1
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NOS. 8733-8734 OF 2018
ENGINEERING ANALYSIS CENTRE OF
EXCELLENCE PRIVATE LIMITED …APPELLANT
Versus
THE COMMISSIONER OF INCOME …RESPONDENTS
TAX & ANR.
WITH
CIVIL APPEAL NOS. 8735-8736 OF 2018
CIVIL APPEAL NOS. 8737-8941 OF 2018
CIVIL APPEAL NOS. 8942-8947 OF 2018
CIVIL APPEAL NOS. 8950-8953 OF 2018
CIVIL APPEAL NOS. 8948-8949 OF 2018
CIVIL APPEAL NO. 4419 OF 2012
CIVIL APPEAL NO. 4420 OF 2012
CIVIL APPEAL NO. 10114 OF 2013
CIVIL APPEAL NO. 10097 OF 2013
CIVIL APPEAL NOS. 10112-10113 OF 2013
CIVIL APPEAL NO. 10106 OF 2013
CIVIL APPEAL NOS. 8954-8955 OF 2018
2
CIVIL APPEAL NOS. 10115-10117 OF 2013
CIVIL APPEAL NO. 8956 OF 2018
CIVIL APPEAL NO. 8957 OF 2018
CIVIL APPEAL NO. 8990 OF 2018
CIVIL APPEAL NO. 10103 OF 2013
CIVIL APPEAL NO. 10104 OF 2013
CIVIL APPEAL NO. 8960 OF 2018
CIVIL APPEAL NO. 8966 OF 2018
CIVIL APPEAL NO. 8958 OF 2018
CIVIL APPEAL NO. 8959 OF 2018
CIVIL APPEAL NO. 8962 OF 2018
CIVIL APPEAL NO. 8961 OF 2018
CIVIL APPEAL NO. 8963 OF 2018
CIVIL APPEAL NO. 8964 OF 2018
CIVIL APPEAL NO. 8965 OF 2018
CIVIL APPEAL NO. 8969 OF 2018
CIVIL APPEAL NO. 8967 OF 2018
CIVIL APPEAL NO. 8968 OF 2018
CIVIL APPEAL NO. 8972 OF 2018
CIVIL APPEAL NO. 8971 OF 2018
CIVIL APPEAL NO. 8970 OF 2018
3
CIVIL APPEAL NO. 4629 OF 2014
CIVIL APPEAL NO. 8973 OF 2018
CIVIL APPEAL NO. 4631 OF 2014
CIVIL APPEAL NO. 4630 OF 2014
CIVIL APPEAL NOS. 8974-8975 OF 2018
CIVIL APPEAL NOS. 6386-6387 OF 2016
CIVIL APPEAL NO. 10105 OF 2013
CIVIL APPEAL NO. 7852 OF 2012
CIVIL APPEAL NOS. 1416-1418 OF 2013
CIVIL APPEAL NO. 1403 OF 2013
CIVIL APPEAL NO. 1405 OF 2013
CIVIL APPEAL NO. 1410 OF 2013
CIVIL APPEAL NO. 1421 OF 2013
CIVIL APPEAL NO. 1409 OF 2013
CIVIL APPEAL NO. 1415 OF 2013
CIVIL APPEAL NO. 1414 OF 2013
CIVIL APPEAL NO. 1412 OF 2013
CIVIL APPEAL NO. 1413 OF 2013
CIVIL APPEAL NO. 1419 OF 2013
CIVIL APPEAL NO. 1411 OF 2013
CIVIL APPEAL NO. 1420 OF 2013
4
CIVIL APPEAL NO. 1404 OF 2013
CIVIL APPEAL NO. 1406 OF 2013
CIVIL APPEAL NO. 1408 OF 2013
CIVIL APPEAL NO. 1407 OF 2013
CIVIL APPEAL NO. 2304 OF 2013
CIVIL APPEAL NO. 2305 OF 2013
CIVIL APPEAL NO. 2306 OF 2013
CIVIL APPEAL NOS. 10098-10102 OF 2013
CIVIL APPEAL NOS. 2307-2308 OF 2013
CIVIL APPEAL NOS. 4666-4667 OF 2013
CIVIL APPEAL NO. 6764 OF 2013
CIVIL APPEAL NO. 4634 OF 2014
CIVIL APPEAL NO. 8976 OF 2018
CIVIL APPEAL NOS. 8977-8988 OF 2018
CIVIL APPEAL NO.781 OF 2021
(@ SLP(C) NO. 37580 OF 2016)
CIVIL APPEAL NO.782 OF 2021
(@ SLP(C) NO. 28867 OF 2016)
CIVIL APPEAL NO. 783 OF 2021
(@ SLP(C) NO. 28868 OF 2016)
CIVIL APPEAL NO. 10673 OF 2016
CIVIL APPEAL NO. 784 OF 2021
(@ SLP(C) NO. 29571 OF 2016)
5
CIVIL APPEAL NO. 10674 OF 2016
CIVIL APPEAL NO. 785 OF 2021
(@ SLP(C) NO. 36782 OF 2016)
CIVIL APPEAL NO. 3402 OF 2017
CIVIL APPEAL NO. 10758 OF 2017
CIVIL APPEAL NO. 9486 OF 2017
CIVIL APPEAL NO. 8711 OF 2018
CIVIL APPEAL NO. 8722 OF 2018
CIVIL APPEAL NO. 8724 OF 2018
CIVIL APPEAL NO. 8725 OF 2018
CIVIL APPEAL NO. 9551 OF 2018
CIVIL APPEAL NO. 786 OF 2021
(@ SLP(C) NO. 450 OF 2019)
CIVIL APPEAL NO. 2006 OF 2019
CIVIL APPEAL NO. 790 OF 2021
(@ SLP(C) NO. 6736 OF 2020)
J U D G M E N T
R.F. Nariman, J.
1. Leave granted.
2. The appeals in these cases are by both the assessees as well as the
Department of Revenue, Ministry of Finance [“Revenue”]. Whereas the
6
assessees have succeeded in the question that was posed before the
High Court of Delhi,1
the Revenue has succeeded insofar as the same
question was posed before the High Court of Karnataka,2 and in the
ruling by the Authority for Advance Rulings [“AAR”], impugned in C.A.
No. 8990/2018.
1 This includes the judgments impugned in C.A No. 8990/2018, C.A Nos. 6386-
6387/2016, SLP(C) No. 37580/2016, SLP(C) No. 28867/2016, SLP(C) No.
28868/2016, C.A No. 10673/2016, SLP(C) No. 29571/2016, C.A No. 10674/2016,
SLP(C) No. 36782/2016, C.A No. 10758/2017, C.A No. 9486/2017, C.A No.
8711/2018, C.A No. 8722/2018, C.A No. 8724/2018, C.A No. 8725/2018, C.A No.
9551/2018, SLP(C) NO. 450/2019, SLP(C) No. 6736/2020.
2 This includes the judgments impugned in C.A Nos. 8735-8736/2018, C.A Nos. 8737-
8941/2018, C.A Nos. 8942-8947/2018, C.A Nos. 8950-8953/2018, C.A Nos. 8948-
8949/2018, C.A No. 4419/2012, C.A No. 4420/2012, C.A No. 10114/2013, C.A No.
10097/2013, C.A Nos. 10112-10113/2013, C.A No. 10106/2013, C.A Nos. 8954-
8955/2018, C.A Nos. 10115-10117/2013, C.A No. 8956/2018, C.A No. 8957/2018, C.A
No. 10103/2013, C.A No. 10104/2013, C.A No. 8960/2018, C.A No. 8966/2018, C.A
No. 8958/2018, C.A No. 8959/2018, C.A No. 8962/2018, C.A No. 8961/2018, C.A No.
8963/2018, C.A No. 8964/2018, C.A No. 8965/2018, C.A No. 8969/2018, C.A No.
8967/2018, C.A No. 8968/2018, C.A No. 8972/2018, C.A No. 8971/2018, C.A No.
8970/2018, C.A No. 4629/2014, C.A No. 8973/2018, C.A No. 4631/2014, C.A No.
4630/2014, C.A Nos. 8974-8975/2018, C.A No. 10105/2013, C.A No. 7852/2012, C.A
Nos. 1416-1418/2013, C.A No. 1403/2013, C.A No. 1405/2013, C.A No. 1410/2013,
C.A No. 1421/2013, C.A No. 1409/2013, C.A No. 1415/2013, C.A No. 1414/2013, C.A
No. 1412/2013, C.A No. 1413/2013, C.A No. 1419/2013, C.A No. 1411/2013, C.A No.
1420/2013, C.A No. 1404/2013, C.A No. 1406/2013, C.A No. 1408/2013, C.A No.
1407/2013, C.A No. 2304/2013, C.A No. 2305/2013, C.A No. 2306/2013, C.A Nos.
10098-10102/2013, C.A Nos. 2307-2308/2013, C.A Nos. 4666-4667/2013, C.A No.
6764/2013, C.A No. 4634/2014, C.A No. 8976/2018, C.A Nos. 8977-8988/2018, C.A
No. 3402/2017, C.A No. 2006/2019.
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3. One group of appeals arises from a common judgment of the High Court
of Karnataka dated 15.10.2011 reported as CIT v. Samsung
Electronics Co. Ltd., (2012) 345 ITR 494, by which the question which
was posed before the High Court, was answered stating that the
amounts paid by the concerned persons resident in India to nonresident, foreign software suppliers, amounted to royalty and as this
was so, the same constituted taxable income deemed to accrue in India
under section 9(1)(vi) of the Income Tax Act, 1961 [“Income Tax Act”],
thereby making it incumbent upon all such persons to deduct tax at
source and pay such tax deductible at source [“TDS”] under section 195
of the Income Tax Act. This judgment dated 15.10.2011 has been relied
upon by the subsequent impugned judgments passed by the High Court
of Karnataka to decide the same question in favour of the Revenue.
4. The appeals before us may be grouped into four categories:
i) The first category deals with cases in which computer software is
purchased directly by an end-user, resident in India, from a foreign,
non-resident supplier or manufacturer.3
3 This category includes C.A. Nos. 8733-8734/2018, C.A. No. 10114/2013, C.A. Nos.
10112-10113/2013, C.A. No. 10106/2013, C.A. No. 10103/2013, C.A. No.
10104/2013, C.A. Nos. 10098-10102/2013, C.A. Nos. 8735-8736/2018, C.A. Nos.
8948-8949/2018, C.A. No. 8956/2018, C.A. No. 8957/2018, C.A. No. 7852/2012, C.A.
Nos. 8974-8975/2018, C.A. No. 2304/2013, C.A. No. 2305/2013, C.A. No. 2306/2013,
8
ii) The second category of cases deals with resident Indian companies
that act as distributors or resellers, by purchasing computer software
from foreign, non-resident suppliers or manufacturers and then
reselling the same to resident Indian end-users.4
iii) The third category concerns cases wherein the distributor happens
to be a foreign, non-resident vendor, who, after purchasing software
from a foreign, non-resident seller, resells the same to resident
Indian distributors or end-users.5
iv) The fourth category includes cases wherein computer software is
affixed onto hardware and is sold as an integrated unit/equipment
C.A. Nos. 2307-2308/2013, C.A. No. 10097/2013, C.A. No. 8976/2018, C.A. No.
3402/2017, SLP(C) No. 450/2019, C.A. No. 2006/2019.
4 This category includes C.A Nos. 8737-8941/2018, C.A No. 8942-8947/2018, C.A No.
4420/2012, C.A No. 8959/2018, C.A No. 8963/2018, C.A No. 8962/2018, C.A No.
8958/2018, C.A No. 8961/2018, C.A No. 8960/2018, C.A Nos. 8950-8953/2018, C.A
No. 8966/2018, C.A No. 8973/2018, C.A No. 8965/2018, C.A No. 8972/2018, C.A No.
8969/2018, C.A No. 8971/2018, C.A No. 8970/2018, C.A No. 8964/2018, C.A No.
8967/2018, C.A No. 8968/2018, C.A No. 1403/2013, C.A No. 1414/2013, C.A No.
1412/2013, C.A No. 1413/2013, C.A Nos. 1416-1418/2013, C.A No. 1405/2013, C.A
No. 1410/2013, C.A No. 1421/2013, C.A No. 1409/2013, C.A No. 1415/2013, C.A No.
1419/2013, C.A No. 1411/2013, C.A No. 1420/2013, C.A No. 1404/2013, C.A No.
1406/2013, C.A No. 1408/2013, C.A No. 1407/2013, C.A Nos. 4666-4667/2013, C.A
No. 6764/2013, C.A No. 4419/2012, C.A Nos. 8977-8988/2018, C.A No. 4629/2014,
C.A No. 4631/2014, C.A No. 4630/2014, C.A No. 10105/2013.
5 This category includes C.A. No. 10758/2017, C.A. No. 8990/2018, C.A. No.
9486/2017, C.A. No. 8711/2018, C.A. No. 8722/2018, C.A. No. 8724/2018, C.A. No.
8725/2018, C.A. No. 9551/2018, SLP(C) No. 6736/2020, C.A. No. 4634/2014.
