN CONSIDERED AND DECIDED BY THE HONOURABLE DELHI HIGH COUR T IN NUMBER OF DECISIONS. THE LANDMARK DECISION IN THIS R EGARD WAS THAT OF DIT V. INFRASOFT LIMITED 264 CTR 329. A C OPY OF THE SAID DECISION IS SUBMITTED IN PAPER-BOOK-LL ON 12 TH MAY 2015. PAGE | 24 APPELLANT HAS PREPARED A QUICK SUMMARY OF THE RIGHTS GRANTED AND RESTRICTIONS IMPOSED IN THE AGREEMENT INVOLVED IN THE SAID INFRASOFT (SUPRA) DECISION AND COMPARED THE SAME WITH APPELLANTS AGREEMENT. THE SAID COMPARISON IS AS UNDE R :- REASONS OF DRP-I EXPLANATION PAGE-6 (PARA-2) THAT THE RIGHT TO USE THE SOFTWARE LICENCE FALLS WI THIN AMBIT OF SECTION 9(L)(VI) KEY PROPOSITION IS DTAA DOES NOT COVER THE RIGHT T O USE SOFTWARE IN THE MEANING OF ROYALTY PAGE - 6 (PARA - 2) THAT THE NATURE OF RIGHTS IS FAR FROM SHRINK- WRAPPED ...... SINCE THE SUPPLIER (REQUIRED TO UPDATE FIX THE BUGS ETC. TOTALLY IRRELEVANT CONTENTION SINCE ISSUE INVOLVED IS WHAT IS THE FATE OF A COPYRIGHTED PRODUCT (I.E. A LICENCE H AVING RESTRICTIONS OF COPYING / DUPLICATING ETC.) ISSUE OF UPDATE / FIXING BUGS ETC. ARE TYPICAL WAR RANTIES WHICH COME WITH EVERY PRODUCT. MOREOVER THE SAME I S BESIDES THE PRESENT ISSUE. PAGE-6 (PARA-3) CONCEPT OF COPYRIGHTED PRODUCT DOES NOT FIND MENTIO N IN THE ITA / DTAA / COPYRIGHT ACT COPYRIGHTED ARTICLE IS THE RESULT OF THE COPYRIGHT ACT ITSELF. MOMENT NEGATIVE RIGHTS ARE INTRODUCED AS REGARDS CO PYING / DUPLICATING A COPYRIGHT BECOMES A COPYRIGHTED PROD UCT. MANY SUCH COPYRIGHTED PRODUCTS ARE PRESENT IN DAILY LIFE SU CH AS - RECENT BOOK CALLED ORIGIN WRITTEN BY AUTHOR DAN BRO WN RESTRICTING USERS FROM COPYING THE BOOK ETC. MUSIC CD OF (SAY) SINGER GULAM ALI WHEREIN RESTR ICTIONS ARE APPLICABLE FOR COPYING AS WRITTEN ON THE CD COVER .... AND SO ON PAGE | 25 2.8 - VARIOUS OTHER REASONS OF LEARNED AO WHILE FRAMING THE DRAFT ORDER DATED 31 ST DECEMBER 2009 THE LEARNED AO HAS TAKEN VARIOUS ALTERNATE POSITIONS. LEARNED AO STATE S THAT THE PMS SOFTWARE IS NOT ONLY A COPYRIGHT BUT ALSO A PAT ENT / PROCESS / EQUIPMENT ETC. AS SUCH PROVISIONS OF SE CTION 9(L)(VI) APPLY TO THE FACTS IN EITHER ONE OF THE SITUATION. APPELLANT HAS PAGE - 6(PARA - 4) THIS IS RATHER A COMPLEX PROPOSITION. ANY PRECEDENT HAS TO BE FOLLOWED IF FACTS ARE SIMILAR. SPECIAL BENCH DECISION IS NOT APPLICABLE SINCE FAC TS HEREIN WERE NOT CONSIDERED IN THE SAID SB CASE OF MOTOROLA PAGE - 6 (PARA - 5 AND 6) ALL THESE PROPOSITIONS ARE NO MORE TENABLE CONSIDER ING THE BINDING DECISIONS OF THE SPECIAL BENCH (IN MOTOROLA CASE) SINCE THE SAID SB DECISION HAS BEEN CONFIRMED BY TH E HONOURABLE DELHI HIGH COURT IN THE CASE OF DIT V. N OKIA NETWORKS -212 TAXMAN 68. SB DECISION IN MOTOROLA CAN'T BE FOLLOWED CONSIDERING PROVISIONS OF SECTION 115A ETC. AND CONSIDERING RESERVATIONS OF INDIA REGARDING OECD COMMENTARY. PAGE - 6 (LAST PARA) HONOURABLE DELHI HIGH COURT IN CASE OF INFRASOFT (\ (SUPRA) HAS RELIED ON HEAVILY ON THE SAID TCS RATIO. IF AS SUCH THE DRP-I OBJECTION IS NO MORE TENABLE. | TCS DECISION IS NOT RELEVANT AS THE SAME RELATES TO SALES-TAX ACT ETC. PAGE - 7 (PARA - 2) ONE OF THE DECISIONS TURNED DOWN BY THE DRP-I WAS T HE HONOURABLE DELHI ITAT DECISION IN CASE OF INFRASOFT - 125 TTJ 53. THE VERY SAME DECISION IS CONFIRMED BY THE HONO URABLE DELHI HIGH COURT REPORTED AT 220 TAXMAN 273 (COPY GIVEN IN PAPER- BOOK-LL). VARIOUS OTHER DECISIONS CITED BY ASSESSEE APPELLANT WERE TURNED DOWN STATING THAT ALL OF THESE DECISI ONS RELY ON TCS RATIO AND SINCE TCS RATIO NOT APPLICABLE EVEN THESE DECISIONS ARE ALSO NOT APPLICABLE. PAGE-7 AND PAG-8 VARIOUS OTHER DECISIONS WERE RELIED UPON WHICH TAKE A VIEW THAT SOFTWARE LICENSES PERMITTING MERE USE IS ALSO A SITUATION COVERED BY SECTION 9(L)(VI) OF ITA 1961. WITH UTMOST RESPECT THE LEARNED DRP-I OUGHT TO HAV E APPRECIATED THAT DTAA OVERRIDES ITA. AS THE DTAA I S NOT AMENDED AMENDMENTS IN ITA ARE NOT RELEVANT AS SO CONFIRMED IN VARIOUS DECISIONS OF INFRASOFT ETC. A PPELLANT IS ENCLOSING HEREWITH LIST OF VARIOUS CASES WHERE RAT IO OF INFRASOFT HAS BEEN FOLLOWED. THE SAME IS GIVEN AT P AGE NO. 535. RECENT JURISPRUDENCE TILTS CLEARLY IN FAVOUR O F THE APPELLANT. PAGE | 26 BEEN SUBMITTING THAT THE SOFTWARE LICENSE IS NOT A PATENTED TECHNOLOGY. THERE IS NO ANY GRAVE AND MATERIAL PROCE SS INVOLVED IN THE SAME. IN FACT THE PMS SOFTWARE'S OF THE APPELLANT ARE SIMPLY BUSINESS INTELLIGENT TOOLS OR MIS DATA TOOLS FOR INCREASING EFFICIENCY. FURTHER THESE SOF TWARE LICENCES ARE CERTAINLY NOT ANY EQUIPMENT. THE DRP-I HAS ALSO FOCUSED ON THE ISSUE OF COPYRIGHT V. COPYRIGHTED ARTICLE AND LEF T THE OTHER ANALOGIES OF THE LEARNED AO AT THAT. APPELLANT SUBMI TS AT THE SAME TIME THE PMS SOFTWARE LICENSE CANNOT BE A COPY RIGHT + PATENT + PROCESS + EQUIPMENT. ANALOGY OF THE LEARNE D AO IS INCORRECT. 2.9 - SUMMARY ON POINT OF COVERED ISSUE AS PER THE DATA AVAILABLE IT TRANSPIRES THERE ARE THREE DECISIONS OF THE HONOURABLE DELHI HIGH COURT WHEREI N RATIO OF INFRASOFT (SUPRA) HAS BEEN FOLLOWED. AS SUCH IT IS SUBMITTED THE SAID INFRASOFT RATIO IS DEEP ROOTED. SIMILAR VIEWS IS ALSO EXPRESSED BY THE HONOURABLE MADRAS HIGH COURT IN THE CASE OF CIT V. VINZAS SOLUTIONS INDIA P. LTD. - 392 ITR 155. THE SAID ISSUE OF SOFTWARE ROYALTY TAXATION MATTER IS POSTED FOR HEARING BEFORE THE HONOURABLE SUPREME COURT IN JANUARY 2019. THE COPY OF THE SAID ORDER IS GIVEN AT PAGE NO. 639. CONS IDERING THE'3B DECISION CONSIDERING THE JURISDICTIONAL HIGH COURT DECISIONS CONSIDERING VARIOUS HONOURABLE DELHI AND O THER ITAT DECISIONS; THE ORDER OF THE LEARNED AO AND LEARNED DRP- I MAY PLEASE BE REVERSED AND APPEALS BE ALLOWED. 