9
by foreign, non-resident suppliers to resident Indian distributors or
end-users.6
5. These cases have a chequered history. The facts of C.A. Nos. 8733-
8734/2018 shall be taken as a sample, indicative of the points of law
that arise from the various appeals before us. In this case, the appellant,
Engineering Analysis Centre of Excellence Pvt. Ltd. [“EAC”], is a
resident Indian end-user of shrink-wrapped computer software, directly
imported from the United States of America [“USA”]. The assessment
years that we are concerned with are 2001-2002 and 2002-2003.
6. The Assessing Officer by an order dated 15.05.2002, after applying
Article 12(3) of the Double Taxation Avoidance Agreement [“DTAA”],
between India and USA, and upon applying section 9(1)(vi) of the
Income Tax Act, found that what was in fact transferred in the
transaction between the parties was copyright which attracted the
payment of royalty and thus, it was required that tax be deducted at
source by the Indian importer and end-user, EAC. Since this was not
done for both the assessment years, EAC was held liable to pay the
6 This category includes C.A. Nos. 10115-10117/2013, C.A. Nos. 6386-6387/2016,
C.A. Nos. 8954-8955/2018, SLP(C) No. 37580/2016, SLP(C) No. 28867/2016, SLP(C)
No. 28868/2016, C.A. No. 10673/2016, SLP(C) No. 29571/2016, C.A. No.
10674/2016, SLP(C) No. 36782/2016.
10
amount of Rs. 1,03,54,784 that it had not deducted as TDS, along with
interest under section 201(1A) of the Income Tax Act amounting to Rs.
15,76,567. The appeal before the Commissioner of Income Tax [“CIT”]
was dismissed by an order dated 23.01.2004. However, the appeal
before the Income Tax Appellate Tribunal [“ITAT”] succeeded vide an
order dated 25.11.2005, in which the ITAT followed its previous order
dated 18.02.2005, passed in Samsung Electronics Co. Ltd. v.
Income Tax Officer, ITA Nos. 264-266/Bang/2002.
7. An appeal was made from the order of the ITAT to the High Court of
Karnataka by the Revenue. The Division Bench of the High Court of
Karnataka heard a batch of appeals and framed nine questions, of
which question nos. 8 and 9 are important and are set out as follows:
“8. Whether the Tribunal was correct in holding that since
the assessee had purchased only a right to use the copyright
i.e. the software and not the entire copyright itself, the
payment cannot be treated as Royalty as per the Double
Taxation Avoidance Agreement and Treaties, which [are]
beneficial to the assessee and consequently section 9 of the
Act should not take into consideration.
9. Whether the Tribunal was correct in holding that the
payment partakes the character of purchase and sale of
goods and therefore cannot be treated as royalty payment
liable to Income Tax.”
11
8. In answering these questions, through a judgment dated 24.09.2009,
the Division Bench of the High Court of Karnataka relied heavily upon
the judgment of this Court in Transmission Corpn. of A.P. Ltd. v. CIT,
(1999) 7 SCC 266 [“AP Transco”] and held that since no application
under section 195(2) of the Income Tax Act had been made, the
resident Indian importers became liable to deduct tax at source, without
more, under section 195(1) of the Income Tax Act.
9. This view of the High Court was set aside by this Court in GE India
Technology Centre (P) Ltd. v. CIT, (2010) 10 SCC 29 [“GE
Technology”], which ultimately found that the judgment of the High
Court dated 24.09.2009 had misread AP Transco (supra).
Consequently, this Court remanded the matter to the High Court of
Karnataka to decide, on merits, the question of law framed as follows:
“24. In our view, Section 195(2) is based on the “principle of
proportionality”. The said sub-section gets attracted only in
cases where the payment made is a composite payment in
which a certain proportion of payment has an element of
“income” chargeable to tax in India. It is in this context that
the Supreme Court stated: (Transmission Corpn. case
[(1999) 7 SCC 266 : (1999) 239 ITR 587] , SCC p. 274, para
10)
“10. … If no such application is filed income tax on
such sum is to be deducted and it is the statutory
obligation of the person responsible for paying
such ‘sum’ to deduct tax thereon before making
12
payment. He has to discharge the obligation [to
TDS].”
(emphasis supplied)
If one reads the observation of the Supreme Court, the
words “such sum” clearly indicate that the observation refers
to a case of composite payment where the payer has a doubt
regarding the inclusion of an amount in such payment which
is exigible to tax in India. In our view, the above observations
of this Court in Transmission Corpn. case [(1999) 7 SCC 266
: (1999) 239 ITR 587] which is put in italics has been
completely, with respect, misunderstood by the Karnataka
High Court to mean that it is not open for the payer to
contend that if the amount paid by him to the non-resident is
not at all “chargeable to tax in India”, then no TAS is required
to be deducted from such payment. This interpretation of the
High Court completely loses sight of the plain words of
Section 195(1) which in clear terms lays down that tax at
source is deductible only from “sums chargeable” under the
provisions of the IT Act i.e. chargeable under Sections 4, 5
and 9 of the IT Act.
25. Before concluding we may clarify that in the present case
on facts ITO(TDS) had taken the view that since the sale of
the software concerned, included a licence to use the same,
the payment made by the appellant(s) to foreign suppliers
constituted “royalty” which was deemed to accrue or arise in
India and, therefore, TAS was liable to be deducted under
Section 195(1) of the Act. The said finding of ITO(TDS) was
upheld by CIT(A). However, in the second appeal, ITAT held
that such sum paid by the appellant(s) to the foreign
software suppliers was not a “royalty” and that the same did
not give rise to any “income” taxable in India and, therefore,
the appellant(s) was not liable to deduct TAS. However, the
High Court did not go into the merits of the case and it went
13
straight to conclude that the moment there is remittance an
obligation to deduct TAS arises, which view stands hereby
overruled.
26. Since the High Court did not go into the merits of the
case on the question of payment of royalty, we hereby set
aside the impugned judgment of the High Court and remit
these cases to the High Court for de novo consideration of
the cases on merits. The question which the High Court will
answer is: whether on facts and circumstances of the case
ITAT was justified in holding that the amount(s) paid by the
appellant(s) to the foreign software suppliers was not
“royalty” and that the same did not give rise to any “income”
taxable in India and, therefore, the appellant(s) was not
liable to deduct any tax at source?”
10. The impugned judgment of the High Court of Karnataka, dated
15.10.2011, reported as CIT v. Samsung Electronics Co. Ltd., (2012)
345 ITR 494, dealt with a whole group of appeals, and was thus faced
with the following question so posed by this Court:
“The question which the High Court will answer is—
“whether, on facts and circumstances of the case,
the Income-tax Appellate Tribunal was justified in
holding that the amount(s) paid by the appellant(s)
to the foreign software suppliers was not “royalty”
and that the same did not give rise to any “income”
taxable in India and, therefore, the appellant(s) was
not liable to deduct any tax at source?””
(page 498)
14
11. After setting out the facts in one of the appeals treated as the lead
matter, namely ITA No. 2808/2005 concerning Samsung Electronics
Co. Ltd., and the relevant provisions of the Income Tax Act, India’s
DTAAs with USA, France and Sweden respectively, the High Court of
Karnataka, on an examination of the End-User Licence Agreement
[“EULA”] involved in the transaction, found that what was sold by way
of computer software included a right or interest in copyright, which thus
gave rise to the payment of royalty and would be an income deemed to
accrue in India under section 9(1)(vi) of the Income Tax Act, requiring
the deduction of tax at source.
12. Leading the charge on behalf of the appellants in the appeals against
this impugned judgment of the High Court of Karnataka, Shri Arvind
Datar, learned Senior Advocate, appearing on behalf of IBM India Ltd.
[“IBM India”] in C.A. No. 4419/2012, which is a resident Indian
distributor of computer software products purchased from IBM
Singapore Pte Ltd. [“IBM Singapore”], submitted that his client is a nonexclusive distributor, which purchases off-the-shelf copies of shrinkwrapped computer software from a foreign company in Singapore for
onward sale to Indian end-users under a Remarketer Agreement. He
stressed that IBM India, the distributor, is not party to the EULA between
IBM Singapore and the ultimate end-users/customers in India. The
15
Indian end-user pays IBM India, and in turn, IBM India pays this amount
to IBM Singapore after deducting a portion of profit. Importantly, under
the Remarketer Agreement, IBM India does not own any right, title or
interest in copyright and other intellectual property owned by IBM
Singapore, and merely markets IBM Singapore’s software products in
India.
13. Shri Datar further argued that the computer software that is imported for
onward sale from Singapore constitutes “goods” and thus was directly
covered by this Court’s judgment in Tata Consultancy Services v.
State of A.P., 2005 (1) SCC 308. He assailed the impugned judgment
of the High Court of Karnataka by referring to Article 12 of the
Agreement between the Government of the Republic of India and the
Government of the Republic of Singapore for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with respect to Taxes on
Income,7
[“India-Singapore DTAA”], and the definition of “royalties”
contained therein. He argued that the definition of “royalties” did not
extend to derivative products of the copyright, for example, a book or a
music CD or software products. He relied upon the judgment in Union
7 Notification No. GSR 610(E), Dated 8-8-1994 As Amended by Notification No. SO
1022(E), Dated 18-7-2005; No. S.O. 2031(E), Dated 1-9-2011 and No. S.O. 935(E),
Dated 23-3-2017.
16
of India v. Azadi Bachao Andolan, (2004) 10 SCC 1 [“Azadi Bachao
Andolan”] to argue that by virtue of section 90(2) of the Income Tax
Act, the DTAA would prevail over domestic law to the extent it is more
beneficial to the deductor of tax under section 195 of the Income Tax
Act. According to him, even assuming that under section 9(1)(vi) of the
Income Tax Act IBM India’s transaction would entail parting with
copyright and attract royalty, upon applying the more beneficial
provisions of the India-Singapore DTAA, it would be made clear that the
amounts payable were not in the nature of royalty, and no income in the
hands of the foreign supplier would be deemed to accrue in India. Thus,
no tax had to be deducted by the Indian importer under section 195(1)
of the Income Tax Act. Equally, he submitted that the retrospective
amendment to section 9(1)(vi) of the Income Tax Act brought in by the
Finance Act 2012, which added explanation 4 to the provision and
expanded its ambit with effect from 01.06.1976, could also not be
applied to the DTAA in question.
14. Pointing to the provisions of the Copyright Act, 1957 [“Copyright Act”],
Shri Datar argued that there was a difference between a copyright in an
original work and a copyrighted article, and that this was recognised in
section 14(b) of the Copyright Act, which refers to a “computer program”
per se and a “copy of a computer program” as two distinct subject
17
matters. He emphasized that under the Remarketer Agreement, no
copyright was given by IBM Singapore and that even the end-user in
India only received a limited licence to use the product by itself, with no
right to sub-license, lease, make copies etc. The licence to use such
shrink-wrapped computer software was thus incidental to and essential
to effectuate the use of the product. He strongly relied upon the
Commentaries on the Articles of the Model Tax Convention on Income
and on Capital [“OECD Commentary”] by the Organisation for
Economic Co-operation and Development [“OECD”] which
distinguishes between the sale of a copyrighted article and the sale of
copyright itself. He further argued that the doctrine of first sale/principle
of exhaustion was cemented in section 14(b)(ii) of the Copyright Act
post the amendment brought in vide Act 49 of 1999, with effect from
15.01.2000 [“1999 Amendment”], thereby making it clear that the
foreign supplier’s distribution right would not extend to the sale of copies
of the work to other persons beyond the first sale. Importantly, he added
that the importer, IBM India, being only a distributor, had no right to use
the computer software, and merely purchased a sealed, shrinkwrapped product and resold it in the same, sealed condition, and
thereby did not pay any consideration for any transfer of or interest in
18
copyright. He cited a number of judgments and other authorities to
buttress his submissions.
15. Shri Percy Pardiwala, learned Senior Advocate appearing on behalf of
Rational Software Corporation India Ltd. in C.A. No. 8962/2018,
supplemented Shri Datar’s submissions, and adverted to the provisions
of the India-Singapore DTAA, Income Tax Act and the relevant EULA
and Remarketer Agreement. Coming to the Finance Act 2012 which
added explanation 4 to section 9(1)(vi) of the Income Tax Act, he
argued that the words “any right, property or information used or
services utilised” which occur in section 9(1)(vi)(b), make it clear that
explanation 4, read both textually and contextually would only apply to
section 9(1)(vi)(b), and not expand the scope of the definition of royalty
contained in explanation 2 to section 9(1)(vi). Further, he referred to
Circular No. 10/2002 dated 09.10.2002 by the Central Board of Direct
Taxes [“CBDT”] in which “remittance for royalties” and “remittance for
supply of articles or…computer software” were addressed as separate
and distinct payments, the former attracting the “royalty” provision under
Article 12 of the DTAA, and the latter being taxable as business profits
under Article 7 of the DTAA, provided that the foreign, non-resident
supplier or manufacturer had a permanent establishment [“PE”] in India.
19
16. Shri S. Ganesh, learned Senior Advocate appearing on behalf of
Sonata Information Technology Ltd. in C.A. Nos. 8737-8941/2018,
submitted that to comprehend the nature of a licence, one would have
to refer to section 52 of the Indian Easements Act 1882. He stressed
the fact that the ruling by the AAR in the case of Dassault Systems,
K.K., In Re., (2010) 322 ITR 125 (AAR), as followed in Geoquest
Systems B.V. Gevers Deynootweg, In Re., (2010) 327 ITR 1 (AAR),
was not appealed against by the Revenue, and the exhaustive
statement of law contained therein is something that he relied upon.
According to him, if the position of the Revenue were correct, arbitrary
results would ensue, inasmuch as his client, receiving a 2%
commission, would, however, after the disallowance of the deduction
under section 40(a)(ia) of the Income Tax Act, end up paying tax of a
huge amount, way beyond the commission, resulting in extreme
financial hardship. Thus, if section 195 of the Income Tax Act could be
construed in a manner so as to avoid such a result, this must be done.
Further, he relied heavily upon the OECD Commentary and went on to
argue that mere nomenclature, such as the use of the term “licence”,
was not conclusive as to the character of the transaction. He also relied
upon section 52(1)(aa) of the Copyright Act to argue that what is
mentioned in the provision is exactly what the transactions in these
20
appeals are concerned with, and therefore, the making of copies only
in order to utilise the product to the extent permitted by the EULA, would
not constitute an infringement of copyright, as expressly stated in this
provision. Going by what the originator or creator holds by way of
copyright, which he either passes on or retains, and what is mentioned
in section 52(1)(aa) of the Copyright Act, he submitted that what was
resold by his client in this case was not copyright, but merely a
copyrighted article, which constituted goods in the hands of the enduser, without any right to transfer the same. He also cited several
judgments to buttress his submissions.
17. Shri Ajay Vohra, learned Senior Advocate appearing on behalf of
Sasken Communications Tech Ltd. in C.A. Nos. 10114/2013 and
8957/2018, relied upon the Convention between the Government of the
United States of America and the Government of the Republic of India
for the Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with respect to Taxes on Income,8
[“India-USA DTAA”] and
echoed the submissions of his predecessors. In addition, he argued that
the retrospective amendment to section 9(1)(vi) of the Income Tax Act
adding explanation 4, could not be applied as the assessment years
8 Notification No. GSR 992(E), dated 20-12-1990.
21
that we are concerned with in all these cases are prior to 2012, and that
the law cannot compel one to do the impossible, namely, to deduct tax
at source on an expanded definition of royalty which did not exist at the
time of the payment/deduction to be made under section 195 of the
Income Tax Act. He cited various judgments and relied upon the
proposition that where no assessment to tax can be made on a foreign,
non-resident supplier, the appellants could not be held to be assessees
in default for not deducting tax at source under section 195 of the
Income Tax Act.
18. Shri Preetesh Kapur, learned Senior Advocate appearing on behalf of
Sunray Computers Pvt. Ltd. in C.A. Nos. 10115-10117/2013, stressed
upon the language of section 14(b)(ii) of the Copyright Act, both pre and
post the 1999 Amendment, brought in with effect from 15.01.2000, and
cited the doctrine of first sale/principle of exhaustion, arguing that the
amendment, after deleting the words “regardless of whether such copy
has been sold or given on hire on earlier occasions”, was a statutory
application of the doctrine of first sale/principle of exhaustion. This, he
argued, made it clear that since no distribution right by the original
owner extended beyond the first sale of the copyrighted goods, it can
be said that only the goods, and not the copyright in the goods, had
passed onto the importer.
22
19. Shri Sachit Jolly, learned advocate appearing on behalf of Engineering
Analysis Centre of Excellence Pvt. Ltd. in C.A. Nos. 8733-8734/2018,
and GE India Technology Centre Pvt. Ltd. in C.A. Nos. 8735-
8736/2018, also echoed these submissions and in particular, relied
upon judgments which made it clear that a retrospective amendment to
a statute cannot be applied to an assessment year in which, as a matter
of fact, the expanded definition of royalty did not exist.
20. Shri Kunal Verma, learned advocate appearing on behalf of Infineon
Technologies India Pvt. Ltd. in C.A. No. 2006/2019, argued that in any
case, in the facts of his case, the payments made by the assessee were
in the nature of reimbursement of costs under a cost-sharing agreement
with a German supplier of software, and thus no “sum chargeable under
the provisions of [the] Act” had been paid, attracting section 195 of the
Income Tax Act. To buttress his submission, he relied in particular upon
the judgment in Director of Income Tax v. A.P. Moller Maersk AS,
(2017) 5 SCC 651.
21. Per contra, Shri Balbir Singh, the learned Additional Solicitor General
appearing on behalf of the Revenue, took us through the provisions of
the Income Tax Act, the Copyright Act, the India-USA DTAA and some
of the EULAs between the parties. He argued that explanation 2(v) to
section 9(1)(vi) of the Income Tax Act applied to payments to a non-
23
resident by way of royalty for the use of or the right to use any copyright.
For this, he relied upon the language of explanation 2(v) and stressed
that the words “in respect of” have to be given a wide meaning. He then
relied upon CBDT Circular No. 152 dated 27.11.1974,9
together with the
statement of the Finance Minister made before the Lok Sabha on
07.09.1990,10 and CBDT Notification No. 21/2012 dated 13.06.2012,11
to submit that explanation 4 to section 9(1)(vi) of the Income Tax Act is
clarificatory of the position in law right from 01.06.1976 when section
9(1)(vi) of the Income Tax Act was first brought into force. He then
argued that the provisions for TDS are distinct from and exist apart from
provisions for assessment under the Income Tax Act. This being so, it
is clear that the India-USA DTAA and other such DTAAs would not apply
to the persons spoken of in section 195 of the Income Tax Act who are
not assessees, since the provisions of the DTAAs, when read with
section 90 of the Income Tax Act, applied only to persons who could be
described as assessees. He also relied upon Article 30 of the India-USA
DTAA which, for the USA, fixes different dates for the entry into force of
9 Circular No. 152 [F.No. 484/31/74-FTD-II], dated 27.11.1974.
10 As recorded in CBDT Circular No. 588 dated 02.01.1991.
11 Notification No. 21/2012 [F.No.142/10/2012-SO(TPL)] S.O. 1323(E), dated
13.06.2012.
24
the provisions concerning withholding taxes and other taxes, unlike the
entry into force provision for India, which makes no such distinction.
This, he argued, would make it clear that persons who have to make
deductions under section 195 of the Income Tax Act do not fall within
the subject matter of the India-USA DTAA and other such DTAAs. He
then relied heavily upon AP Transco (supra) and other judgments which
make it clear that a “payer” under section 195 and an “assessee” under
section 2(7) of the Income Tax Act are distinct. He also relied heavily
upon a recent judgment of this Court in PILCOM v. CIT, West BengalVII, 2020 SCC Online SC 426 [“PILCOM”], which dealt with section
194E of the Income Tax Act, for the proposition that tax has to be
deducted at source irrespective of whether tax is otherwise payable by
the non-resident assessee. He then relied upon CBDT Circular No. 588
dated 02.01.1991,12 which clarified that tax concessions were not
available in relation to payments in respect of software imported
separately or independently of computer hardware.
22. Coming to the Copyright Act, the learned Additional Solicitor General
relied upon sections 2(a)(v), 19(3), 30A, 52(1)(ad), 58 and 65A of the
Copyright Act to buttress the submission that in some of the cases
12 187 ITR (St.) 0063.
25
before us, since adaptation of software could be made, albeit for
installation and use on a particular computer, copyright is parted with by
the original owner. He added that section 51(b) of the Copyright Act
makes it clear that when any person makes for sale or hire, or sells or
lets for hire, or distributes, either for the purpose of trade or to such an
extent as to affect prejudicially the owner of the copyright, or imports
into India, any infringing copies of the work, such importation into India
without a licence would amount to infringement of copyright. Further,
section 58 of the Copyright Act regards infringing copies of any work as
the property of the owner of the copyright, who accordingly may take
proceedings for the recovery of possession thereof or in respect of the
conversion thereof. From section 52(1)(ad) of the Copyright Act, the
learned Additional Solicitor General sought to argue that only the
making of copies or the adaptation of a computer programme from a
legally obtained copy for non-commercial, personal use would not
amount to infringement, and therefore in the appeals before us, where
such copies were made for commercial use, the converse would be true.
He relied strongly upon the AAR’s ruling in Citrix Systems Asia Pacific
Ptyl. Ltd., In Re., (2012) 343 ITR 1 (AAR), arguing that it approached
the subject correctly and that the findings made therein are different and
preferable to the findings made by the AAR in Dassault Systems, K.K.,
26
In Re., (2010) 322 ITR 125 (AAR) and Geoquest Systems B.V.
Gevers Deynootweg, In Re., (2010) 327 ITR 1 (AAR), and the other
judgments of the High Court of Delhi.
23. The learned Additional Solicitor General further pointed out that the
Indian Government had expressed its reservations on the OECD
Commentary, especially on the parts of the OECD Commentary dealing
with the parting of copyright and royalty. He also relied upon on the
Report of the High Powered Committee on ‘Electronic Commerce and
Taxation’ constituted by the CBDT,13 [“HPC Report 2003”] and the
Report of the Committee on the Taxation of E-Commerce [“ECommerce Report 2016”], which proposed an equalization levy on
specified transactions. He then went on to rely on certain judgments to
state that even if the OECD Commentary could be relied upon, it being
a rule of international law contrary to domestic law, to the extent it was
contrary to explanations 2 and 4 of section 9(1)(vi) of the Income Tax
Act, it must give way to domestic law. Referring to the doctrine of first
sale/principle of exhaustion, he cited a number of judgments in order to
show that under section 14(b)(ii) of the Copyright Act, this doctrine
cannot be said to apply insofar as distributors are concerned. He finally
13 F. No 500/ 122/ 99 dated December 16, 1999.
27
concluded his arguments by stating that the judgments which deal with
computer software under sales tax law and excise law have no
relevance to income tax law, as the laws relating to indirect taxes are
fundamentally different from the laws relating to direct taxes, since they
must follow the drill of the chargeability under the Income Tax Act, which
is different from chargeability under sales tax law or excise law.
THE INCOME TAX ACT, 1961
24. Having heard the learned counsels appearing on behalf of various
parties, we first set out the relevant provisions of the Income Tax Act
that we are directly concerned with:
“2. Definitions.
In this Act, unless the context otherwise requires,—
xxx xxx xxx
(7) "assessee" means a person by whom any tax or any
other sum of money is payable under this Act, and
includes—
(a) every person in respect of whom any proceeding
under this Act has been taken for the assessment of his
income or assessment of fringe benefits or of the
income of any other person in respect of which he is
assessable, or of the loss sustained by him or by such
other person, or of the amount of refund due to him or
to such other person ;
(b) every person who is deemed to be an assessee
under any provision of this Act ;
28
(c) every person who is deemed to be an assessee in
default under any provision of this Act ;
xxx xxx xxx
14(37A) “rate or rates in force” or “rates in force”, in relation
to an assessment year or financial year, means—
xxx xxx xxx
(iii) for the purposes of deduction of tax under section
194LBA or section 194LBB or section 194LBC or
section 195, the rate or rates of income-tax specified in
this behalf in the Finance Act of the relevant year or the
rate or rates of income-tax specified in an agreement
entered into by the Central Government under section
90, or an agreement notified by the Central Government
under section 90A, whichever is applicable by virtue of
the provisions of section 90, or section 90A, as the case
may be;”
“4. Charge of income-tax.
(1) Where any Central Act enacts that income-tax shall be
charged for any assessment year at any rate or rates,
income-tax at that rate or those rates shall be charged for
that year in accordance with, and subject to the provisions
(including provisions for the levy of additional income-tax) of,
this Act in respect of the total income of the previous year of
every person:
Provided that where by virtue of any provision of this Act
income-tax is to be charged in respect of the income of a
period other than the previous year, income-tax shall be
charged accordingly.
(2) In respect of income chargeable under sub-section (1),
income-tax shall be deducted at the source or paid in
advance, where it is so deductible or payable under any
provision of this Act.”
14 Substituted by the Finance Act 1992 (18 of 1992), sec. 3(c) (w.e.f. 1-6-1992).
29
“5. Scope of total income.
(1) Subject to the provisions of this Act, the total income of
any previous year of a person who is a resident includes all
income from whatever source derived which—
(a) is received or is deemed to be received in India in
such year by or on behalf of such person ; or
(b) accrues or arises or is deemed to accrue or arise to
him in India during such year ; or
(c) accrues or arises to him outside India during such
year :
Provided that, in the case of a person not ordinarily resident
in India within the meaning of sub-section (6) of section 6,
the income which accrues or arises to him outside India shall
not be so included unless it is derived from a business
controlled in or a profession set up in India.
(2) Subject to the provisions of this Act, the total income of
any previous year of a person who is a non-resident includes
all income from whatever source derived which—
(a) is received or is deemed to be received in India in
such year by or on behalf of such person ; or
(b) accrues or arises or is deemed to accrue or arise to
him in India during such year.
Explanation 1.—Income accruing or arising outside India
shall not be deemed to be received in India within the
meaning of this section by reason only of the fact that it is
taken into account in a balance sheet prepared in India.
Explanation 2.—For the removal of doubts, it is hereby
declared that income which has been included in the total
income of a person on the basis that it has accrued or arisen
or is deemed to have accrued or arisen to him shall not again
be so included on the basis that it is received or deemed to
be received by him in India.”