21. THE LD. COUNSEL FOR THE ASSESSEE ALSO RELIED UP ON THE FOLLOWING DECISIONS :- PAGE | 27 1. QUALCOMM INCORPORATED VS. ADIT 56 TAXMANN.COM 179 2. ASPECT SOFTWARE INC. VS. ADIT 61 TAXMANN.COM 36 (DELHI TRB.) 3. PCIT VS. M TECH INDIA (P) LTD. 381 ITR 31 (DEL H C) 4. GALATEA LTD. VS. DCIT 67 TAXMANN.COM 190 (MUMBA I TRIB) 5. DATAMINE INTERNATIONAL LTD. VS. ADIT 68 TAXMANN. COM 97 6. DDIT VS. RELIANCE INDUSTRIES LIMITED 69 TAXMANN. COM 311 (MUMBAI TRIB.) 7. ADIT (IT) 3 (2) VS. BANN GLOBAL BV 71 TAXMANN. COM 213 (MUMBAI TRIB) 8. SAIC INDIA (P.) LTD. VS. DCIT 71 TAXMANN.COM 237 (DELHI TRIB.) 9. CIT VS. HALLIBURTON EXPORT INC (DEL HC) ITA NO.363/2016 & ITA NO.365/2016 10. DASSAULT SYSTEMS VS. DCIT 79 TAXMANNM.COM 205 (MUM ITAT) 11. DCIT VS. ATMEL R & D INDIA (P.) LTD. 74 TAXMANN.COM 106 (CHENNAI TRIB.) 12. DCIT VS. BOMBARDIER TRANSPORTATION INDIA (P.) L TD. 77 TAXMANN.COM 166 (AHEMDABAD TRIB.) 13. CIT VS. VINZAS SOLUTION INDIA( P. ) LTD. 77 TAXMANN.COM 279 (MADRAS HC) 14. ADIT VS. FIRST ADVANTAGE (P.) LTD. 77 TAXMANN.COM 195 (MUMBAI ITAT) 15. VISTEON TECHNICAL & SERVICES CENTRE (P.) LTD. V . DCIT 81 TAXMANN.COM 390 (CHENNAI ITAT) PAGE | 28 16. DDIT VS. SHELL INFORMATION TECHNOLOGY INTERNATI ONAL BV 80 TAXMANN.COM 64 (DELHI ITAT) 17. ADIT (INTL TAX.) VS. HAMPSON RUSSEL LTD. 88 TAXMANN.COM 654 (DELHI ITAT) 18. ACIT VS. LANDMARKS GRAPHICS CORP. 87 TAXMANN.COM 311 (DELHI ITAT) 19. BLACK DUCK SOFTWARE INC. VS. DCIT (INTL TAX.) 86 TAXMANN.COM 62 (DELHI ITAT) 20. QUALCOMM INCORPORATED VS. DDIT (INTL TAX.) 93 TAXMANN.COM 80 (DELHI ITAT) 21. CIENA INDIA P. LTD. VS. ITO (INTL TAX.) 96 TAXMANN.COM 17 (DELHI ITAT) 22. ENGINEERING ANALYSIS CENTRE OF EXCELLENCE P. L TD. CIVIL APPEAL NO.8733-8734/2018 (SC). 23. DIT VS. INFRASOLT LTD. (220 TAXMAN 273) 24. HALLIBURTON EXPORT INC. VS. ADIT (2014) 43 TAXM ANN.COM 223 DELHI ITAT 22. THE LD. DR ON THE OTHER HAND RELIED ON THE ORDE R OF THE AO / DRP AND FILED THE FOLLOWING WRITTEN SYNOPSIS :- D. TAXATION OF SOFTWARE ROYALTY - THE ASSESSEE CLAIMS THE NATURE OF ITS TRANSACTIONS WITH INFOSYS AND OTHER CLIENTS AS ONE OF SALE SIMPLICITOR INVOLVING THE SALE/TRANSFER OF A COPYRIGHTED MATERIAL/PRODUCT RAT HER THAN A TRANSFER OF COPYRIGHT. HEAVY RELIANCE HAS BEEN PLAC ED BY THE ASSESSEE ON THE DECISION OF HONBLE DELHI HIGH COUR T IN THE CASE OF INFRASOFT LTD. [2013-TII-50-HC-DEL-INTL] HO WEVER NOWHERE IT HAS BEEN ESTABLISHED THAT THE FACTS OF TH E CASE OF PAGE | 29 THE ASSESSEE ARE IDENTICAL TO THAT OF INFRASOFT. MOR EOVER THE HONBLE DELHI HIGH COURT IN THE CASE OF INFRASOFT H AD ALSO OBSERVED - 69. THE TRIBUNAL HAS HELD AND RIGHTLY SO THAT THE QUESTION WHETHER THERE WAS A TRANSFER OF A COPYRIGHT RIGHT O R ONLY OF A COPYRIGHTED ARTICLE MUST BE DETERMINED TAKING INT O ACCOUNT ALL THE FACTS AND CIRCUMSTANCES OF THE CASE AND THE BENEFITS AND BURDEN OF OWNERSHIP WHICH HAVE BEE N TRANSFERRED. ACCORDINGLY IN THE FOLLOWING PARAGRAPHS THE FACTS OF THE PRESENT CASE ARE EXAMINED IN THE LIGHT OF THE DECISIO N OF HONBLE HIGH COURT IN THE CASE OF INFRASOFT LTD. I. NATURE OF CONTRACT - IT MAY BE NOTED THAT THE CLIENTS OF THE ASSESSEE LIKE INFOSYS TECH MAHINDRA VIRTUS A 3I INFOTECH ETC ARE ENGAGED IN THE BUSINESS OF DEVELOP ING SOFTWARE THEMSELVES. AS EXPLAINED IN THE FOLLOWING PARAGRAPHS THE AGREEMENT BETWEEN THE ASSESSEE AND ITS CLIENTS ARE MORE IN THE NATURE OF SOFTWARE DEVELOP MENT AGREEMENTS THAN PURE SALE OF SOFTWARES AS GOODS. THE CONTRACT/AGREEMENT BETWEEN THE ASSESSEE AND INFOSYS [PAPER BOOK-3] AND MORE SPECIFICALLY THE STATEMEN T OF WORK [P.295 TO 298] AND EXHIBIT-C [P.293] WHEN ANALYSED CLEARLY BRINGS OUT THE FALLACY IN THE ASS ESSEES CONTENTION THAT THE TRANSACTION IS A 'SALE SIMPLICI TOR. AS PER THE AGREEMENT THE ASSESSEE NOT ONLY PROVIDES I NFOSYS ITS PROPRIETARY SOFTWARE IT ALSO PROVIDES BOTH THE SOURCE CODE [CL. 1.4 P.270; CL. 3(D) OF STATEMENT OF WOR K P.296; CL. 9.1 P.280 & CL.9.3 P.281]AS WELL AS THE OBJEC T CODE [CL. 2.1 (IV) P.271] OF SUCH SOFTWARE. THE STATEME NT OF WORK PAGE | 30 CLEARLY HIGHLIGHTS THE DUTIES AND RESPONSIBILITIES OF THE ASSESSEE AS THAT OF AN INTEGRATOR WHO CUSTOMIZES AN D INTEGRATES THE SOFTWARE SUPPLIED BY IT WITH THE SOF TWARE DEVELOPED BY INFOSYS. SUCH CUSTOMIZATION AND INTEGR ATION OF BOTH THE SOFTWARES IS A PREREQUISITE FOR CREATIN G ADAPTATIONS &DERIVATIVES. [CL. 2.1 (II) P.271; CL. 3.1(B) P.272; CL. 4 P.273; STATEMENT OF WORK P. 295-296 AND EXHIBIT-E P.300] THE ABOVE OBSERVATION THAT THE AGREEMENT IS SOMETHING MORE THAN A PURE SALE SIMPL ICITOR IS FURTHER STRENGTHENED BY THE PAYMENT TERMS AS PER EXHIBIT-C [P.293] WHICH PROVIDES FOR PAYMENTS ON THE BASIS OF MILESTONES/PHASES [ALSO CL.3.1(A) P.272] AS WELL AS AFTER FINAL ACCEPTANCE BY INFOSYS. IN FACT TH ERE IS A PROVISION OF PAYMENT OF BONUS ON COMPLETION OF ORGANIZATION WIDE ROLL OUT AND SATISFACTORY FE EDBACK FROM THE CLIENT AS WELL AS END USERS. ALL THE ABOVE FACTS CLEARLY PROVES THA T THE AGREEMENT BETWEEN THE ASSESSEE AND THE CLIENT IS NO T IN THE NATURE OF A PURE SALE SIMPLICITOR OF SHRINK- WRAPPED/OFF-THE-SHELF SOFTWARE AS CLAIMED BY THE ASSESSEE BUT ONE OF DEVELOPING CUSTOMIZING & INTEG RATING THE SOFTWARE OF THE ASSESSEE WITH THAT OF THE CLIEN T FOR THE ULTIMATE USE BY THE END-USERS. THIS IS ONE OF THE M OST SIGNIFICANT DIFFERENCES BETWEEN THE FACTS IN THE CA SE OF INFRASOFT & THAT OF THE ASSESSEE. II. SIGNIFICANCE OF SOURCE & OBJECT CODE & CREATION OF DERIVATIVE WORKS - ANOTHER IMPORTANT POINT OF DEPARTURE FROM THE FACTS IN THE CASE OF INFRASOFT IS THE PROVISION OF SOURCE CODE & OBJECT CODE OF THE SUPPLIED SOFTWARE TO THE CLIENT. AFTER BECOMING A PARTY TO THE AGREEMENT ON TRADE-REL ATED PAGE | 31 ASPECTS OF IP RIGHTS (TRIPS) INDIA HAS SIGNIFICANT LY AMENDED ITS IP LAWS TO COMPLY WITH VARIOUS REQUIREMENTS SET OUT IN TRIPS. ARTICLE 27(1) OF TRIPS STATES THAT PATENT PR OTECTION FOR NEW INVENTIVE AND INDUSTRIALLY APPLICABLE INVENTION S MUST BE AVAILABLE WITHOUT DISCRIMINATION BASED ON THE TECHNI CAL FIELD OF AN INVENTION. IN RESPECT OF SOFTWARE ARTICLE 10(1) OF TRIPS MANDATES THE PROTECTION OF COMPUTER PROGRAMS WHETH ER IN SOURCE CODE OR OBJECT CODE AS LITERARY WORKS UN DER THE BERNE CONVENTION TO WHICH INDIA HAS ALSO ACCED ED. IT IS IN THIS CONTEXT THAT THE IMPORTANCE OF THE PROVI SIONS OF THE AGREEMENT MAKING AVAILABLE THE SOURCE & OBJECT CODES TO THE LICENSEE MUST BE EXAMINED. THESE ARE THE CODES WHICH CAN BE USED TO ADAPT CUSTOMIZE AND INTEGRATE THE SYSTEMS OF THE CLIENT WITH THAT OF THE ASSESSEE SO AS TO ENABLE TH E CLIENT TO CREATE/PREPARE/DEVELOP DERIVATIVE SOFTWARES/PROGRAMS OR NEW PRODUCTS WHICH CAN BE USED BY THE END USERS OR CAN B E COMMERCIALLY EXPLOITED. CL.2.1 (II) R.W. CL. 3.1(B) OF THE AGREEMENT CLEARLY PROVIDES THAT INFOSYS CAN MODIFY AND PREPARE DERIVATIVE WORKS BASED ON THE SOFTWARE [SUPPLIED BY THE ASSESSEE] INCLUDING WITHOUT LIMI TATION INCORPORATING THE SOFTWARE IN WHOLE OR IN PART INT O INFOSYSS OWN PRODUCTS AND DEVELOPING NEW PRODUCTS BASED ON THE SOFTWARE. THIS IS A VERY POWERFUL PROVISION WHICH GIVES THE RIGHT TO THE CLIENT NOT ONLY TO CRE ATE DERIVATIVE WORKS BUT ALSO TO INCORPORATE THE SOFTWARE SUPPLIE D BY THE ASSESSEE IN THE EXISTING PRODUCTS AND NEW PRODUCT S TO BE DEVELOPED BY THE CLIENT. IT IS IN THE CONTEXT OF THES E PRODUCTS THAT THE PROVISION OF BONUS ON THE BASIS OF FEEDBA CK FROM THE END-USERS MUST BE LOOKED AT. PAGE | 32 III. COPYING & OWNERSHIP - THE THIRD IMPORTANT DISTINGUISHING FEATURE OF ASSESSEES AGREEMENT WITH INFOSYS RELATE TO THE COPYING OF AND OWNERSHIP OVER THE SOFTWARE SUPPLIED B Y THE ASSESSEE AND DERIVATIVE WORKS BASED UPON SUCH SOFTWARE . AS PER CLAUSE 2.1 [P.271] THE SOFTWARE CAN BE USED NOT ONLY BY THE ASSESSEE BUT ALSO BY ITS SUBSIDIARIES EMPLOYE ES AND EVEN ITS CONTRACTORS. ACCORDINGLY THERE IS NO FIXED LIMI T ON THE NUMBER OF COPIES MADE/USERS AS LONG AS THE CLIENT P AYS ADDITIONAL LICENSE FEE AS PER EXHIBIT-C. [P.293] HO WEVER ONCE THE NUMBER OF USERS EXCEED 100 000 NO FURTHER ADDIT IONAL LICENSE FEE IS PAYABLE. TOWARDS THIS END THE ASSESS EE WARRANTS [UNLIKE INFRASOFT] THAT THE SOFTWARE SHALL NOT CONTAIN ANY SOFTWARE LOCKS SYSTEM FORECLOSURE FEATURES TI ME BOMBS OR ENCRYPTIONS [CL.6 4 P.278]AS REGARDS OF THE OWNERSH IP OF THE DERIVATIVES AND INTEGRATION CODES DEVELOPED BY THE ASS ESSEE FOR INFOSYS CL.4.4 [P.274] PROVIDES THAT CODE MODUL ES APIS OR LIKE MATERIALS THAT ARE DESIGNED TO INTEGRATE THE SO FTWARE WITH INFOSYS PRODUCTS... (COLLECTIVELY INTEGRATION CODE) INFOSYS WILL OWN ALL WORLDWIDE RIGHT TITLE AND INTEREST IN AND T O ALL SUCH INTEGRATION CODE. DIGITE WILL ASSIGN TO INFOSYS ALL OF ITS RIGHT TITLE AND INTEREST IN AND TO ALL SUCH INTEGRATION CODE INCL UDING ALL WORLDWIDE INTELLECTUAL PROPERTY RIGHTS THEREIN. SIM ILARLY CL.11.3 [P.282] PROVIDES THAT IN THE EVENT OF TERMIN ATION OF THE AGREEMENT INFOSYS SHALL BE ENTITLED TO RETAIN AND WITHHOLD AND USE WITHOUT ANY RESTRICTIONS THE SOFTWARE SOFTWARE CORE DERIVATIVES AND SOFTWARE DERIVATIVES. MOREOVER THE A GREEMENT PROVIDES THAT THE ASSESSEE SHALL REFRAIN FROM PROV IDING SUCH SOFTWARE AND SOFTWARE CORE DERIVATIVES TO ANY THIRD PA RTY AND PAGE | 33 IN THE EVENT OF ANY BREACH TO THIS THE ASSESSEE IS LIABLE TO PAY LIQUIDATED DAMAGES TO INFOSYS. IV. COMMERCIAL EXPLOITATION - IT HAS ALREADY BEEN DISCUSSED EARLIER THAT THE AGREEMENT PERMITS AND THE ACCESS TO THE SOURCE CODE ALLOWS INFOSYS TO EMBED AND INCORPORA TE WHOLE OR PART OF THE SOFTWARE INTO INFOSYS OWN PRODUCTS A ND DEVELOPING NEW PRODUCTS BASED ON THE SOFTWARE [CL.2.1 (II) P.271] IT HAS ALSO BEEN HIGHLIGHTED THAT THE ASSESS EE WILL RECEIVE A BONUS ON THE BASIS OF END USER SATISF ACTION OF THE PRODUCTS WHERE THE SOFTWARE HAS BEEN INCORPORATED. I T WAS ALSO HIGHLIGHTED THAT INFOSYS WILL OWN ALL WORLDWIDE RIGHT TITLE AND INTEREST IN AND TO ALL SUCH INTEGRATION CODE AND TH E ASSESSEE WILL ASSIGN TO INFOSYS ALL OF ITS RIGHT T ITLE AND INTEREST IN AND TO ALL SUCH INTEGRATION CODE INCLUDING ALL WORLDWIDE INTELLECTUAL PROPERTY RIGHTS THEREIN. MOREOVER THE RE ARE NO RESTRICTIONS TO THE NUMBER OF COPIES/USERS TO THE S OFTWARE [INCLUDING INFOSYS SOFTWARES WHERE THE SOFTWARE HAS BEEN EMBEDDED]. ALL THESE PROVISIONS CLEARLY ESTABLISH TH E COMMERCIAL EXPLOITATION OF THE SOFTWARE BY INFOSYS. IN FACT CL.13.4 [P.283] PROVIDES THAT INFOSYS AND THE ASSES SEE SHALL MAKE ALL COMMERCIALLY REASONABLE EFFORTS TO ENTER I NTO A PRODUCT MARKETING/DISTRIBUTION AGREEMENT UNDER WHICH THE SOF TWARE (INCLUDING SOFTWARE DERIVATIVES/SOFTWARE CORE DERIVA TIVES) WILL BE OFFERED TO OTHER ENTITIES IN THE MARKET FOR LICEN SING.' TOWARDS THIS END CL. 10 [P.281] PROVIDES FOR THE NON-SOLIC ITATION OF THE EMPLOYEES OF EACH OTHER. IN THE LIGHT OF ABOVE IT MAY BE SEEN THAT THE NATU RE OF THE TRANSACTION BETWEEN THE ASSESSEE AND INFOSYS IS MATE RIALLY DIFFERENT FROM THE FACTS OF INFRASOFT. COMING BACK TO LEGAL PAGE | 34 PRINCIPLES ENUNCIATED BY THE HONBLE HIGH COURT IN T HE CASE OF INFRASOFT THE HONBLE HIGH COURT HAD HE FOLLOWING OBSERVATIONS TO DISTINGUISH A COPYRIGHT FROM A COPYRIGHTED PRODUCT . 67 ....IF THE TRANSFEREE ACQUIRES A COPY OF A COMPU TER PROGRAMME BUT DOES NOT ACQUIRE ANY OF THE RIGHTS IDENTIFIED IN CERTAIN SECTIONS (OF THE U.S. REGULAT IONS) THE REGULATION CLASSIFIED THE TRANSACTION AS THE TRANSF ER OF A COPYRIGHTED ARTICLE. IF A TRANSFER OF A COMPUTER PROGRAMME RESULTS IN THE TRANSFEREE ACQUIRING ANY O NE OR MORE OF THE LISTED RIGHTS IT IS A TRANSFER OF A COPYRIGHT RIGHT. IF A PERSON ACQUIRES A COPY OF A COMPUTER PROGRAMME BUT DOES NOT ACQUIRE ANY OF THE FOUR LIST ED COPYRIGHT RIGHTS HE GETS ONLY A COPYRIGHTED ARTICL E BUT NO COPYRIGHT. THE FOUR RIGHTS BEING: (I) THE RIGHT TO MAKE COPIES OF THE COMPUTER PROGRA MME FOR PURPOSES OF DISTRIBUTION TO THE PUBLIC BY SALE OR O THER TRANSFER OF OWNERSHIP OR BY RENTAL LEASE OR LEND ING. [ (II) THE RIGHT TO PREPARE DERIVATIVE COMPUTER PROGRAMMES BASED UPON THE COPYRIGHTED COMPUTER PROGRAMME (III) THE RIGHT TO MAKE A PUBLIC PERFORMANCE OF THE COMPUTER PROGRAMME ) (IV) THE RIGHT TO PUBLICALLY DISPLAY THE COMPUTER PROGRAMME. ACCORDINGLY THE HONBLE HIGH COURT PROCEEDED ON TO EXAMINE THE FACTS OF THE CASE IN THE LIGHT OF THE FOLLOWING TESTS- PAGE | 35 COPYING TEST - WHETHER THE LICENSE GRANTED BY THE ASSESSEE IS LIMITED TO THOSE NECESSARY TO ENABLE THE LICENSEE TO OPERATE THE PROGRAM OR SOMETHING MORE THAN IT. [PARA-88] - PURPOSE TEST - WHETHER THE PURPOSE OF THE LICENSE OR THE TRANSACTION IS ONLY TO RESTRICT USE OF THE COPYRIGH TED PRODUCT FOR INTERNAL BUSINESS PURPOSE [PARA-89] OR THE LICENSEE WAS PERMITTED TO USE AND EXPLOIT THE SAME COMMERCIALLY I. E. LOAN/RENT/SALE/SUB-LICENSE OR TRANSFER THE COPY OF SOFTWARE TO ANY THIRD PARTY WITHOUT THE CONSENT OF THE LICENSOR [PARA- 92] THE CASE OF THE ASSESSEE WHEN EXAMINED FROM THE ABO VE PERSPECTIVE CLEARLY ESTABLISHES THAT THE TRANSFER I S THAT OF A COPYRIGHT AND NOT A COPYRIGHTED MATERIAL. THE FO LLOWING FACTS ARE THE CLEAR INDICATORS OF THIS CONCLUSION - NATURE OF TRANSACTION - IT HAS ALREADY BEEN DISCUSSED EARLIER THAT THE AGREEMENT BETWEEN THE ASSESSEE AND INFOSYS & OTHER CUSTOMERS IS MORE IN THE NATURE OF A SOFTWARE DEVEL OPMENT AGREEMENT THAN IN THE NATURE OF SALE SIMPLICITOR AND THE AS CONTENTION OF THE ASSESSEE THAT THE PRODUCT TRANSFER RED IS IN THE NATURE OF GOODS IS NOT TENABLE. AS HAS BEEN OBSER VED BY THE HONBLE SPECIAL BENCH OF THIS TRIBUNAL IN THE CASE OF MOTOROLA INC. [2005-TII-10-ITAT-DEL-SB-INTL1 THE APPELLANT HAS TRANSFERRED SOMETHING MORE THAN MERELY A COPYRIGH TED ARTICLE. ADAPTATION & DERIVATIVES - AS HAS BEEN STATED EARLIER THE HONBLE HIGH COURT IN PARA- 67 OF ITS ORDER QUOTED U S REGULATIONS AS PER WHICH IF A TRANSFER OF A COMPUTER PROGRAMME RESULTS IN THE TRANSFEREE