30
“9. Income deemed to accrue or arise in India.
(1) The following incomes shall be deemed to accrue or arise
in India:—
xxx xxx xxx
15(vi) income by way of royalty payable by—
xxx xxx xxx
(b) a person who is a resident, except where the
royalty is payable in respect of any right, property or
information used or services utilised for the purposes
of a business or profession carried on by such person
outside India or for the purposes of making or earning
any income from any source outside India;
xxx xxx xxx
Explanation 2.—For the purposes of this clause, "royalty"
means consideration (including any lump sum consideration
but excluding any consideration which would be the income
of the recipient chargeable under the head "Capital gains")
for—
(i) the transfer of all or any rights (including the granting
of a licence) in respect of a patent, invention, model,
design, secret formula or process or trade mark or
similar property;
(ii) the imparting of any information concerning the
working of, or the use of, a patent, invention, model,
design, secret formula or process or trade mark or
similar property ;
(iii) the use of any patent, invention, model, design,
secret formula or process or trade mark or similar
property ;
15 Inserted by the Finance Act 1976 (66 of 1976), sec 4(b) (w.e.f. 1-6-1976).
31
(iv) the imparting of any information concerning
technical, industrial, commercial or scientific
knowledge, experience or skill ;
16(iva) the use or right to use any industrial, commercial
or scientific equipment but not including the amounts
referred to in section 44BB;
(v) the transfer of all or any rights (including the granting
of a licence) in respect of any copyright, literary, artistic
or scientific work including films or video tapes for use
in connection with television or tapes for use in
connection with radio broadcasting; or
(vi) the rendering of any services in connection with the
activities referred to in 17[sub-clauses (i) to (iv), (iva) and
(v)].
18Explanation 3.—For the purposes of this clause, "computer
software" means any computer programme recorded on any
disc, tape, perforated media or other information storage
device and includes any such programme or any customized
electronic data.
19Explanation 4.—For the removal of doubts, it is hereby
clarified that the transfer of all or any rights in respect of any
right, property or information includes and has always
included transfer of all or any right for use or right to use a
16 Inserted by the Finance Act 2001 (14 of 2001), sec. 4(i) (w.e.f. 1-4-2002).
17 Substituted by the Finance Act 2001 (14 of 2001), sec. 4(ii), for “sub-clauses (i) to
(v)” (w.e.f. 1-4-2002).
18 Substituted by the Finance Act 2000 (10 of 2000), sec. 4, for Explanation 3 (w.e.f.
1-4-2001). Explanation 3 before substitution, stood as under:
“Explanation 3.- For the purposes of this clause, the expression
“computer software” shall have the meaning assigned to it in clause
(b) of the Explanation to section 80HHE”.
19 Inserted by the Finance Act 2012 (23 of 2012), sec 4(b) (w.r.e.f 1-6-1976).
32
computer software (including granting of a licence)
irrespective of the medium through which such right is
transferred.
20Explanation 5.—For the removal of doubts, it is hereby
clarified that the royalty includes and has always included
consideration in respect of any right, property or information,
whether or not—
(a) the possession or control of such right, property or
information is with the payer;
(b) such right, property or information is used directly by
the payer;
(c) the location of such right, property or information is
in India.”
“90. Agreement with foreign countries or specified
territories.
(1) The Central Government may enter into an agreement
with the Government of any country outside India or
specified territory outside India,—
(a) for the granting of relief in respect of—
(i) income on which have been paid both incometax under this Act and income-tax in that country or
specified territory, as the case may be, or
(ii) income-tax chargeable under this Act and under
the corresponding law in force in that country or
specified territory, as the case may be, to promote
mutual economic relations, trade and investment,
or
(b) for the avoidance of double taxation of income under
this Act and under the corresponding law in force in that
country or specified territory, as the case may be,
20
Inserted by the Finance Act 2012 (23 of 2012), sec 4(b) (w.r.e.f 1-6-1976).
33
without creating opportunities for non-taxation or
reduced taxation through tax evasion or avoidance
(including through treaty-shopping arrangements aimed
at obtaining reliefs provided in the said agreement for
the indirect benefit to residents of any other country or
territory), or
(c) for exchange of information for the prevention of
evasion or avoidance of income-tax chargeable under
this Act or under the corresponding law in force in that
country or specified territory, as the case may be, or
investigation of cases of such evasion or avoidance, or
(d) for recovery of income-tax under this Act and under
the corresponding law in force in that country or
specified territory, as the case may be,
and may, by notification in the Official Gazette, make
such provisions as may be necessary for implementing
the agreement.
(2) Where the Central Government has entered into an
agreement with the Government of any country outside India
or specified territory outside India, as the case may be,
under sub-section (1) for granting relief of tax, or as the case
may be, avoidance of double taxation, then, in relation to the
assessee to whom such agreement applies, the provisions
of this Act shall apply to the extent they are more beneficial
to that assessee.
xxx xxx xxx
21Explanation 4.—For the removal of doubts, it is hereby
declared that where any term used in an agreement entered
into under sub-section (1) is defined under the said
agreement, the said term shall have the same meaning as
assigned to it in the agreement; and where the term is not
defined in the said agreement, but defined in the Act, it shall
21 Inserted by the Finance Act 2017, sec. 39 (w.e.f. 1-4-2018).
34
have the same meaning as assigned to it in the Act and
explanation, if any, given to it by the Central Government.”
“195. Other sums.
(1) Any person responsible for paying to a non-resident, not
being a company, or to a foreign company, any interest (not
being interest referred to in section 194LB or section 194LC)
or section 194LD or any other sum chargeable under the
provisions of this Act (not being income chargeable under
the head "Salaries") shall, at the time of credit of such
income to the account of the payee or at the time of payment
thereof in cash or by the issue of a cheque or draft or by any
other mode, whichever is earlier, deduct income-tax thereon
at the rates in force:
Provided that in the case of interest payable by the
Government or a public sector bank within the meaning of
clause (23D) of section 10 or a public financial institution
within the meaning of that clause, deduction of tax shall be
made only at the time of payment thereof in cash or by the
issue of a cheque or draft or by any other mode.
Explanation 1.—For the purposes of this section, where any
interest or other sum as aforesaid is credited to any account,
whether called "Interest payable account" or "Suspense
account" or by any other name, in the books of account of
the person liable to pay such income, such crediting shall be
deemed to be credit of such income to the account of the
payee and the provisions of this section shall apply
accordingly.
22Explanation 2.—For the removal of doubts, it is hereby
clarified that the obligation to comply with sub-section (1)
and to make deduction thereunder applies and shall be
deemed to have always applied and extends and shall be
22 Inserted by the Finance Act 2012 (23 of 2012), sec. 77(a)(ii) (w.r.e.f. 1-4-1962).
35
deemed to have always extended to all persons, resident or
non-resident, whether or not the non-resident person has—
(i) a residence or place of business or business
connection in India; or
(ii) any other presence in any manner whatsoever in
India.
(2) Where the person responsible for paying any such sum
chargeable under this Act 23(other than salary) to a nonresident considers that the whole of such sum would not be
income chargeable in the case of the recipient, he may make
an application in such form and manner to the Assessing
Officer, to determine in such manner, as may be prescribed,
the appropriate proportion of such sum so chargeable, and
upon such determination, tax shall be deducted under subsection (1) only on that proportion of the sum which is so
chargeable.”
“201. Consequences of failure to deduct or pay.
(1) Where any person, including the principal officer of a
company,—
(a) who is required to deduct any sum in accordance
with the provisions of this Act; or
(b) referred to in sub-section (1A) of section 192, being
an employer,
does not deduct, or does not pay, or after so deducting fails
to pay, the whole or any part of the tax, as required by or
under this Act, then, such person, shall, without prejudice to
any other consequences which he may incur, be deemed to
be an assessee in default in respect of such tax:
Provided that any person, including the principal officer of a
company, who fails to deduct the whole or any part of the
23 Substituted by the Finance Act 2003 (32 of 2003), sec. 80(b) (w.e.f. 1-6-2003).
36
tax in accordance with the provisions of this Chapter on the
sum paid to a payee or on the sum credited to the account
of a payee shall not be deemed to be an assessee in default
in respect of such tax if such payee—
(i) has furnished his return of income under section 139;
(ii) has taken into account such sum for computing
income in such return of income; and
(iii) has paid the tax due on the income declared by him
in such return of income,
and the person furnishes a certificate to this effect from an
accountant in such form as may be prescribed:
Provided further that no penalty shall be charged under
section 221 from such person, unless the Assessing Officer
is satisfied that such person, without good and sufficient
reasons, has failed to deduct and pay such tax.”
25. The scheme of the Income Tax Act, insofar as the question raised
before us is concerned, is that for income to be taxed under the Income
Tax Act, residence in India, as defined by section 6, is necessary in
most cases. By section 4(1), income tax shall be charged for any
assessment year at any rate or rates, as defined by section 2(37A) of
the Income Tax Act, in respect of the total income of the previous year
of every person. Under section 4(2), in respect of income chargeable
under sub-section (1) thereof, income tax shall be deducted at source
or paid in advance, depending upon the provisions of the Income Tax
Act. Importantly, under section 5(2) of the Income Tax Act, the total
income of a person who is a non-resident, includes all income from
37
whatever source derived, which accrues or arises or is deemed to
accrue or arise to such person in India during such year. This, however,
is subject to the provisions of the Income Tax Act. Certain income is
deemed to arise or accrue in India, under section 9 of the Income Tax
Act, notwithstanding the fact that such income may accrue or arise to a
non-resident outside India. One such income is income by way of
royalty, which, under section 9(1)(vi) of the Income Tax Act, means the
transfer of all or any rights, including the granting of a licence, in respect
of any copyright in a literary work.
26. That such transaction may be governed by a DTAA is then recognized
by section 5(2) read with section 90 of the Income Tax Act, making it
clear that the Central Government may enter into any such agreement
with the government of another country so as to grant relief in respect
of income tax chargeable under the Income Tax Act or under any
corresponding law in force in that foreign country, or for the avoidance
of double taxation of income under the Income Tax Act and under the
corresponding law in force in that country. What is of importance is that
once a DTAA applies, the provisions of the Income Tax Act can only
apply to the extent that they are more beneficial to the assessee and
not otherwise. Further, by explanation 4 to section 90 of the Income Tax
38
Act, it has been clarified by the Parliament that where any term is
defined in a DTAA, the definition contained in the DTAA is to be looked
at. It is only where there is no such definition that the definition in the
Income Tax Act can then be applied. This position has been recognised
by this Court in Azadi Bachao Andolan (supra), which held:
“21. The provisions of Sections 4 and 5 of the Act are
expressly made “subject to the provisions of this Act”, which
would include Section 90 of the Act. As to what would
happen in the event of a conflict between the provision of the
Income Tax Act and a notification issued under Section 90,
is no longer res integra.”
“28. A survey of the aforesaid cases makes it clear that the
judicial consensus in India has been that Section 90 is
specifically intended to enable and empower the Central
Government to issue a notification for implementation of the
terms of a Double Taxation Avoidance Agreement. When
that happens, the provisions of such an agreement, with
respect to cases to which they apply, would operate even if
inconsistent with the provisions of the Income Tax Act. We
approve of the reasoning in the decisions which we have
noticed. If it was not the intention of the legislature to make
a departure from the general principle of chargeability to tax
under Section 4 and the general principle of ascertainment
of total income under Section 5 of the Act, then there was no
purpose in making those sections “subject to the provisions
of the Act”. The very object of grafting the said two sections
with the said clause is to enable the Central Government to
issue a notification under Section 90 towards
implementation of the terms of DTACs which would
automatically override the provisions of the Income Tax Act
39
in the matter of ascertainment of chargeability to income tax
and ascertainment of total income, to the extent of
inconsistency with the terms of DTAC.”
(emphasis supplied)
27. The machinery provision contained in section 195 of the Income Tax
Act is inextricably linked with the charging provision contained in section
9 read with section 4 of the Income Tax Act, as a result of which, a
person resident in India, responsible for paying a sum of money,
“chargeable under the provisions of [the] Act”, to a non-resident, shall
at the time of credit of such amount to the account of the payee in any
mode, deduct tax at source at the rate in force which, under section
2(37A)(iii) of the Income Tax Act, is the rate in force prescribed by the
DTAA. Importantly, such deduction is only to be made if the nonresident is liable to pay tax under the charging provision contained in
section 9 read with section 4 of the Income Tax Act, read with the DTAA.
Thus, it is only when the non-resident is liable to pay income tax in India
on income deemed to arise in India and no deduction of TDS is made
under section 195(1) of the Income Tax Act, or such person has, after
applying section 195(2) of the Income Tax Act, not deducted such
proportion of tax as is required, that the consequences of a failure to
deduct and pay, reflected in section 201 of the Income Tax Act, follow,
by virtue of which the resident-payee is deemed an “assessee in
40
default”, and thus, is made liable to pay tax, interest and penalty
thereon. This position is also made amply clear by the referral order in
the concerned appeals from the High Court of Karnataka, namely, the
judgment of this Court in GE Technology (supra).