ACQUIRING ANY ONE OR MORE OF THE LISTED RIGHTS IT IS A TRANSFER OF A COPYRIGHT RIGHT. IN THE CASE OF THE ASSESSEE THERE IS NO DISPUTE OR DOUBT THAT THE RIGHT TO PREPARE DERIVATIVE COMPUTER PAGE | 36 PROGRAMMES BASED UPON THE COPYRIGHTED COMPUTER PROGRAMME IS ONE OF SUCH RIGHTS ASSIGNED TO THE CLIENTS BY THE ASSESSEE. ACCORDINGLY THE TRANSACTION BETWEEN THE ASSESSEE A ND INFOSYS AND OTHER CLIENTS INVOLVES TRANSFER OF COPYRIGHT R ATHER THAN COPYRIGHTED MATERIAL. IN THIS REGARD REVENUE PLACE S RELIANCE ON THE DECISION OF HONBLE ITAT DELHI IN THE CASE OF ELEKTROBIT AUTOMOTIVE GMBH[2018-TII-166-ITAT-DEL-INTL1 WHEREIN ON IDENTICAL SITUATION IT WAS HELD THAT THE RECEIPTS BY THE ASSESSEE ARE IN THE NATURE OF ROYALTY ON ACCOUNT OF TRANSFER OFCOPYRIGHT THROUGH DERIVATIVE AND EMBEDDED SOFTWAR E PROGRAMS. COPYING TEST - IT HAS ALREADY BEEN HIGHLIGHTED EARLIER THAT THE CLIENT HAS BEEN PERMITTED TO MAKE UNLIMITED COPIES/US ERS AS LONG AS ADDITIONAL LICENSE FEE IS PAID. MOREOVER S UCH ADDITIONAL LICENSE FEE IS NO PAYABLE IF THE NUMBER OF USERS EX CEEDS 100 000. FURTHERMORE THE CLIENT IS AT LIBERTY TO E NABLE AND ALLOW ITS EMPLOYEES SUBSIDIARIES AND THIRD PARTY CON TRACTORS WORKING FOR IT TO USE THE SOFTWARE. SIMILARLY PROV ISION OF SOURCE CODE PERMITS THE CLIENT TO EMBED WHOLE OR PART OF ASS ESSEES SOFTWARE IN THE PRODUCTS DEVELOPED BY IT SO THAT THE END USERS AND OTHER CUSTOMERS USING CLIENTS SOFTWARE CAN USE THE ASSES SEES SOFTWARE AS WELL. IT CANNOT BE SAID THAT THE LICENSEE IS COPYING THE PROGRAM ONTO ITS COMPUTER'S HARD DRIVE OR RANDOM ACCESS MEMORY FOR MAKING AN ARCHIVAL COPY. PROVISIO N OF THE SOURCE & OBJECT CODES TO THE CLIENT ENSURES THAT THE LICENSE GRANTED BY THE ASSESSEE IS NOT LIMITED TO THOSE NECES SARY TO ENABLE THE LICENSEE TO OPERATE THE PROGRAM AND IN R EALITY IS SOMETHING MORE THAN IT. PAGE | 37 PURPOSE TEST - IT HAS BEEN ELABORATELY DISCUSSED EARLIER THE USE OF THE SOFTWARE BY THE LICENSEE IS NOT RESTRICT ED TO THE USE OF THE PRODUCT FOR ITS INTERNAL BUSINESS PURPOSE ONL Y. ALTHOUGH IT IS CLAIMED THAT AS PER CL.2.2 [P.271] EXCEPT AS PROVIDED/AUTHORISED IN MLA THE LICENSEE CANNOT LEASE LEND OR RENT THE SOFTWARE TO THE THIRD PARTIES IN REALITY THE PROVISIONS OF MLA ITSELF PERMIT THE LICENSEE TO ALLOW THIRD PAR TY USER OF THE SOFTWARE EITHER INDEPENDENTLY OR THROUGH EMBEDDED FORM ALONG WITH THE LICENSEES PRODUCTS. THE LICENSEE THUS CAN ALLOW ANY NUMBER OF USERS TO USE THE PRODUCT EITHER (I) BY ENGAGING/GETTING INVOLVED SUCH USER IN THE BUSINESS OF THE LICENSEE I.E. SUBSIDIARIES EMPLOYEES AND CONTR ACTORS AND (II) BY ANY OTHER PERSON BY SUPPLYING/USING LIC ENSEES OWN PRODUCTS EMBEDDED WITH THE SOFTWARE. IN FACT INTEGRATION OF THE SOFTWARE SUPPLIED BY THE ASSESSEE WITH INFOSYS OWN SOFTWARE AND EMBEDDING OF THE ASSESSEE S SOFTWARE IN THE PRODUCTS OF INFOSYS AND OTHER CUSTOME RS FOR THE THIRD PARTY USERS/CUSTOMERS CLEARLY ESTABLISH THE COMMERCIAL USE AND EXPLOITATION OF THE SOFTWARE BY THE LICENSEE. IN FACT THE AGREEMENT EXPLICITLY PROVIDES FOR AND ENCOURAGES SUCH JOINT COMMERCIAL EXPLOITATION OF THE SOFTWARE. SUCH COMMERCIAL USE OF THE SOFTWARE AND FOR THAT MATTER THE PURPO SE OF THE LICENSE IN NO STRETCH OF IMAGINATION CAN BE V IEWED OR TREATED AS A RESTRICTED USE OF THE PRODUCT FOR I NTERNAL BUSINESS PURPOSE OF THE LICENSEE. THUS APPLICATION OF VARIOUS TESTS AS REGARDS OF RIG HTS TO OWNERSHIP COPYING COMMERCIAL EXPLOITATION ETC. AS HAS BEEN DISCUSSED ABOVE CLEARLY ESTABLISHES WHAT HONBL E AAR HELD IN THE CASE OF DASSAULT SYSTEMS [2010-TII-02-ARA-INTL] THAT PAGE | 38 THE GRANTEE/LICENSEE PRACTICALLY STEP INTO THE SHOES OF THE OWNER/GRANTOR/LICENSOR AND HE ENJOYS THE COPYRIGHT TO THE EXTENT OF ITS GRANT TO THE EXCLUSION OF OTHERS. IN ADDITION TO THE DECISIONS IN THE CASE OF INFASOFT LT D. [SUPRA] AND ELEKTROBIT AUTOMOTIVE GMBH [SUPRA] REVENUE RELIES UP ON THE FOLLOWING DECISIONS - I. AIRPORT AUTHORITY OF INDIA (AAR NO.819 OF 2009) II. CIT VS. SYNAPSIS INTERNATIONAL OLD LTD. (212 TAXMAN 454)(HC KARNATAKA) III. CITRIX SYSTEMS ASIA PACIFIC PTY (343 ITR 1 AAR)(AAR NO. 822 OF 2009) IV. SKILLSOFT IRELAND LTD. (AAR NO. 985 OF 2010) V. CIT VS SAMSUNG ELECTRONICS CO. LTD & OTHERS (345 ITR 499) (KAR) VI. VERIZON COMMUNICATIONS SINGAPORE PTE LTD VS ITO (361 ITR 575)(MAD) 23. THE LD. DR DREW THE ATTENTION OF THE BENCH TO T HE FOLLOWING OBSERVATION AT PARA 3.1 OF THE ORDER OF THE AO :- 3.1 THE SOFTWARE IS DELIVERED AT THE SITE OF THE END CUSTOMER. THERE IS A SPECIFIC ROIL OUT PLAN AND INSTALLATION A ND IMPLEMENTATION PROGRAMME. DURING THE SAME THE EMPLO YEES OF THE CUSTOMER ARE GIVEN TRAINING ON HOW TO USE THE S AME. THE SERVICES INCLUDING UPDATES MAINTENANCE SUPPORT ET C. ARE PART & PARCEL OF THE CONTRACT. THE SAME IS ALSO VERIFIAB LE FROM THE NATURE OF RECEIPTS OF THE ASSESSEE: PAGE | 39 24. HE SUBMITTED THAT IT IS NOT A SALE SIMPLICATOR. IN ADDITION TO COPY RIGHT SERVICES SERVICE HAS BEEN PROVIDED. WHETHER THE SERVICES ARE TO BE TAXED AS BUSINESS RECEIPTS OR RO YALTY HAS BEEN DISCUSSED BY THE AO THOROUGHLY AND HE HELD THAT THE CONSIDERATION RECEIVED BY THE ASSESSEE FALLS IN THE CATEGORY OF ROYALTY BOTH UNDER THE ACT AS PER SECTION 9(1) (VI) CLAUSE (I) (III) THE DETAILS AS PROVIDED OF SUMS INVOICED BY THE ASS ESSEE ARE: INFOSYS HCL TOTAL (USD) LICENSE $ 200 000.00 $ 200 000.00 PROFESSIONAL SERVICES $ 208 436.61 $ 14 249.47 222 686.08 ANNUAL MAINTENANCE CONTRACT $ 25 898.00 $ 15 539.00 41 437.00 TOTAL (USD) $ 434 334.61 $ 29 788.47 464 123.08 ONCE THE LICENSE IS GRANTED THE ASSESSEE IS RESPONSIBLE TO MAINTAIN IT AS IT IS THEIR PROPRIETO RY PRODUCT. AFTER THE GRANTED OF LICENSE THE ASSESSEE KEEPS ON BILLING THE CUSTOMERS. THERE ARE NUMBER OF SOFTWARE AND SOLUTIONS ON THE WEBSITE OF THE ASSESSEE THEN IN EACH PRODUCT / SOLUTION NUMBER OF MODULES ARE INTEGRATED. THE ASSESSEE HAS FILED ONLY ONE CONTRACT DURING THE PROCEEDINGS. THIS CONTRACT I S WITH INFOSYS AND IS IN RELATION TO THE PROJECT MANAGEMENT SOFTWARE THAT IS WHY ONLY THE DETAILS OF PROJECT MANAGEMENT SOFTWARE HAVE BEEN DESCRIBED ABOVE. PAGE | 40 (IVA) AND (V) OF EXPLANATION 2 AND ARTICLE 12 (3) ( A) AND 12 (3) (B) OF INDO US DTAA. HE SUBMITTED THAT THE AGREEMENT IN T HE INSTANT CASE PROVIDES FOR AUDITING AND DOCUMENTATION. HAD I T BEEN A SALE SIMPLICITOR NO QUESTION OF AUDITING ARISES. HE SUB MITTED THAT THE SUPPLY OF THE SOFTWARE IN THE INSTANT CASE GIVES FU LL FREEDOM TO CUSTOMERS TO COMMERCIALLY EXPLOIT THE SAME. FURTHE R PAYMENT OF BONUS IS NOT POSSIBLE IN CASE OF A SIMPLE SALE. REL YING ON THE FOLLOWING DECISIONS HE SUBMITTED THAT THE ORDER OF DRP/ AO BE UPHELD. 