28. However, the learned Additional Solicitor General relied strongly upon
the recent judgment of this Court in PILCOM (supra). This judgment
dealt with payments made to non-resident sportspersons or sports
associations, the relevant provision under section 194E of the Income
Tax Act reading as follows:
“194-E. Payments to non-resident sportsmen or sports
associations. - Where any income referred to in Section
115-BBA is payable to a non-resident sportsman (including
an athlete) who is not a citizen of India or a non-resident
sports association or institution, the person responsible for
making the payment shall, at the time of credit of such
income to the account of the payee or at the time of payment
thereof in cash or by issue of a cheque or draft or by any
other mode, whichever is earlier, deduct income tax thereon
at the rate of ten percent”
29. It is in this context that this Court referred to the judgment in GE
Technology (supra) (see paragraph 16) and distinguished the same,
stating:
“16.1 The submission that unless permission was obtained
under Section 195(2) of the Act, the liability to deduct Tax at
Source must be with respect to the entire payment, was not
41
accepted. Relying on the expression “chargeable under the
provisions of the Act” occurring in Section 195(1) of the Act,
it was held “the obligation to deduct TAS, is however, limited
to the appropriate proportion of the income chargeable
under the Act forming part of the gross sum of money
payable to the non-resident”.
16.2 This decision, in our view, has no application insofar as
payments at serial nos. (vi) and (vii) are concerned. To the
extent the payments represented amounts which could not
be subject matter of charge under the provisions of the Act,
appropriate benefit already stands extended to the
Appellant.”
30. It was in the context of section 194E of the Income Tax Act, that the
Court went on to observe:
“18. We now come to the issue of applicability of DTAA. As
observed by the High Court, the matter was not argued
before it in that behalf, yet the issue was dealt with by the
High Court. In our view, the reasoning that weighed with the
High Court is quite correct. The obligation to deduct Tax at
Source under Section 194E of the Act is not affected by the
DTAA and in case the exigibility to tax is disputed by the
assessee on whose account the deduction is made, the
benefit of DTAA can be pleaded and if the case is made out,
the amount in question will always be refunded with interest.
But, that by itself, cannot absolve the liability under Section
194E of the Act.
19. In the premises, it must be held that the payments made
to the Non Resident Sports Associations in the present case
represented their income which accrued or arose or was
deemed to have accrued or arisen in India. Consequently,
42
the Appellant was liable to deduct Tax at Source in terms of
Section 194E of the Act.”
31. It will be seen that section 194E of the Income Tax Act belongs to a set
of various provisions which deal with TDS, without any reference to
chargeability of tax under the Income Tax Act by the concerned nonresident assessee. This section is similar to sections 193 and 194 of the
Income Tax Act by which deductions have to be made without any
reference to the chargeability of a sum received by a non-resident
assessee under the Income Tax Act. On the other hand, as has been
noted in GE Technology (supra), at the heart of section 195 of the
Income Tax Act is the fact that deductions can only be made if the nonresident assessee is liable to pay tax under the provisions of the Income
Tax Act in the first place.
32. Thus, the judgment of this Court in PILCOM (supra), dealing with a
completely different provision in a completely different setting, has no
application to the facts of this case.
THE COPYRIGHT ACT, 1957
33. The relevant provisions of the Copyright Act are as follows:
“2. Interpretation.—In this Act, unless the context otherwise
requires,—
(a) “adaptation” means,-
xxx xxx xxx
43
(v) in relation to any work, any use of such work
involving its rearrangement or alteration;
xxx xxx xxx
(d) “author” means,—
24(vi) in relation to any literary, dramatic, musical or
artistic work which is computer-generated, the
person who causes the work to be created;
xxx xxx xxx
25(fa) “commercial rental” does not include the rental,
lease or lending of a lawfully acquired copy of a
computer programme, sound recording, visual
recording or cinematographic film for non-profit
purposes by a non-profit library or non-profit
educational institution;
xxx xxx xxx
(ffb) “computer” includes any electronic or similar
device having information processing capabilities
(ffc) “computer programme” means a set of instructions
expressed in words, codes, schemes 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;
xxx xxx xxx
24 Substituted by Act 38 of 1994, sec. 2 (w.e.f. 10-5-1995).
25 Inserted by Act 27 of 2012, sec. 2(ii) (w.e.f. 21-6-2012).
44
(m) "infringing copy" means--
(i) in relation to a literary, dramatic, musical or
artistic work, a reproduction thereof otherwise than
in the form of a cinematograph film;
(ii) in relation to a cinematographic film, a copy of
the film made on any medium by any means;
(iii) in relation to a sound recording, any other
recording embodying the same sound recording,
made by any means;
(iv) in relation to a programme or performance in
which such a broadcast reproduction right or a
performer's right subsists under the provisions of
this Act, the sound recording or a cinematographic
film of such programme or performance,;
if such reproduction, copy or sound recording is made
or imported in contravention of the provisions of this Act;
xxx xxx xxx
26(o) "literary work" includes computer programmes,
tables and compilations including computer databases;”
“14. Meaning of copyright.-- For the purposes of this Act,
copyright means the exclusive right subject to the provisions
of this Act, to do or authorise the doing of any of the following
acts in respect of a work or any substantial part thereof,
namely--
(a) in the case of a literary, dramatic or musical work,
not being a computer programme,--
(i) to reproduce the work in any material form
including the storing of it in any medium by
electronic means;
26 Substituted by Act 38 of 1994, sec. 2 (w.e.f. 10-5-1995).
45
(ii) to issue copies of the work to the public not
being copies already in circulation;
(iii) to perform the work in public, or communicate
it to the public;
(iv) to make any cinematograph film or sound
recording in respect of the work;
(v) to make any translation of the work;
(vi) to make any adaptation of the work;
(vii) to do, in relation to a translation or an
adaptation of the work, any of the acts specified in
relation to the work in sub-clauses (i) to (vi);
(b) in the case of a computer programme--
(i) to do any of the acts specified in clause (a);
27(ii) to sell or give on commercial rental or offer for
sale or for commercial rental any copy of the
computer programme:
Provided that such commercial rental does not apply in
respect of computer programmes where the
programme itself is not the essential object of the
rental.”
“16. No copyright except as provided in this Act.-- No
person shall be entitled to copyright or any similar right in
any work, whether published or unpublished, otherwise than
under and in accordance with the provisions of this Act or of
any other law for the time being in force, but nothing in this
section shall be construed as abrogating any right or
jurisdiction to restrain a breach of trust or confidence.”
“18. Assignment of copyright.-- (1) The owner of the
copyright in an existing work or the prospective owner of the
27 Substituted by Act 49 of 1999, sec. 3 (w.e.f. 15-1-2000).
46
copyright in a future work may assign to any person the
copyright either wholly or partially and either generally or
subject to limitations and either for the whole term of the
copyright or any part thereof:
Provided that in the case of the assignment of copyright in
any future work, the assignment shall take effect only when
the work comes into existence.
28Provided further that no such assignment shall be applied
to any medium or mode of exploitation of the work which did
not exit or was not in commercial use at the time when the
assignment was made, unless the assignment specifically
referred to such medium or mode of exploitation of the work:
Provided also that the author of the literary or musical work
included in a cinematograph film shall not assign or waive
the right to receive royalties to be shared on an equal basis
with the assignee of copyright for the utilisation of such work
in any form other than for the communication to the public of
the work along with the cinematograph film in a cinema hall,
except to the legal heirs of the authors or to a copyright
society for collection and distribution and any agreement to
contrary shall be void:
Provided also that the author of the literary or musical work
included in the sound recording but not forming part of any
cinematograph film shall not assign or waive the right to
receive royalties to be shared on an equal basis with the
assignee of copyright for any utilisation of such work except
to the legal heirs of the authors or to a collecting society for
collection and distribution and any assignment to the
contrary shall be void.
28 Inserted by Act 27 of 2012, sec. 8 (w.e.f. 21-6-2012).
47
(2) Where the assignee of a copyright becomes entitled to
any right comprised in the copyright, the assignee as
respects the rights so assigned, and the assignor as
respects the rights not assigned, shall be treated for the
purposes of this Act as the owner of copyright and the
provisions of this Act shall have effect accordingly.
(3) In this section, the expression "assignee" as respects the
assignment of the copyright in any future work includes the
legal representatives of the assignee, if the assignee dies
before the work comes into existence.”
“19. Mode of assignment.—
xxx xxx xxx
(3) The assignment of copyright in any work shall also
specify the amount of royalty and any other consideration
payable, to the author or his legal heirs during the currency
of the assignment and the assignment shall be subject to
revision, extension or termination on terms mutually agreed
upon by the parties.”
“30. Licences by owners of copyright-- The owner of the
copyright in any existing work of the prospective owner of
the copyright in any future work may grant any interest in the
right by licence in writing by him or by his duly authorised
agent:
Provided that in the case of a licence relating to copyright in
any future work, the licence shall take effect only when the
work comes into existence.
Explanation.--Where a person to whom a licence relating to
copyright in any future work is granted under this section
dies before the work comes into existence, his legal
48
representatives shall, in the absence of any provision to the
contrary in the licence, be entitled to the benefit of the
licence.
2930A. Application of section 19.— The provisions of
section 19 shall, with any necessary adaptations and
modifications, apply in relation to a licence under section 30
as they apply in relation to assignment of copyright in a
work.”
“51. When copyright infringed. Copyright in a work shall
be deemed to be infringed--
(a) when any person, without a licence granted by the owner
of the copyright or the Registrar of Copyrights under this Act
or in contravention of the conditions of a licence so granted
or of any condition imposed by a competent authority under
this Act--
(i) does anything, the exclusive right to do which is by
this Act conferred upon the owner of the copyright, or
(ii) permits for profit any place to be used for the
communication of the work to the public where such
communication constitutes an infringement of the
copyright in the work, unless he was not aware and had
no reasonable ground for believing that such
communication to the public would be an infringement
of copyright; or
(b) when any person--
(i) makes for sale or hire, or sells or lets for hire, or by
way of trade displays or offers for sale or hire, or
(ii) distributes either for the purpose of trade or to such
an extent as to affect prejudicially the owner of the
copyright, or
29 Inserted by Act 38 of 1994, s. 10 (w.e.f. 10-5-1995).
49
(iii) by way of trade exhibits in public, or
(iv) imports into India, any infringing copies of the work:
Provided that nothing in sub-clause (iv) shall apply to the
import of one copy of any work for the private and domestic
use of the importer.]
Explanation.-- For the purposes of this section, the
reproduction of a literary, dramatic, musical or artistic work
in the form of a cinematograph film shall be deemed to be
an "infringing copy".
“52. Certain acts not to be infringement of copyright.
(1) The following acts shall not constitute an infringement of
copyright, namely,--
xxx xxx xxx
30(aa) the making of copies or adaptation of a computer
programme by the lawful possessor of a copy of such
computer programme, from such copy--
(i) in order to utilise the computer programme for
the purpose for which it was supplied; or
(ii) to make back-up copies purely as a temporary
protection against loss, destruction or damage in
order only to utilise the computer programme for
the purpose for which it was supplied;
xxx xxx xxx
(ad) the making of copies or adaptation of the computer
programme from a personally legally
obtained copy for non-commercial personal use;”
“58. Rights of owner against persons possessing or
dealing with infringing copies.— All infringing copies of
any work in which copyright subsists, and all plates used or
30 Inserted by Act 38 of 1994, sec. 17 (w.e.f. 10-5-1995).
50
intended to be used for the production of such infringing
copies, shall be deemed to be the property of the owner of
the copyright, who accordingly may take proceedings for the
recovery of possession thereof or in respect of the
conversion thereof:
Provided that the owner of the copyright shall not be entitled
to any remedy in respect of the conversion of any infringing
copies, if the opponent proves—
(a) that he was not aware and had no reasonable
ground to believe that copyright subsisted in the work of
which such copies are alleged to be infringing copies;
or
(b) that he had reasonable grounds for believing that
such copies or plates do not involve infringement of the
copyright in any work.”
34. A reading of the aforesaid provisions leads to the following conclusions.
Under section 2(o) of the Copyright Act, a literary work includes a
computer programme and a computer programme has been defined
under section 2(ffc) of the Copyright Act to mean a set of instructions
expressed in words, codes, schemes or in any other form capable of
causing a computer to perform a particular task or achieve a particular
result.
35. Though the expression “copyright” has not been defined separately in
the “definitions” section of the Copyright Act, yet, section 14 makes it
clear that “copyright” means the “exclusive right”, subject to the
51
provisions of the Act, to do or authorise the doing of certain acts “in
respect of a work”. When an “author” in relation to a “literary work” which
includes a “computer programme”, creates such work, such author has
the exclusive right, subject to the provisions of the Copyright Act, to do
or authorise the doing of several acts in respect of such work or any
substantial part thereof. In the case of a computer programme, section
14(b) specifically speaks of two sets of acts – the seven acts
enumerated in sub-clause (a) and the eighth act of selling or giving on
commercial rental or offering for sale or for commercial rental any copy
of the computer programme. Insofar as the seven acts that are set out
in sub-clause (a) are concerned, they all delineate how the exclusive
right that is with the owner of the copyright may be parted with, i.e., if
there is any parting with the right to reproduce the work in any material
form; the right to issue copies of the work to the public, not being copies
already in circulation; the right to perform the work in public or
communicate it to the public; the right to make any cinematograph film
or sound recording in respect of the work; the right to make any
translation of the work; the right to make any adaptation of the work; or
the right to do any of the specified acts in relation to a translation or an
adaptation.