1. ELEKTROBIT AUTOMOTIVE GMBH VS. DDIT 2018-TII-166 - ITAT-DEL. 2. PINE LABS (P.) LTD. VS. GEMALTO TERMINALS INDIA (P) LTD. & ORS. FAO (OS) 635 OF 2009 ORDER DATED 03.08.2011 25. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES PERUSED THE ORDERS OF THE AO AND DRP AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSI DERED THE VARIOUS DECISIONS CITED BEFORE US. WE FIND THE ASS ESSEE IN THE INSTANT CASE IS ENGAGED IN SALE OF LICENSES OF ITS SOFTWARE PRODUCT CALLED AS PROJECT MANAGEMENT SOFTWARE (PMS). THE PM S IS CONSIDERED AS A BI TOOL I.E. BUSINESS INTELLIGENCE TOOL. IT ASSISTS THE USERS IN REGULATING AND EFFECTIVELY UTILIZING P ROGRAMMERS TIME ON A COLLECTIVE BASIS WITH EFFICIENCY. WE FIND THE AMOUNT RECEIVED BY THE ASSESSEE FROM ITS CUSTOMERS FOR SALE OF SOFT WARE PRODUCTS / LICENSES WERE TREATED BY THE AO AS ROYALTY AND HE T AXED THE SAME AT APPLICABLE RATE OF TAX. ACCORDING TO THE AO AND LD. DR THE SOFTWARE IS DELIVERED AT THE SITE OF THE END CUSTOM ER. THERE IS A SPECIFIC ROLE OUT PLAN AND INSTALLATION AND IMPLEME NTATION PAGE | 41 PROGRAMME. DURING THE SAME THE EMPLOYEES OF THE CUS TOMER ARE GIVEN TRAINING ON HOW TO USE THE SAME. THE SERVICES INCLUDING UPDATES MAINTENANCE SUPPORT ETC ARE PART AND PARCE L OF THE CONTRACT. ONCE THE LICENSE IS GRANTED THE ASSESSEE IS RESPONSIBLE TO MAINTAIN IT AS IT IS THEIR PROPRIETARY PRODUCT. AFTER GRANTING OF LICENSE THE ASSESSEE KEEPS ON BILLING THE CUSTOMER S. THE SOFTWARE FOR USE OF WHICH THE LICENSE IS GRANTED QUALIFIED T O BE TECHNICAL AND COMMERCIAL EQUIPMENT. THE APPLICATION OF VARIOU S TESTS AS REGARDS OF RIGHT TO OWNERSHIP COPYING COMMERCIAL EXPLOITATION ETC. CLEARLY ESTABLISH THAT THE GRANTEE/ LICENSE PR ACTICALLY STEPS INTO THE SHOES OF THE OWNER/GRANTOR/LICENSOR AND HE ENJOYS THE COPY RIGHT TO THE EXTENT OF ITS GRANT TO THE EXCLUS ION OF OTHERS. THEREFORE THE CONSIDERATION RECEIVED BY THE ASSESS EE FALLS IN THE CATEGORY OF ROYALTY BOTH U/S. 9(1) (VI) OF THE IT A CT 1961 AND ARTICLE 12 (3) (A) AND ARTICLE 12 (3) (B) OF INDO U S DTAA. 25.1 IT IS THE SUBMISSION OF THE LD. COUNSEL FOR TH E ASSESSEE THAT THE ASSESSEE BEING A USA COMPANY ENTERS INTO A GREEMENTS WITH THE CUSTOMERS FOR SALE OF LICENSES. AS PER VAR IOUS CLAUSES IN THE AGREEMENT THE ASSESSEE RETAINS THE OWNERSHIP OF INTELLECTUAL PROPERTY RIGHTS RELATING TO THE SOFTWARE LICENSES S OLD TO CUSTOMERS. THE ASSESSEE PERMITS THE CUSTOMERS TO MERELY USE TH E SOFTWARE LICENSES FOR THEIR BUSINESS NEED. THE ASSESSEE REST RICTS ITS CUSTOMERS FROM DUPLICATING/ ADOPTING ETC OF THE SOF TWARE PRODUCTS. IT IS THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT THE MOMENT RESTRICTIONS ARE PUT REGARDING COPYING/DUPLICATING/REPRODUCING ETC A COPY RIGHT GE TS CONVERTED INTO A COPY RIGHTED PRODUCT. HOWEVER IN THE INSTA NT CASE THE PAGE | 42 ASSESSEE DOES NOT PART WITH ANY COPY RIGHT TO THE C USTOMERS BUT MERELY EXTENDS A COPY RIGHTED PRODUCT TO THE CUSTOM ERS. IT IS ALSO HIS SUBMISSION THAT UNLESS AND UNTIL A RIGHT PROTEC TED UNDER THE COPY RIGHT ACT IS NOT EXTENDED / SHARED WITH A PART Y AND UNLESS CONSIDERATION IS RECEIVED FOR SUCH A RIGHT THERE I S NO CASE OF ANY ROYALTY FOR IT PURPOSE. ACCORDING TO THE LD. AR TH E LIMB FOR SALE / COMMERCIALLY RENT AS SO MADE APPLICABLE FOR SOFTWAR E INFACT ASCRIBES COPYRIGHT PROTECTION EVEN IN MAKING OF SUC H USE PURPOSE COPIES. ACCORDING TO HIM THE ENHANCED KITTY OF COPYRIGHT PROTECTIONS FOR SOFTWARE ELEVATES THE SOFTWARE FAM ILY AND MAKES THE SAME HIGHLY PROTECTED FROM INFRINGEMENTS. IT IS ALSO HIS SUBMISSION THAT THE ASSESSEE HAS NOT TRANSFERRED AN Y RIGHTS FOR COPYING THE SOFTWARES FOR COMMERCIAL EXPLOITATION. 26. WE FIND SOME FORCE IN THE ARGUMENTS OF THE LD. COUNSEL FOR THE ASSESSEE. THE TERMS ROYALTIES AS USED IN ARTICL E 12 (3) (A) AND 12 (3) (B) READS AS UNDER :- 3. THE TERM 'ROYALTIES' AS USED IN THIS ARTICLE MEANS : (A) PAYMENTS OF ANY KIND RECEIVED AS A CONSIDERATION F OR THE USE OF OR THE RIGHT TO USE ANY COPYRIGHT OF A LITERARY A RTISTIC OR SCIENTIFIC WORK INCLUDING CINEMATOGRAPH FILMS OR WORK ON FILM TAPE OR OTHER MEANS OF REPRODUCTION FOR USE IN CONNECTION WITH RA DIO OR TELEVISION BROADCASTING ANY PATENT TRADE MARK DE SIGN OR MODEL PLAN SECRET FORMULA OR PROCESS OR FOR INFORMATION CONCERNING INDUSTRIAL COMMERCIAL OR SCIENTIFIC EXPERIENCE IN CLUDING GAINS DERIVED FROM THE ALIENATION OF ANY SUCH RIGHT OR PR OPERTY WHICH ARE CONTINGENT ON THE PRODUCTIVITY USE OR DISPOSITION THEREOF; AND (B) PAYMENTS OF ANY KIND RECEIVED AS CONSIDERATION FOR THE USE OF OR THE RIGHT TO USE ANY INDUSTRIAL COMMERCIAL OR SC IENTIFIC EQUIPMENT OTHER THAN PAYMENTS DERIVED BY AN ENTERP RISE PAGE | 43 DESCRIBED IN PARAGRAPH 1 OF ARTICLE 8 (SHIPPING AND AIR TRANSPORT) FROM ACTIVITIES DESCRIBED IN PARAGRAPH 2(C) OR 3 OF ARTICLE 8. 27. WE FIND THE ISSUE AS TO WHETHER SOFTWARE WITH R ESTRICTION OF COPYING ETC IS A COPY RIGHT OR A COPY RIGHTED PRODU CT HAS BEEN CONSIDERED AND DECIDED BY VARIOUS COURTS AND DIFFER ENT BENCHES OF THE TRIBUNAL. WE FIND THE HONBLE DELHI HIGH CO URT IN THE CASE OF DIRECTOR OF INCOME TAX VS. INFRA SOFT LIMITED RE PORTED IN 220 TAXMA 273 HAS HELD THAT AMOUNT RECEIVED BY ASSESSEE A NON RESIDENT COMPANY FOR GRANTING LICENSES TO USE ITS C OPY RIGHTED SOFTWARE FOR OWN BUSINESS PURPOSE ONLY COULD NOT BE BROUGHT TO TAX AS ROYALTY UNDER ARTICLE 12 (3) INDO US DTAA. THE RELEVANT OBSERVATION OF THE HONBLE DELHI HIGH COURT READS A S UNDER :- 89. THERE IS A CLEAR DISTINCTION BETWEEN ROYALTY PAID ON TRANSFER OF COPYRIGHT RIGHTS AND CONSIDERATION FOR V TRANSFER OF COPYRIGHTED ARTICLES. RIGHT TO USE A COPYRIGHTED ARTI CLE OR PRODUCT WITH THE OWNER RETAINING HIS \ COPYRIGHT IS NOT THE SAME THING AS TRANSFERRING OR ASSIGNING RIGHTS IN R ELATION TO THE COPYRIGHT. THE ENJOYMENT \ OF SOME OR ALL THE RIGHT S WHICH THE COPYRIGHT OWNER HAS IS NECESSARY TO INVOKE THE ROY ALTY DEFINITION. \VIEWED FROM THIS ANGLE A NON-EXCLUSIVE AND NON- TRANSFERABLE LICENCE ENABLING THE USE OF A COPYRIGH TED PRODUCT CANNOT BE CONSTRUED AS AN AUTHORITY TO ENJOY ANY OR ALL OF THE ENUMERATED RIGHTS INGRAINED IN ARTICLE 12 OF DTAA. WH ERE THE PURPOSE OF THE LICENCE OR THE TRANSACTION IS ONLY T O RESTRICT USE OF THE COPYRIGHTED PRODUCT FOR INTERNAL BUSINESS PUR POSE IT WOULD NOT BE LEGALLY CORRECT TO STATE THAT THE COPYR IGHT ITSELF OR PAGE | 44 RIGHT T R USE COPYRIGHT HAS BEEN TRANSFERRED TO ANY EXTENT. THE PARTING OF INTELLECTUAL PROPERTY RIGHTS INHERENT IN AND ATTACHED TO THE SOFTWARE PRODUCT IN FAVOUR OF THE LICENSEE/CU STOMER IS WHAT IS CONTEMPLATED BY THE TREATY. MERELY AUTHORIZI NG OR ENABLING A CUSTOMER TO HAVE THE BENEFIT OF DATA OR INSTRUCTIONS CONTAINED THEREIN WITHOUT ANY FURTHER RIGHT TO DEAL W ITH THEM INDEPENDENTLY DOES NOT AMOUNT TO TRANSFER OF RIGHTS IN RELATION TO COPYRIGHT OR CONFERMENT OF THE RIGHT OF USING TH E COPYRIGHT. THE TRANSFER OF RIGHTS IN OR OVER COPYRIGHT OR THE CONFERMENT OF THE RIGHT OF USE OF COPYRIGHT IMPLIES THAT THE TRANSFEREE/LICENSEE SHOULD ACQUIRE RIGHTS EITHER IN ENTIRETY OR PARTIALLY CO-EXTENSIVE WITH THE OWNER/TRANSFEROR WH O DIVESTS HIMSELF OF THE RIGHTS HE POSSESSES PRO TANTO. 