52
36. In essence, such right is referred to as copyright, and includes the right
to reproduce the work in any material form, issue copies of the work to
the public, perform the work in public, or make translations or
adaptations of the work. This is made even clearer by the definition of
an “infringing copy” contained in section 2(m) of the Copyright Act, which
in relation to a computer programme, i.e., a literary work, means
reproduction of the said work. Thus, the right to reproduce a computer
programme and exploit the reproduction by way of sale, transfer, license
etc. is at the heart of the said exclusive right.
37. Section 14(b)(ii) of the Copyright Act was amended twice, first in 1994
and then again in 1999, with effect from 15.01.2000. Prior to the 1999
Amendment, section 14(b)(ii) of the Copyright Act read as follows:
“(ii) to sell or give on hire, or offer for sale or hire any copy
of the computer programme, regardless of whether such
copy has been sold or given on hire on earlier occasions;”
What is conspicuous by its absence is the phrase “regardless of
whether such copy has been sold or given on hire on earlier occasions”.
38. Importantly, no copyright exists in India outside the provisions of the
Copyright Act or any other special law for the time being in force, vide
section 16 of the Copyright Act. When the owner of copyright in a literary
work assigns wholly or in part, all or any of the rights contained in
53
section 14(a) and (b) of the Copyright Act, in the said work for a
consideration, the assignee of such right becomes entitled to all such
rights comprised in the copyright that is assigned, and shall be treated
as the owner of the copyright of what is assigned to him (see section
18(2) read with section 19(3) of the Copyright Act). Also, under section
30 of the Copyright Act, the owner of the copyright in any literary work
may grant any interest in any right mentioned in section 14(a) of the
Copyright Act by licence in writing by him to the licensee, under which,
for parting with such interest, royalty may become payable (see section
30A of the Copyright Act). When such licence is granted, copyright is
infringed when any use, relatable to the said interest/right that is
licensed, is contrary to the conditions of the licence so granted.
Infringement of copyright takes place when a person “makes for sale or
hire or sells or lets for hire” or “offers for sale or hire” or “distributes…so
as to affect prejudicially the owner of the copyright”, vide section 51(b)
of the Copyright Act. Importantly, the making of copies or adaptation of
a computer programme in order to utilise the said computer programme
for the purpose for which it was supplied, or to make up back-up copies
as a temporary protection against loss, destruction or damage so as to
be able to utilise the computer programme for the purpose for which it
was supplied, does not constitute an act of infringement of copyright
54
under section 52(1)(aa) of the Copyright Act. In short, what is referred
to in section 52(1)(aa) of the Copyright Act would not amount to
reproduction so as to amount to an infringement of copyright.
39. Section 52(1)(ad) is independent of section 52(1)(aa) of the Copyright
Act, and states that the making of copies of a computer programme from
a personally legally obtained copy for non-commercial personal use
would not amount to an infringement of copyright. However, it is not
possible to deduce from this what is sought to be deduced by the
learned Additional Solicitor General, namely, that if personally legally
obtained copies of a computer programme are to be exploited for
commercial use, it would necessarily amount to an infringement of
copyright. Section 52(1)(ad) of the Copyright Act cannot be read to
negate the effect of section 52(1)(aa), since it deals with a subject matter
that is separate and distinct from that contained in section 52(1)(aa) of
the Copyright Act.
DOUBLE TAXATION AVOIDANCE AGREEMENTS
40. These appeals concern the DTAAs between India and the following
countries/parties:
1. Commonwealth of Australia
2. Canada
55
3. People’s Republic of China
4. Republic of Cyprus
5. Republic of Finland
6. Republic of France
7. Federal Republic of Germany
8. Hong Kong Special Administrative Region of the
People's Republic of China
9. Republic of Ireland
10. Republic of Italy
11. Japan
12. Republic of Korea
13. Kingdom of Netherlands
14. Republic of Singapore
15. Kingdom of Sweden
16. India-Taipei Association in Taipei (Taiwan)
17. United States of America
18. United Kingdom of Great Britain and Northern
Ireland
41. Insofar as is material, each of these DTAAs is based on the OECD
Model Tax Convention on Income and on Capital, and are therefore
substantially similar, if not identical, in respect of the provisions
concerning “business profits” and “royalties”. The provisions of one of
these DTAAs, namely the India-Singapore DTAA, are set out as follows:
56
“ARTICLE 2 - TAXES COVERED
1. The taxes to which this Agreement shall apply are:
(a) in India: income-tax including any surcharge thereon
(hereinafter referred to as "Indian tax");
(b) in Singapore: the income tax (hereinafter referred to
as "Singapore tax").
2. The Agreement shall also apply to any identical or
substantially similar taxes which are imposed by either
Contracting State after the date of signature of the present
Agreement in addition to, or in place of, the taxes referred to
in paragraph 1. The competent authorities of the Contracting
States shall notify each other of any substantial changes
which are made in their respective taxation laws.”
“ARTICLE 3 - GENERAL DEFINITIONS
xxx xxx xxx
2. As regards the application of the Agreement by a
Contracting State, any term not defined therein shall, unless
the context otherwise requires, have the meaning which it
has under the law of that State concerning the taxes to which
the Agreement applies.”
“ARTICLE 7 - BUSINESS PROFITS
1. The profits of an enterprise of a Contracting State shall be
taxable only in that State unless the enterprise carries on
business in the other Contracting State through a permanent
establishment situated therein. If the enterprise carries on
business as aforesaid, the profits of the enterprise may be
taxed in the other State but only so much of them as is
57
directly or indirectly attributable to that permanent
establishment.”
“ARTICLE 12 - ROYALTIES AND FEES FOR TECHNICAL
SERVICES
1. Royalties and fees for technical services arising in a
Contracting State and paid to a resident of the other
Contracting State may be taxed in that other State.
2. However, such royalties and fees for technical services
may also be taxed in the Contracting State in which they
arise and according to the laws of that State, but if the
recipient is the beneficial owner of the royalties or fees for
technical services, the tax so charged shall not exceed:
(a) in the case of royalties referred to in paragraph 3(a)
and fees for technical services as defined in this Article
(other than services described in subparagraph (b) of
this paragraph), 15% of the gross amount of the
royalties and fees;
(b) in the case of royalties referred to in paragraph 3(b)
and fees for technical services as defined in this Article
that are ancillary and subsidiary to the enjoyment of
property for which royalties under paragraph 3(b) are
received, 10% of the gross amount of the royalties and
fees.
3. The term "royalties" as used in this Article means
payments of any kind received as a consideration for the use
of, or the right to use:
(a) any copyright of a literary, artistic or scientific work,
including cinematograph films or films or tapes used for
radio or television broadcasting, any patent, trade mark,
58
design or model, plan, secret formula or process, or for
information concerning industrial, commercial or
scientific experience, including gains derived from the
alienation of any such right, property or information;
(b) any industrial, commercial or scientific equipment,
other than payments derived by an enterprise from
activities described in paragraph 4(b) or 4(c) of Article
8.”
“ARTICLE 30 - ENTRY INTO FORCE
1. Each of the Contracting States shall notify the other of the
completion of the procedures required by its law for the
bringing into force of this Agreement. This Agreement shall
enter into force on the date of the later of these notifications
and shall thereupon have effect:
(a) in India: in respect of income arising in any fiscal
year beginning on or after the first day of April 1994;
(b) in Singapore: in respect of income arising in any
fiscal year beginning on or after the first day of January
1994.
2. The Agreement between the Government of the Republic
of India and the Government of the Republic of Singapore
for the avoidance of double taxation and the prevention of
fiscal evasion with respect to taxes on income signed in
Singapore on 20th April, 1981 shall terminate and cease to
be effective from the date on which this Agreement comes
into effect.”
42. The subject matter of each of the DTAAs with which we are concerned
is income tax payable in India and a foreign country. Importantly, as is
now reflected by explanation 4 to section 90 of the Income Tax Act and
59
under Article 3(2) of the DTAA, the definition of the term “royalties” shall
have the meaning assigned to it by the DTAA, meaning thereby that the
expression “royalty”, when occurring in section 9 of the Income Tax Act,
has to be construed with reference to Article 12 of the DTAA. This
position is also clarified by CBDT Circular No. 333 dated 02.04.1982,31
which states as follows:
“Circular : No. 333 dated 2-4-1982.
Specific provisions made in double taxation avoidance
agreement - Whether it would prevail over general
provisions contained in Income-tax Act
1. It has come to the notice of the Board that sometimes
effect to the provisions of double taxation avoidance
agreement is not given by the Assessing Officers when they
find that the provisions of the agreement are not in
conformity with the provisions of the Income-tax Act, 1961.
2. The correct legal position is that where a specific provision
is made in the double taxation avoidance agreement, that
provisions will prevail over the general provisions contained
in the Income-tax Act. In fact that the double taxation
avoidance agreements which have been entered into by the
Central Government under section 90 of the Income-tax Act,
also provide that the laws in force in either country will
continue to govern the assessment and taxation of income
in the respective countries except where provisions to the
contrary have been made in the agreement.
31 F. No. 506/42/81-FTD.
60
3. Thus, where a double taxation avoidance agreement
provides for a particular mode of computation of income, the
same should be followed, irrespective of the provisions in
the Income-tax Act. Where there is no specific provision in
the agreement, it is basic law, i.e., the Income-tax Act, that
will govern the taxation of income.”
43. Thus, by virtue of Article 12(3) of the DTAA, royalties are payments of
any kind received as consideration for “the use of, or the right to use,
any copyright” of a literary work, which includes a computer programme
or software.
END-USER LICENCE AGREEMENTS AND DISTRIBUTION
AGREEMENTS
44. Certain sample clauses of the EULAs that are illustrative of the
transactions with which we are concerned in each category (outlined in
paragraph 4 of this judgment), are set out hereinbelow:
44. i) Category 1:
The EULA between Samsung Electronics Co. and the end-user
(updated on 16.11.2016) contains, inter alia, the following terms:
“This End User Licence Agreement ("EULA") is a legal
agreement between you (either an individual or a single
entity) and Samsung Electronics Co., Ltd. ("Samsung") for
software, whether pre-installed or downloaded, owned by
Samsung and its affiliated companies and its third party
suppliers and licensors, that accompanies this EULA, which
61
includes computer software and may include associated
media, content and data, printed materials, or electronic
documentation in connection with your use of Samsung
Mobile Device, which will be defined below ("Samsung
Software").
xxx xxx xxx
1. GRANT OF LICENCE. Samsung grants you a limited
non-exclusive licence to install, use, access, display and run
one copy of the Samsung Software on a single Samsung
Mobile Device, local hard disk(s) or other permanent storage
media of one computer and you may not make Samsung
Software available over a network where it could be used by
multiple computers at the same time. You may make one
copy of the Samsung Software in machine readable form for
backup purposes only; provided that the backup copy must
include all copyright or other proprietary notices contained
on the original.
Certain items of the Samsung Software may be subject to
open source licences. The open source licence provisions
may override some of the terms of this EULA. We make the
applicable open source licenses available to you on the
Legal Notices section of the Settings menu of your device.
2. RESERVATION OF RIGHTS AND OWNERSHIP.
Samsung reserves all rights not expressly granted to you in
this EULA. The Software is protected by copyright and other
intellectual property laws and treaties. Samsung or its
suppliers own the title, copyright and other intellectual
property rights in the Samsung Software. The Samsung
Software is licenced, not sold.
62
3. LIMITATIONS ON END USER RIGHTS. You shall not,
and shall not enable or permit others to, copy, reverse
engineer, decompile, disassemble, or otherwise attempt to
discover the source code or algorithms of, the Software
(except and only to the extent that such activity is expressly
permitted by applicable law notwithstanding this limitation),
or modify, or disable any features of, the Software, or create
derivative works based on the Software. You may not rent,
lease, lend, sublicense or provide commercial hosting
services with the Software. You may not transfer this EULA
or the rights to the Samsung Software granted herein to any
third party unless it is in connection with the sale of the
mobile device which the Samsung Software accompanied.
In such event, the transfer must include all of the Samsung
Software (including all component parts, the media and
printed materials, any upgrades, this EULA) and you may
not retain any copies of the Samsung Software. The transfer
may not be an indirect transfer, such as a consignment. Prior
to the transfer, the end user receiving the Samsung
Software must agree to all the EULA terms. Where
Samsung Mobile Device is being used by your employee or
other person using the Samsung Mobile Device as part of
your undertaking ("Your Staff"), that member of your Staff is
licenced to use the Samsung Software as if it were you and
must comply with these terms on the same basis. Any failure
to comply with these terms by your Staff shall be deemed [to
be a] failure to comply with these terms by you.
xxx xxx xxx
7. EXPORT RESTRICTIONS. You acknowledge that the
Samsung Software is subject to export restrictions of various
countries. You agree to comply with all applicable
international and national laws that apply to the Samsung
63
Software, including all the applicable export restriction laws
and regulations.”