90. THE LICENSE GRANTED TO THE LICENSEE PERMITTING HIM TO DOWNLOAD THE COMPUTER PROGRAMME AND STORING IT IN THE COMPUTER FOR HIS OWN USE IS ONLY INCIDENTAL TO THE F ACILITY EXTENDED TO THE LICENSEE TO MAKE USE OF THE COPYRIGHT ED PRODUCT FOR HIS INTERNAL BUSINESS PURPOSE. THE SAID PROCESS IS NECESSARY TO MAKE THE PROGRAMME FUNCTIONAL AND TO HA VE ACCESS TO IT AND IS QUALITATIVELY DIFFERENT FROM TH E RIGHT CONTEMPLATED BY THE SAID PARAGRAPH BECAUSE IT IS ONL Y INTEGRAL TO THE USE OF COPYRIGHTED PRODUCT. APART FROM SUCH I NCIDENTAL FACILITY THE LICENSEE HAS NO RIGHT TO DEAL WITH TH E PRODUCT JUST AS THE OWNER WOULD BE IN A POSITION TO DO. 91. THERE IS NO TRANSFER OF ANY RIGHT IN RESPECT OF CO PYRIGHT BY THE ASSESSEE AND IT IS A CASE OF MERE TRANSFER OF A COPYRIGHTED ARTICLE. THE PAYMENT IS FOR A COPYRIGHTE D ARTICLE AND REPRESENTS THE PURCHASE PRICE OF AN ARTICLE AND C ANNOT BE CONSIDERED AS ROYALTY EITHER UNDER THE INCOME-TAX ACT OR UNDER PAGE | 45 THE DTAA. 92. THE LICENSEES ARE NOT ALLOWED TO EXPLOIT THE COMPU TER SOFTWARE COMMERCIALLY THEY HAVE ACQUIRED UNDER LICE NCE AGREEMENT ONLY THE COPYRIGHTED SOFTWARE WHICH BY IT SELF IS AN ARTICLE AND THEY HAVE NOT ACQUIRED ANY COPYRIGHT IN THE SOFTWARE. IN THE CASE OF THE ASSESSEE COMPANY THE LICENSEE TO WHOM THE ASSESSEE COMPANY HAS SOLD/LICENSED THE SOFT WARE WERE ALLOWED TO MAKE ONLY ONE COPY OF THE SOFTWARE AND ASSOCIATED SUPPORT INFORMATION FOR BACKUP PURPOSES W ITH A CONDITION THAT SUCH COPYRIGHT SHALL INCLUDE INFRASOF T COPYRIGHT AND ALL COPIES OF THE SOFTWARE SHALL BE EXCLUSIVE P ROPERTIES OF INFRASOFT. LICENSEE WAS ALLOWED TO USE THE SOFTWARE ONLY FOR ITS OWN BUSINESS AS SPECIFICALLY IDENTIFIED AND WAS NOT P ERMITTED TO LOAN/RENT/SALE/SUB-LICENCE OR TRANSFER THE COPY OF SOFTWARE TO ANY THIRD PARTY WITHOUT THE CONSENT OF INFRASOFT. 93. THE LICENSEE HAS BEEN PROHIBITED FROM COPYING DECOMPILING DE-ASSEMBLING OR REVERSE ENGINEERING T HE SOFTWARE WITHOUT THE WRITTEN CONSENT OF INFRASOFT. THE LICENCE AGREEMENT BETWEEN THE ASSESSEE COMPANY AND ITS CUSTO MERS STIPULATES THAT ALL COPYRIGHTS AND INTELLECTUAL PROP ERTY RIGHTS IN THE SOFTWARE AND COPIES MADE BY THE LICENSEE WERE OW NED BY INFRASOFT AND ONLY INFRASOFT HAS THE POWER TO GRANT LICENCE RIGHTS FOR USE OF THE SOFTWARE. THE LICENCE AGREEME NT STIPULATES THAT UPON TERMINATION OF THE AGREEMENT FOR ANY REAS ON THE LICENCEE SHALL RETURN THE SOFTWARE INCLUDING SUPPOR TING INFORMATION AND LICENCE AUTHORIZATION DEVICE TO INFRA SOFT. 94. THE INCORPOREAL RIGHT TO THE SOFTWARE I.E. COPYRIGHTER MAINS WITH THE OWNER AND THE SAME WAS NOT TRANSFERRE D BY PAGE | 46 THE ASSESSEE. THE RIGHT TO USE A COPYRIGHT IN A PRO GRAMME IS TOTALLY DIFFERENT FROM THE RIGHT TO USE A PROGRAMME EMBEDDED IN A CASSETTE OR A CD WHICH MAY BE A SOFTWARE AND TH E PAYMENT MADE FOR THE SAME CANNOT BE SAID TO BE RECEI VED AS CONSIDERATION FOR THE USE OF OR RIGHT TO USE OF ANY COPYRIGHT TO BRING IT WITHIN THE DEFINITION OF ROYALTY AS GIVEN I N THE DTAA. WHAT THE LICENSEE HAS ACQUIRED IS ONLY A COPY OF THE COPYRIGHT ARTICLE WHEREAS THE COPYRIGHT REMAINS WITH THE OWNE R AND THE LICENSEES HAVE ACQUIRED A COMPUTER PROGRAMME FOR BE ING USED IN THEIR BUSINESS AND NO RIGHT IS GRANTED TO THEM TO UTILIZE THE COPYRIGHT OF A COMPUTER PROGRAMME AND THUS THE PAYMENT FOR THE SAME IS NOT IN THE NATURE OF ROYALTY. 95. WE HAVE NOT EXAMINED THE EFFECT OF THE SUBSEQUENT AMENDMENT TO SECTION 9 (1) (VI) OF THE ACT AND ALSO WHETHER THE AMOUNT RECEIVED FOR USE OF SOFTWARE WOULD BE ROYALTY IN TERMS THEREOF FOR THE REASON THAT THE ASSESSEE IS COVERED BY THE DTAA THE PROVISIONS OF WHICH ARE MORE BENEFICIAL. 96. THE AMOUNT RECEIVED BY THE ASSESSEE UNDER THE LICENC E AGREEMENT FOR ALLOWING THE USE OF THE SOFTWARE IS N OT ROYALTY UNDER THE DTAA. 97. WHAT IS TRANSFERRED IS NEITHER THE COPYRIGHT IN THE SOFTWARE NOR THE USE OF THE COPYRIGHT IN THE SOFTWA RE BUT WHAT IS TRANSFERRED IS THE RIGHT TO USE THE COPYRIGHTED MA TERIAL OR ARTICLE WHICH IS CLEARLY DISTINCT FROM THE RIGHTS I N A COPYRIGHT. THE RIGHT THAT IS TRANSFERRED IS NOT A RIGHT TO USE THE COPYRIGHT BUT IS ONLY LIMITED TO THE RIGHT TO USE THE COPYRIGH TED MATERIAL AND THE SAME DOES NOT GIVE RISE TO ANY ROYALTY INCOME AND WOULD BE BUSINESS INCOME. PAGE | 47 98. WE ARE NOT IN AGREEMENT WITH THE DECISION OF THE KARNATAKA HIGH COURT IN THE CASE OF SAMSUNG ELECTRONICS CO. LTD {SUPRA) 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 WOR K UNDER SECTION 14(1) OF THE COPYRIGHT ACT AND THE PAYM ENT MADE FOR THE GRANT OF THE LICENCE FOR THE SAID PURPO SE WOULD CONSTITUTE ROYALTY. THE LICENSE GRANTED TO THE LICEN SEE PERMITTING HIM TO DOWNLOAD THE COMPUTER PROGRAMME AN D STORING IT IN THE COMPUTER FOR HIS OWN USE WAS ONLY INCIDENTAL TO THE FACILITY EXTENDED TO THE LICENSEE TO MAKE USE OF THE COPYRIGHTED PRODUCT FOR HIS INTERNAL BUSINESS PURPOS E. THE SAID PROCESS WAS NECESSARY TO MAKE THE PROGRAMME FUNCTIONAL AND TO HAVE ACCESS TO IT AND IS QUALITATI VELY DIFFERENT FROM THE RIGHT CONTEMPLATED BY THE SAID PR OVISION BECAUSE IT IS ONLY INTEGRAL TO THE USE OF COPYRIGHT ED PRODUCT. THE RIGHT TO MAKE A BACKUP COPY PURELY AS A TEMPORA RY PROTECTION AGAINST LOSS DESTRUCTION OR DAMAGE HAS B EEN HELD BY THE DELHI HIGH COURT IN NOKIA NETWORKS OY {SUPRA) AS NOT AMOUNTING TO ACQUIRING A COPYRIGHT IN THE SOFTWARE. 99. IN VIEW OF THE ABOVE WE ACCORDINGLY HOLD THAT WHAT HAS BEEN TRANSFERRED IS NOT COPYRIGHT OR THE RIGHT TO US E COPYRIGHT BUT A LIMITED RIGHT TO USE THE COPYRIGHTED MATERIAL A ND DOES NOT GIVE RISE TO ANY ROYALTY INCOME. 