(emphasis supplied)
44. ii) Category 2:
44. ii) a. The Remarketer Agreement dated 01.10.2004, between IBM
Singapore, a foreign, non-resident supplier of computer
programmes and IBM India, an Indian distributor/remarketer, with
which C.A. No. 4419/2012 is concerned, contains, inter alia, the
following terms:
“IMB Distribution Agreement
General Terms
1.Definitions
IMB shall mean International Business Machines
Corporation
Customer is either an End User or a Remarketer. You may
market to End User or Remarketers or both.
End User is anyone, who is not a Related Company, who
acquires Programs for its own use and not for resale.
Programs shall mean instructions written, contained or
recorded on materials, documents or machine readable
media capable of being executed on, or used in the
operation of a machine and information technology or data
related thereto. The term shall include, but is not limited to,
instructions, documentation, information or data recorded on
reels of magnetic tape, magnetic disks, microfiche cards,
and other similar media, and logic manuals, flow charts,
64
operational instruction guides, interface specifications,
detailed listings, application manuals, modification guides,
operating Instructions, functional specifications and design
specifications containing or related to such information,
instruments or data. In particular, the term Programs
includes, but is not limited to supervisors, monitors,
operating systems, language compiles, sorts conversion aid
programs, general purpose utilities, industry application
programs and other general purpose application programs.
IMB Programs shall mean programs protected by IBM's
Patents or IMB's Copyrights, other than or in addition to
Remarketer's Patents and Remarkets, which are marketed
by IMB or its Subsidiaries.”
xxx xxx xxx
“3. Our Relationship
Responsibilities
Each of us agrees that:
1. you are an independent contractor, and this Agreement
is non-exclusive. Neither of us is a legal representative or
legal agent of the other. Neither of us is legally a partner of
the other (for example, neither of us is responsible for debts
incurred by the other), and neither of us is an employee or
franchise of the other nor does this Agreement create joint
venture between us
xxx xxx xxx
5. We may withdraw a Program from marketing at any time”
“Other Responsibilities
You agree:
xxx xxx xxx
65
2. that your rights under this Agreement are not property
rights and therefore, you can not transfer them to anyone
else or encumber them in any way. For example, you can
not sell your approval to market our Programs or your rights
to use Trademarks;
3. Not to assign or otherwise transfer this Agreement, your
rights under it, or any of its approvals or delegate any duties,
other than to a Related Company, unless expressly
permitted to do so under this Agreement.”
“7. Patents, Copyrights and Intellectual Property Rights.
You agree that you do not and shall not own any right, title
or interest in and to any and all patents, copyrights and
intellectual property rights.
You shall not alter, deface, remove, cover, mutilate, or add
to, in any manner whatsoever, any patent notice, copyright
notice, trademark, service mark, trade name, serial number,
model number, brand name or legend that we may attach or
affix to the Programs.
If a third party claims that Program we provide under this
Agreement infringes that part's patents or copyrights, we will
defend you against that claim at our expense and pay all
costs, damages, and attorney's fees that a court finally
awards, provided that you:
1. promptly notify us in writing of the claim; and
2. allow us to control, and cooperate with us in the defense
and any related settlement negotiations;”
“You may market to your Customers the Programs we sell
to you. We will notify you from time to time of the types of
Programs that are available for purchase by you under this
Agreement. These terms apply to all methods of distribution
66
including to End Users and through distributors, resellers,
solution providers, and systems integrators.”
(emphasis supplied)
44. ii) b. The EULA dated 01.07.2019, involved in C.A. No. 4419/2012,
granting resident Indian end-users the licence to use the software
remarketed or distributed in India through IBM India, contains the
following terms:
“1. Definitions and Interpretation
1.1 In this Agreement, unless the context requires otherwise,
the following words and expressions shall have the following
meanings:
″Authorized Use″ – the specified level at which Licensee is
authorized to execute or run the Program. That level may be
measured by number of users, millions of service units
(″MSUs″), Processor Value Units (″PVUs″), or other level of
use specified by IBM.
″IBM″ – International Business Machines Corporation or one
of its subsidiaries.
″License Information″ (″LI″) – a document that provides
information and any additional terms specific to a Program.
″Program″ – the following, including the original and all
whole or partial copies:
1) machine-readable instructions and data,
2) components, files and modules
3) audio-visual content (such as images, text,
recordings, or pictures),
67
4) related licensed materials (such as keys and
documentation).”
“2. License Grant
The Program is owned by IBM or an IBM supplier, and is
copyrighted and licensed, not sold. Licensee receives a
license to the Programs from Assimil8 Limited through a
sublicensing agreement between IBM and Assimil8 Limited.
Assimil8 Limited grants Licensee a nonexclusive license to
1) use the Program up to the Authorized Use specified
in the PoE
2) make and install copies to support such Authorized
Use, and
3) make a backup copy, all provided that
a. Licensee has lawfully obtained the Program
and complies with the terms of the
Agreement;
b. The backup copy does not execute unless
the backed-up Program cannot execute
c. Licensee reproduces all copyright notices
and other legends of ownership on each
copy, or partial copy of the Program
d. …
e. Licensee does not:
1) use, copy, modify, or distribute the
Program except as expressly permitted in
this agreement;
2) reverse assemble, reverse compile,
otherwise translate, or reverse engineer the
program, except as expressly permitted by
law without the possibility of contractual
waiver;
3) use any of the Program’s components,
files, modules, audio-visual content, or
68
related licensed materials separately from
that program; or
4) sublicense, rent, or lease the Program;”
(emphasis supplied)
44. iii) Category 3:
The standard-form EULA accompanying Microsoft software products
sold to resident Indian end-users by Microsoft Corporation, a nonresident, foreign vendor includes the following terms:
“1. GRANT OF LICENSE: This EULA grants you the
following rights:
a. Systems Software -
You may install and use one copy of the SOFTWARE
PRODUCT on a single computer, including a workstation,
terminal, or other digital electronic device (“COMPUTER”).
You may permit a maximum of five (5) COMPUTERS to
connect to the single COMPUTER running the SOFTWARE
PRODUCT solely to access the Internet using the Internet
Connection Sharing feature of the SOFTWARE PRODUCT.
You may not allow these connected COMPUTERS to use
any other components of the SOFTWARE PRODUCT, nor
to invoke application sharing as described below. The five
(5) connection maximum includes any indirect connections
made through software or hardware that pools or
aggregates connections.
b. Storage/Network Use -
You may also store or install a copy of the SOFTWARE
PRODUCT on a storage device, such as a network server,
used on to install or run the SOFTWARE PRODUCT on your
other COMPUTERS over an internal network: however, you
must acquire and run a licence for each separate
COMPUTER on or from which the SOFTWARE PRODUCT
69
is installed, used, accessed, displayed, or forgoing any
number of COMPUTERS may access or otherwise utilize
the file and print services and peer web services of the
SOFTWARE PRODUCT. In addition, you may use the
“Multiple Display” feature of the SOFTWARE PRODUCT to
expand your desktop as described in the online Help file
without obtaining a license for each display.”
“2. DESCRIPTION OF OTHER RIGHTS AND
LIMITATIONS
xxx xxx xxx
Limitations on Reverse Engineering, Decompilation, and
Disassembly - You may not reverse engineer, decompile, or
disassemble the SOFTWARE PRODUCT, except and only
to the extent that such activity is expressly permitted by
applicable law nothwithstanding this limitation.”
“4. COPYRIGHT- All title and intellectual property rights in
and to the SOFTWARE PRODUCT (including but not limited
to any images, photographs, animations, video, audio,
music, text, and “applets” incorporated into the SOFTWARE
PRODUCT), the accompanying printed materials, and any
copies of the SOFTWARE PRODUCT are owned by
Microsoft or its suppliers. All title and intellectual property
rights in and to the content that is not contained in the
Software Product, but may be accessed through use of the
Software Product, is the property of the respective content
owners and may be protected by applicable copyright or
other intellectual property laws and treaties. This EULA
grants you no rights to use such content. All rights not
expressly granted are reserved by Microsoft.”
70
“6. BACKUP COPY- After installation of one copy of the
SOFTWARE PRODUCT pursuant to this EULA, you may
keep the original media on which the SOFTWARE
PRODUCT was provided by Microsoft solely for backup or
archival purposes. If the original media is required to use the
SOFTWARE PRODUCT on the COMPUTER, you may
make one copy of the SOFTWARE PRODUCT solely for
backup or archival purposes. Except as expressly provided
in this EULA, you may not otherwise make copies of the
SOFTWARE PRODUCT or the printed materials
accompanying the SOFTWARE PRODUCT”
(emphasis supplied)
44. iv) Category 4
The Supply Contract (undated) between a resident Indian company, JT
Mobiles Ltd., and a Swedish supplier, Ericsson Radio Systems A.B.
concerning the supply of a Mobile Telephone System in C.A. Nos. 6386-
6387/2016, states the following in respect of the software licence
granted:
“20.LICENSE
20.1 Subject to the terms of conditions set forth in this
Article 20, Licence, JT MOBILES is hereby granted a nonexclusive restricted licence to use the Software and
Documentation, but only for JT MOBILES' own operation
and maintenance of the System in accordance with this
contract, and not otherwise.
20.2 Notwithstanding anything this Contract to the
contrary, it is understood that JT MOBILES receives no title
71
or ownership rights to the Software or Documentation, and
all such rights shall remain with Contractor or its suppliers.
20.3 JT MOBILES agrees that the Software or
Documentation provided to it by Contractor under this
Contract or any renewals, extension, or expansions thereof,
shall, as between the parties hereto, be treated as
proprietary and a trade secret of Contractor or its suppliers,
and be subject to the provisions of Article 30, Confidentiality.
20.4 In pursuance of the foregoing JT MOBILES shall:
a) not provide or make the Software or
Documentation or any portions or aspects thereof
(including any methods or concepts utilized or
expressed therein) available to any person except
to its employees on a "need to know" basis;
b) not make any copies of Software or
Documentation or parts thereof, except for archival
backup purposes;
c) when making permitted copies as aforesaid
transfer to the copy/copies any copyright or other
marking on the Software or Documentation.
d) not use the Software or Documentation for any
other purpose than permitted in this Article 20,
License or sell or in any manner alienate or part
with its possession.
e) not use or transfer the Software and/or the
Documentation outside India without the written
consent of the Contractor and after having received
necessary export or re-export permits from
relevant authorities.
20.5 JT MOBILES and any successor to JT MOBILES
title to the Hardware or part of Hardware shall have the right
without further consent of Contractor to transfer this license
72
to a third party which acquires the System, provided any
such third party agrees in writing to abide by all the terms
and conditions of this license.
20.6. The obligations of JT MOBILES under this Article
20, Licence, shall survive the termination or expiration of this
Contract for any reason.
20.7 The Software licensed under this Contract is
delivered in an inseparable package also containing other
software functionality than the Software. In order to avoid
doubt JT MOBILES may not in any use that other part of the
software functionality. However, upon JT MOBILES' request
Contractor shall offer a licence to use such other software
functionality to JT MOBILES on the same terms and
conditions as stipulated in this Contract but not price.”
(emphasis supplied)
45. A reading of the aforesaid distribution agreement would show that what
is granted to the distributor is only a non-exclusive, non-transferable
licence to resell computer software, it being expressly stipulated that no
copyright in the computer programme is transferred either to the
distributor or to the ultimate end-user. This is further amplified by stating
that apart from a right to use the computer programme by the end-user
himself, there is no further right to sub-license or transfer, nor is there
any right to reverse-engineer, modify, reproduce in any manner
otherwise than permitted by the licence to the end-user. What is paid
by way of consideration, therefore, by the distributor in India to the
foreign, non-resident manufacturer or supplier, is the price of the
73
computer programme as goods, either in a medium which stores the
software or in a medium by which software is embedded in hardware,
which may be then further resold by the distributor to the end-user in
India, the distributor making a profit on such resale. Importantly, the
distributor does not get the right to use the product at all.
46. When it comes to an end-user who is directly sold the computer
programme, such end-user can only use it by installing it in the
computer hardware owned by the end-user and cannot in any manner
reproduce the same for sale or transfer, contrary to the terms imposed
by the EULA.
47. In all these cases, the “licence” that is granted vide the EULA, is not a
licence in terms of section 30 of the Copyright Act, which transfers an
interest in all or any of the rights contained in sections 14(a) and 14(b)
of the Copyright Act, but is a “licence” which imposes restrictions or
conditions for the use of computer software. Thus, it cannot be said that
any of the EULAs that we are concerned with are referable to section
30 of the Copyright Act, inasmuch as section 30 of the Copyright Act
speaks of granting an interest in any of the rights mentioned in sections
14(a) and 14(b) of the Copyright Act. The EULAs in all the appeals
before us do not grant any such right or interest, least of all, a right or
74
interest to reproduce the computer software. In point of fact, such
reproduction is expressly interdicted, and it is also expressly stated that
no vestige of copyright is at all transferred, either to the distributor or to
the end-user. A simple illustration to explain the aforesaid position will
suffice. If an English publisher sells 2000 copies of a particular book to
an Indian distributor, who then resells the same at a profit, no copyright
in the aforesaid book is transferred to the Indian distributor, either by
way of licence or otherwise, inasmuch as the Indian distributor only
makes a profit on the sale of each book. Importantly, there is no right in
the Indian distributor to reproduce the aforesaid book and then sell
copies of the same. On the other hand, if an English publisher were to
sell the same book to an Indian publisher, this time with the right to
reproduce and make copies of the aforesaid book with the permission
of the author, it can be said that copyright in the book has been
transferred by way of licence or otherwise, and what the Indian
publisher will pay for, is the right to reproduce the book, which can then
be characterised as royalty for the exclusive right to reproduce the book
in the territory mentioned by the licence.