100. THE QUESTION OF LAW IS THUS ANSWERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE THAT THE INCOME-TAX APPELLATE TRIBUNAL WAS RIGHT IN HOLDING THAT THE CO NSIDERATION RECEIVED BY THE RESPONDENT ASSESSEE ON GRANT OF LICEN CES FOR USE OF SOFTWARE IS NOT ROYALTY WITHIN THE MEANING O F ARTICLE PAGE | 48 12(3) OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT BE TWEEN INDIA AND THE UNITED STATES OF AMERICA. 28. WE FIND THE HONBLE DELHI HIGH COURT IN THE CAS E OF PCIT VS. M TECH INDIA PRIVATE LIMITED REPORTED IN 381 IT R 31 HAS HELD THAT WHERE PAYMENTS ARE MADE FOR PURCHASE OF SOFTWA RE AS A PRODUCT WOULD BE TREATED AS A PAYMENT FOR PURCHASE OF SOFTWARE RATHER THAN PAYMENT FOR USE OR RIGHT TO USE SOFTWAR E TO BE CONSIDERED AS A ROYALTY. THE RELEVANT OBSERVATION OF THE HONBLE HIGH COURT FROM PARA 10 ONWARDS READS AS UNDER :- 10. THE ASSESSEE HAD ENTERED INTO A 'VAR AGREEMENT' WITH THPL. PARAGRAPH 1.1 OF THE SAID AGREEMENT EXPRESSLY INDIC ATES THAT THPL HAD APPOINTED THE ASSESSEE (DESCRIBED AS VAR) TO 'MARKET AND SELL THE PRODUCTS' IN THE TERRITORY. ARTICLE 2 OF THE SAID AGREEMENT PROVIDES FOR 'VARS OBLIGATIONS'. CLAUSE (A) OF PARAGRAPH 2.1 OF ARTICLE 2 EXPRESSLY PROVIDES THAT THE ASSESSEE 'SHALL PROMOTE MARKET AND SELL THE PRODUCTS IN ACCORDANCE WITH A BUSINESS PLAN WHICH SHALL BE S UBMITTED TO TRAK WITHIN THREE (3) MONTHS OF THE EFFECTIVE DATE OF TH E AGREEMENT'. PARAGRAPH 4.2 ENTITLES THE ASSESSEE TO INTER ALIA USE THE SOFTWARE AND SOUR CE CODE S FOR A LIMITED PU RPO SES TO SELL AND PROMOTE THE SOFTWARE FOR USE BY THIRD PARTIES; DEMONSTRATE THE SOFTWARE TO T HIR D PARTIES; AND TO CUSTOMISE THE SOFTWARE FOR THE PURPOSES OF END USER S. THE SAID AGREEMENT FURTHER CONTAINS A NUMBER OF COVENANTS TO ENSURE THAT THE INTELLECTUAL PROPERTY RIGHTS IN RESPECT OF THE SOFT WARE RELATED MATERIAL AND SOURCE CODES REMAINS WITH THPL. A PLAIN READING OF THE AFORESAID AGREEMENT INDICATES THAT THE ASSESSEE HAS APPOINTED FOR THE PURPOSES OF RESELLING THPLS SOFTWARE. PAGE | 49 11. THE CIT (A) FOUND THAT THE ASSESSEE WAS ENGAGED IN THE RESALE OF SOFTWARE AND THE PAYMENTS MADE BY IT TO THPL AND OT HERS WERE ON ACCOUNT OF PURCHASES MADE BY THE ASSESSEE. THE ITAT CONCURRED WITH THE AFORESAID FINDING. IT IS ALSO NOT DISPUTED THAT IN THE PRECEDING YEARS THE AO HAD ACCEPTED THE TRANSACTIONS IN QUESTION TO BE THAT OF PURCHASE OF SOFTWARE. THE LIMITED ISSUE TO BE ADDRESSED IS W HETHER IN VIEW OF THESE FINDINGS THE AMOUNT PAID BY THE ASSESSEE COUL D BE TAXED AS ROYALTY. 12. IN THE CASES WHERE AN ASSESSEE ACQUIRES THE RIGHT T O USE A SOFTWARE THE PAYMENT SO MADE WOULD AMOUNT TO ROYAL TY. HOWEVER IN CASES WHERE THE PAYMENTS ARE MADE FOR PURCHASE OF S OFTWARE AS A PRODUCT THE CONSIDERATION PAID CANNOT BE CONSIDERE D TO BE FOR USE OR THE RIGHT TO USE THE SOFTWARE. IT IS WELL SETTLED T HAT WHERE SOFTWARE IS SOLD AS A PRODUCT IT WOULD AMOUNT TO SALE OF GOODS. IN THE CASE OF TATA CONSULTANCY SERVICES V. STATE OF ANDHRA PRADESH [ 2004] 271 ITR 401/141 TAXMAN 132 (SC) THE SUPREME COURT EXAMINED THE TRANSACTIONS RELAT ING TO THE PURCHASE AND SALE OF SOFTWARE RECORDED ON A CD IN THE CONTEXT OF THE ANDHRA PRADESH GENERAL SALES TAX ACT. THE COURT HELD THE SAME TO BE GOODS WITHIN THE MEANING OF SECTION 2(B) OF THE SAID ACT AND CONSEQUENTLY EXIGIBLE TO SALES TAX UNDER THE SAID A CT. CLEARLY THE CONSIDERATION PAID FOR PURCHASE OF GOODS CANNOT BE CONSIDERED AS ROYALTY. THUS IT IS NECESSARY TO MAKE A DISTINCT ION BETWEEN THE CASES WHERE CONSIDERATION IS PAID TO ACQUIRE THE RIGHT TO USE A PATENT OR A COPYRIGHT AND CASES WHERE PAYMENT IS MADE TO ACQUIR E PATENTED OR A COPYRIGHTED PRODUCT/MATERIAL. IN CASES WHERE PAYMEN TS ARE MADE TO ACQUIRE PRODUCTS WHICH ARE PATENTED OR COPYRIGHTED THE CONSIDERATION PAID WOULD HAVE TO BE TREATED AS A PAYMENT FOR PURC HASE OF THE PRODUCT RATHER THAN CONSIDERATION FOR USE OF THE PATENT OR COPYRIGHT. 13. A COORDINATE BENCH OF THIS COURT HAS ALSO EXPRESSE D A SIMILAR VIEW IN THE CASE OF LNFRASOFT LTD. ( SURPA ). IN THAT CASE THE REVENUE SOUGHT TO TAX THE RECEIPTS ON SALE OF LICEN SING OF CERTAIN PAGE | 50 SOFTWARE AS ROYALTY. THE TRIBUNAL HELD THAT THERE W AS NO TRANSFER OF RIGHTS IN RESPECT OF THE COPYRIGHT HELD BY THE ASSE SSEE IN THE SOFTWARE AND IT WAS A CASE OF MERE TRANSFER OF COPYRIGHTED A RTICLE. THIS COURT CONCURRED WITH THE TRIBUNAL AND HELD THAT WHAT WAS TRANSFERRED WAS NOT COPYRIGHT OR THE RIGHT TO USE A COPYRIGHT BUT A LIMITED RIGHT TO USE THE COPYRIGHTED MATERIAL AND THAT DID NOT GIVE RISE TO ANY ROYALTY INCOME. 14. INSOFAR AS THE RELIANCE PLACED BY THE REVENUE ON T HE DECISION OF THE KARNATAKA HIGH COURT IN SAMSUNG ELECTRONICS CO. LTD. {SUPRA) IS CONCERNED A COORDINATE BENCH OF THIS COURT IN LNFRASOFT LTD. {SURPA) HAS UNEQUIVOCALLY EXPRESSED ITS VIEW THAT IT WAS NOT IN AGREEMENT WITH THAT DECISION. THUS THE SAID DECISION IS OF NO ASSISTAN CE TO THE REVENUE IN THIS CASE. 15. IN ANOTHER CASE DYNAMIC VERTICAL SOFTWARE INDIA (P.) LTD. {SUPRA) THIS COURT HAD REITERATED THE VIEW THAT PAYMENT MA DE BY A RESELLER FOR THE PURCHASE OF SOFTWARE FOR SALE IN T HE INDIAN MARKET COULD BY NO STRETCH BE CONSIDERED AS ROYALTY. 16. IN THE AFORESAID VIEW THE QUESTION FRAMED MUST BE ANSWERED IN THE AFFIRMATIVE THAT IS IN FAVOUR OF THE ASSES SEE AND AGAINST THE REVENUE. 17. THE APPEAL IS ACCORDINGLY DISMISSED. IN THE CIRCUMSTANCES THE PARTIES ARE LEFT TO BEAR THEIR OWN COSTS. 29. WE FIND THE HONBLE MADRAS HIGH COURT IN THE CA SE OF CIT VS. VINZAS SOLUTIONS INDIA PRIVATE LIMITED REPORTED IN 77 TAXMAN.COM 279 HAS HELD AS UNDER : (SHORT NOTES) THE PROVISIONS OF SECTION 9(1 )(VI) DEALING WITH AND DEFINING 'ROYALTY' CANNOT BE MADE APPLICABLE TO A S ITUATION OF OUTRIGHT PURCHASE AND SALE OF A PRODUCT. ACCORDI NG TO PAGE | 51 THE CORPUS JURIS SECUNDUM THE WORD 'ROYALTY' MEANS A SHARE OF THE PRODUCT OR PROFIT RESERVED BY THE OWNE R FOR PERMITTING ANOTHER TO USE THE PROPERTY THE SHARE O F THE PRODUCT OR PROFIT PAID BY THE OWNER; A SHARE OF THE PRODUCT OR PROCEEDS THEREFROM RESERVED TO THE OWNER FOR PER MITTING THE ANOTHER TO USE THE PROPERTY; THE SHARE OF THE P RODUCE RESERVED TO THE OWNER FOR PERMITTING ANOTHER TO EXPLOIT AND USE THE PROPERTY; A SHARE OF THE PROFIT RESERVED B Y THE OWNER FOR PERMITTING ANOTHER TO USE THE PROPERTY; T HE AMOUNT RESERVED OR THE RENTAL TO BE PAID THE ORIGIN AL OWNER OF THE WHOLE ESTATE. [PARA 4] THE MADRAS HIGH COURT IN CIT V. NEYVELI LIGNITE CORPN. LTD. [2000] 243ITR 459/109 TAXMAN 369 HAS EXPLAINED THE CONCEPT OF ROYALTY AS THE PAYMENT MAD E BY A PERSON WHO HAS EXCLUSIVE RIGHT OVER A THING FOR ALL OWING ANOTHER TO MAKE USE OF THAT THING WHICH MAY BE EITH ER PHYSICAL OR INTELLECTUAL PROPERTY OR THING. THE EXC LUSIVITY OF THE RIGHT IN RELATION TO THE THING FOR WHICH ROYALT Y IS PAID SHOULD BE WITH THE GRANTOR OF THAT RIGHT. MERE PASS ING OF INFORMATION CONCERNING THE DESIGN OF A MACHINE WHIC H IS A TAILOR-MADE TO MEET THE REQUIREMENT OF A BUYER DOES NOT BY ITSELF AMOUNT TO TRANSFER OF ANY RIGHT OF EXCLUSIVE USER SO AS TO RENDER THE PAYMENT MADE THEREFOR BEING REGARDED AS 'ROYALTY'. [PARA 5] THE COURTS HAVE CONSISTENTLY NOTED THE DIFFERENCE BETWEEN A TRANSACTION OF SALE OF A 'COPYRIGHTED ARTICLE' AN D ONE OF COPYRIGHT' ITSELF. [PARA 6] PAGE | 52 THE PROVISIONS OF SECTION 9(1 )(VI) AS A WHOLE WOULD STAND ATTRACTED IN THE CASE OF THE LATTER AND NOT THE FOR MER. EXPLANATIONS 4 AND 7 RELIED BY THE AUTHORITIES WOULD THUS HAVE TO BE READ AND UNDERSTOOD ONLY IN THAT C ONTEXT AND CANNOT BE EXPANDED TO BRING WITHIN ITS FOLD TRA NSACTION BEYOND THE REALM OF THE PROVISION. [PARA 7] 30. WE FIND THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF ADIT (IT) MUMBAI VS. FIRST ADVANTAGE PRIVATE LIMITE D REPORTED IN 77 TAXMAN.COM 195 HAS HELD THAT PAYMENT MADE BY ASS ESSEE TO US COMPANY FOR USE OF SOFTWARE OWNED BY US COMPANY WHEN ASSESSEE WOULD USE SOFTWARE ONLY FOR INTERNAL BUSIN ESS OPERATIONS AND WOULD NOT SUB-LICENSE OR MODIFY SAME COULD NOT BE CONSIDERED AS ROYALTY WITHIN MEANING OF ARTICLE 12(4) OF DTAA. 31. WE FIND THE COORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF ACIT VS. LANDMARKS GRAPHICS CORPORATION REPORTED IN 87 TAXMAN.COM 311 HAS HELD THAT WHERE ASSESSEE A US B ASED COMPANY DID NOT HAVE PE IN INDIA AND ITS ACTIVITIE S WERE NOT COVERED BY DEEMING FICTION OF ARTICLE 5(2) OF INDIA - USA DTAA INCOME EARNED BY IT FROM SALE OF SOFTWARE TO INDIAN COMPANIES WHICH WAS 'OFF THE SHELF SOFTWARE WAS NOT TAXABLE IN INDIA. 32. WE FIND THE COORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF BLACK DUCK SOFTWARE INC VS. DCIT REPORTED IN 86 TAX MAN.COM 62 HAS HELD THAT WHERE ASSESSEE A US BASED COMPANY G RANTED A NON-EXCLUSIVE NON-TRANSFERABLE SOFTWARE LICENSE TO INDIAN PAGE | 53 CUSTOMER FOR A SPECIFIC TIME PERIOD SINCE COPYRIGH T IN SAID SOFTWARE PROGRAMME WAS RETAINED BY ASSESSEE PAYMEN T RECEIVED BY IT WAS NOT LIABLE TO TAX IN INDIA AS ROYALTY. 33. WE FIND THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF ASPECT SOFTWARE INC VS. ADIT REPORTED IN 61 TAXMANN .COM 36 HAS HELD THAT CONSIDERATION RECEIVED BY ASSESSEE FOR SU PPLY OF 'CONTACT SOLUTIONS' USED FOR BETTER MANAGEMENT CUSTOMER INT ERACTION COMPRISING OF SALE OF HARDWARE ALONGWITH LICENSE OF EMBEDDED SOFTWARE TO END USER IS NOT ROYALTY UNDER ARTICLE 1 2 OF DTAA BETWEEN INDIA AND USA. PROVISION OF IMPLEMENTATION AND MAINTENANCE SERVICES ARE INEXTRICABLY AND ESSENTIAL LY LINKED TO SUPPLY OF SOFTWARE; WHERE SUPPLY OF SOFTWARE IS ITS ELF NOT TAXABLE AS 'ROYALTY' THESE SERVICES ARE ALSO NOT ROYALTY. 34. RESPECTFULLY FOLLOWING THE DECISIONS CITED (SUP RA) WE HOLD THAT THE PAYMENT RECEIVED BY THE ASSESSEE FROM ITS CUSTOMERS FROM SALE OF SOFTWARE PRODUCTS/ LICENSES IS NOT IN THE NATURE OF THE ROYALTY U/S. 9(1)(VI) OF THE IT ACT 1961 AND A LSO AS PER ARTICLE 12 (3) (A) AND ARTICLE 12(3) (B) OF THE INDO US DTA A. IN OUR OPINION THE SAID AMOUNT RECEIVED BY THE ASSESSEE IS NORMAL BUSINESS INCOME OF THE ASSESSEE ON ACCOUNT OF SALE OF COPY RIGHTED PRODUCTS (LICENSES) AND NOT TAXABLE IN INDI A IN THE ABSENCE OF PERMANENT ESTABLISHMENT. THE VARIOUS DECISIONS RELIED ON BY THE LD. DR ARE NOT APPLICABLE TO THE FACTS OF THE C ASE AND ARE DISTINGUISHABLE. THE GROUNDS RAISED BY THE ASSESSEE ARE ACCORDINGLY ALLOWED. PAGE | 54 35. IDENTICAL GROUNDS HAVE BEEN RAISED BY THE ASSES SEE IN THE REMAINING APPEALS. SINCE WE HAVE ALREADY DECIDED TH E ISSUE IN FAVOUR OF THE ASSESSEE BY TREATING THE AMOUNT RECEI VED BY THE ASSESSEE COMPANY FROM SALE OF SOFTWARE PRODUCTS/ LI CENSES AS NOT TAXABLE AS ROYALTY U/S.9 (1) (VI) OF THE IT ACT AND ALSO AS PER ARTICLE 12 (3) (A) AND 12 (3) (B) OF THE INDO US DTAA THER EFORE FOLLOWING SIMILAR REASONING THE GROUNDS RAISED BY THE ASSESSE E ON THIS ISSUE ARE ALLOWED. 36. THERE IS ONE MORE GROUND IN ITA NO.382/DEL/2016 FOR A.Y.2012-13 WHEREIN THE ASSESSEE HAS CHALLENGED THE ORDER OF THE AO NOT IN GRANTING TDS CREDIT OF RS. 5 88 007/- . 37. AFTER HEARING BOTH THE SIDES WE FIND IT IS THE GRIEVANCE OF THE ASSESSEE THAT THE AO HAS GRANTED SHORT TDS CRED IT OF RS. 5 88 007/- WHICH WAS DEDUCTED BY THE INDIAN CUSTOME RS OF THE ASSESSEE. CONSIDERING THE TOTALITY OF THE FACTS OF THE CASE AND IN THE INTEREST OF JUSTICE WE DEEM IT PROPER TO RESTOR E THE ISSUE TO THE FILE OF THE AO WITH A DIRECTION TO VERIFY THE RECOR DS AND GRANT APPROPRIATE TDS CREDIT TO THE ASSESSEE. NEEDLESS T O SAY THE AO SHALL GIVE DUE OPPORTUNITY OF BEING HEARD TO THE AS SESSEE AS PER LAW. WE HOLD AND DIRECT ACCORDINGLY. THE GROUND O F APPEAL NO. 3 FOR A. Y. 2012-13 IS ACCORDINGLY ALLOWED FOR STATIS TICAL PURPOSE. 38. SO FAR AS THE GROUND OF APPEAL NO.4 FOR A. Y. 2 012-13 IS CONCERNED THE SAME IS AN ALTERNATE GROUND WHICH IN OUR OPINION PAGE | 55 BECOMES INFRUCTOUS IN VIEW OF OUR ALLOWING THE GROU NDS OF APPEAL NO. 1 AND 2. ACCORDINGLY GROUND OF APPEAL NO.4 IS DISMISSED. 39. IN THE RESULT APPEAL NOS. 4918/DEL/2012 2415/DEL/2013 772/DEL/2014 987/DEL/2015 ARE ALLOW ED WHERE IN APPEAL NO.382/ DEL/2016 IS PARTLY ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 19.11.2019. SD/- SD/- (KULDIP SINGH) (R.K PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER *NEHA* DATE:-19.11.2019 COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI DATE OF DICTATION 14.11.2019 DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 14.11.2019 DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.PS /PS 19.11.2019 DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE D ICTATING MEMBER FOR PRONOUNCEMENT 19.11.2019 DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR. PS/ PS 19.11.2019 DATE ON WHICH THE FINAL ORDER IS UPLOADED ON THE WEBSITE OF ITAT 19.11.2019 DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 19.11.2019 DATE ON WHICH FILE GOES TO THE HEAD CLERK. THE DATE ON WHICH FILE GOES TO THE ASSISTANT REGIST RAR FOR SIGNATURE ON THE ORDER DATE OF DISPATCH OF THE ORDER