48. An instructive judgment of this Court in this respect is to be found in
State Bank of India v. Collector of Customs, (2000) 1 SCC 727. In
this case, the State Bank of India imported a consignment of computer
75
software and manuals from Kindle Software Ltd., Dublin, Ireland, and
cleared the goods for home consumption, and filed an application before
the Additional Collector of Customs, claiming a refund of customs duty.
After setting out section 14 of the Customs Act 1962 and rule 9(1)(c) of
the Customs Valuation (Determination of Price of Imported Goods)
Rules, 1988, the Court stated:
“9. Now, if we refer to the interpretative note relating to Rule
9(1)(c) it says that royalties and licence fees may include,
among other things, payments in respect to patents,
trademarks and copyrights. There is, however, an exception
which says that the charges for the right to reproduce the
imported goods in the country of importation shall not be
added to the price actually paid or payable for the imported
goods in determining the customs value. Further payments
made by the buyer for the right to distribute or resell the
imported goods shall not be added to the price actually paid
or payable for the imported goods if such payments are not
a condition of the sale for the exports to the country of
importation of the imported goods.
xxx xxx xxx
11. What we have now to see is if under the agreement SBI
has the right to reproduce the imported software and for that
purpose SBI has paid “royalties and licence fee” which have
been added to the price actually paid for the imported
software for use at the principal place called the Support
Centre. If that is so under the press note no customs duty is
leviable on the royalty so paid. This takes us to the relevant
terms of the agreement which would indicate as to whether
76
or not the royalty/licence fees needed to be included in the
value of the imported goods."
49. The contention of the State Bank of India that the countrywide licence
fee paid by it by way of royalty was for the reproduction of the said
software and was thus exempt from customs duty, was turned down by
this Court as follows:
“17. The question that arises for consideration is if licence
fee charged towards countrywide use of software in the
second invoice could be the charges for the right to
reproduction and were these added to the price actually paid
or payable for the imported goods. If we refer to the
agreement, software is not sold to SBI as such but it was to
remain the property of Kindle. There is no other value of the
software indicated in the agreement except the licence fee.
Price is payable only for allowing SBI to use the software in
a limited way at its own centres for a limited period and that
is why the amount charged is called the licence fee. After
five years SBI is required to pay only recurring licence fee.
Countrywide use of the software and reproduction of
software are two different things and licence fee for
countrywide use cannot be considered as the charges for
the right to reproduce the imported goods. Under the
agreement copying, storage, removal, etc. are under the
strict control of Kindle and all copies are the property of
Kindle. SBI can use the software for its internal requirements
only. Licence has been given to SBI to use the property of
Kindle at its branches and not for reproduction of the
software as claimed by SBI. The words in the agreement are
specific that “SBI shall pay the licensor the initial licence fee
and the recurring licence fees for use under the provisions
of this agreement”.”
77
50. The Court then made an important observation, stating:
“21. Reproduction and use are two different things. Now
under the agreement user is specifically limited to licence
sites. The transaction as a whole is to be seen. The press
note is of no help to SBI. Rule 9(1)(c) and the interpretative
note thereto did not apply as nothing was added to the price
actually paid for the imported goods by way of royalties etc.
Refund would be allowable only if there was something
added on to the royalty payment which was not in the
present case. The invoice originally presented was complete
in itself. The second invoice was not filed along with the bill
of entry. In the second invoice also it is the licence fee for
the right to use countrywide and it is not the right to
reproduce as claimed by SBI. Schedule I to the agreement
is module and copies are modalities for the use of software
by SBI with various restrictions. If we again refer to clause
6.4 of the agreement there is a complete restraint on SBI
which says SBI shall not use, print, copy, reproduce or
disclose the software or documentation in whole or in part
except as is expressly permitted by the agreement nor shall
SBI permit any of the foregoing. SBI is also barred from
allowing access to its software or documentation except
what is permitted under the agreement. Again SBI is barred
from selling, charging or otherwise making the software or
documentation available to any person except what is
expressly permitted under the agreement. Clause 6.5 of the
agreement says that SBI shall not copy or permit copying of
the software supplied to it by Kindle save as may be strictly
required for delivery to licence sites. The terms of the
agreement also apply to the copies.”
(emphasis supplied)
78
Though this judgment has been delivered under the Customs Act 1962,
yet the important differentiation made between the right to reproduce
and the right to use computer software has been recognized by this
judgment. Whereas the former would amount to a parting of copyright
by the owner thereof, the latter would not.
51. An argument was advanced by the learned Additional Solicitor General
that in some of the aforestated EULAs, it was clearly stated that what
was licensed to the distributor/end-user by the non-resident, foreign
supplier would not amount to a sale, thereby making it clear that what
was transferred was not goods. This argument has no legs to stand on.
It is settled law that in all such cases, the real nature of the transaction
must be looked at upon reading the agreement as a whole. Thus, in
Sundaram Finance Ltd. v. State of Kerala, (1966) 2 SCR 828, one of
the questions that was raised before this Court was as to the execution
of a “sale letter” acknowledging the sale of a vehicle. This “sale letter”
was dealt with by the Court as follows:
“The appellants are financiers and their business is to
advance loans on favourable terms on the security of
vehicles. This is effected by obtaining a promissory-note for
repayment of the amount advanced, and a hire-purchase
agreement which provides a mechanism for recovery of the
amount. It is true that a “sale letter” is obtained from the
customer, but the consideration for the sale letter is only the
79
balance remaining payable to the dealer, after giving credit
against the price of the vehicle the amount paid by the
customer. The application for a loan, and the letter
addressed to the appellants undertaking to insure the
vehicle expressly mention that a loan is asked for and
granted on the security of the motor-vehicle under the hirepurchase agreement. It is the customer who insures the
vehicle, and in the books of the Motor Vehicle Authorities he
remains, with the consent of the appellants, owner of the
vehicle. Undue importance to the acknowledgment of sale in
the “sale letter” and the recital of sale in the bill and in the
receipt cannot therefore be attached. These documents —
“sale letter”, bill and receipt — must be read with the
application for granting a loan on the security of the vehicles,
the letter in which the customer requests the appellants to
pay the balance of the price remaining to be paid by him to
the dealer, the promissory-note executed by him for that
amount, the undertaking to insure the vehicle, and intimation
to the Motor Vehicles Authorities to make note of the hirepurchase agreement.”
(page 839)
“The true effect of a transaction may be determined from the
terms of the agreement considered in the light of the
surrounding circumstances. In each case, the Court has,
unless prohibited by statute, power to go behind the
documents and to determine the nature of the transaction,
whatever may be the form of the documents. An owner of
goods who purports absolutely to convey or acknowledges
to have conveyed goods and subsequently purports to hire
them under a hire-purchase agreement is not estopped from
proving that the real bargain was a loan on the security of
the goods. If there is a bona fide and completed sale of
goods, evidenced by documents, anterior to and
independent of a subsequent and distinct hiring to the
vendor, the transaction may not be regarded as a loan
80
transaction, even though the reason for which it was entered
into was to raise money. If the real transaction is a loan of
money secured by a right of seizure of the goods, the
property ostensibly passes under the documents embodying
the transaction, but subject to the terms of the hiring
agreement, which become part of the buyer's title, and
confer a licence to seize. When a person desiring to
purchase goods and not having sufficient money on hand
borrows the amount needed from a third person and pays it
over to the vendor, the transaction between the customer
and the lender will unquestionably be a loan transaction. The
real character of the transaction would not be altered if the
lender himself is the owner of the goods and the owner
accepts the promise of the purchaser to pay the price or the
balance remaining due against delivery of goods. But a hirepurchase agreement is a more complex transaction. The
owner under the hire-purchase agreement enters into a
transaction of hiring out goods on the terms and conditions
set out in the agreement, and the option to purchase
exercisable by the customer on payment of all the
instalments of hire arises when the instalments are paid and
not before. In such a hire-purchase agreement there is no
agreement to buy goods; the hirer being under no legal
obligation to buy, has an option either to return the goods or
to become its owner by payment in full of the stipulated hire
and the price for exercising the option. This class of hirepurchase agreements must be distinguished from
transactions in which the customer is the owner of the goods
and with a view to finance his purchase he enters into an
arrangement which is in the form of a hire-purchase
agreement with the financier, but in substance evidences a
loan transaction, subject to a hiring agreement under which
the lender is given the license to seize the goods.”
(pages 841-842)
(emphasis supplied)
81
“In the light of these principles the true nature of the
transactions of the appellants may now be stated. The
appellants are carrying on the business of financiers: they
are not dealing in motor-vehicles. The motor-vehicle
purchased by the customer is registered in the name of the
customer and remains at all material times so registered in
his name. In the letter taken from the customer under which
the latter agrees to keep the vehicle insured, it is expressly
recited that the vehicle has been given as security for the
loan advanced by the appellants. As a security for
repayment of the loan, the customer executes a promissorynote for the amount paid by the appellants to the dealer of
the vehicle. The so-called “sale letter” is a formal document
which is not made effective by registering the vehicle in the
name of the appellants and even the insurance of the vehicle
has to be effected as if the customer is the owner. Their right
to seize the vehicle is merely a licence to ensure compliance
with the terms of the hire-purchase agreement. The
customer remains qua the world at large the owner and
remains in possession, and on condition of performing the
covenants, has a right to continue to remain in possession.
The right of the appellants may be extinguished by payment
of the amount due to them under the terms of the hirepurchase agreement even before the dates fixed for
payment. The agreement undoubtedly contains several
onerous covenants, but they are all intended to secure to the
appellants recovery of the amount advanced. We are
accordingly of the view that the intention of the appellants in
obtaining the hire-purchase and the allied agreements was
to secure the return of loans advanced to their customers,
and no real sale of the vehicle was intended by the customer
to the appellants. The transactions were merely financing
transactions.”
(page 844)
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52. There can be no doubt as to the real nature of the transactions in the
appeals before us. What is “licensed” by the foreign, non-resident
supplier to the distributor and resold to the resident end-user, or directly
supplied to the resident end-user, is in fact the sale of a physical object
which contains an embedded computer programme, and is therefore, a
sale of goods, which, as has been correctly pointed out by the learned
counsel for the assessees, is the law declared by this Court in the
context of a sales tax statute in Tata Consultancy Services v. State
of A.P., 2005 (1) SCC 308 (see paragraph 27).
APPLICABILITY OF THE DOUBLE TAXATION AVOIDANCE
AGREEMENT’S PROVISIONS
53. The learned Additional Solicitor General sought to reopen a contention
made by the Revenue in the earlier round of litigation in GE
Technology (supra) which led to this Court framing the question of law
and sending it back to the High Court to decide “on merits”. He sought
to argue, based in particular on Article 30 of the India-USA DTAA, that
the DTAA’s provisions in these cases would not apply at all, inasmuch
as provisions relatable to deduction of TDS under section 195 of the
Income Tax Act do not refer to tax at all, but are deductions that are to
be made before assessments to tax are made. He argued that these
83
deductions do not partake the character of tax at all, section 195 of the
Income Tax Act speaking of “any person responsible to pay”, as
opposed to an “assessee”. He therefore differentiated between the
language used in section 9 and section 195 of the Income Tax Act and
argued that the deductions made under section 195, not being in the
nature of tax at all and at a stage prior to the person responsible for
paying defaulting, and being declared an assessee in default (under
section 201 of the Income Tax Act), the DTAA provisions would not
apply at all.
54. There is no doubt that section 9 of the Income Tax Act refers to persons
who are non-residents and taxes their income as income which is
deemed to accrue or arise in India, thus, making such persons
assessees under the Income Tax Act, who are liable to pay tax. There
is also no doubt that the “person responsible for paying” spoken of in
section 195 of the Income Tax Act is not a non-resident assessee, but
a person resident in India, who is liable to make deductions under
section 195 of the Income Tax Act when payments are made by it to the
non-resident assessee. The submission of the learned Additional
Solicitor General is answered by the judgment of this Court in GE
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Technology (supra). This judgment, after setting out section 195 of the
Income Tax Act, held:
“8. The most important expression in Section 195(1)
consists of the words chargeable under the provisions of the
Act. A person paying interest or any other sum to a nonresident is not liable to deduct tax if such sum is not
chargeable to tax under the IT Act. For instance, where there
is no obligation on the part of the payer and no right to
receive the sum by the recipient and that the payment does
not arise out of any contract or obligation between the payer
and the recipient but is made voluntarily, such payments
cannot be regarded as income under the IT Act.
9. It may be noted that Section 195 contemplates not merely
amounts, the whole of which are pure income payments, it
also covers composite payments which have an element of
income embedded or incorporated in them. Thus, where an
amount is payable to a non-resident, the payer is under an
obligation to deduct TAS in respect of such composite
payments. The obligation to deduct TAS is, however, limited
to the appropriate proportion of income chargeable under
the Act forming part of the gross sum of money payable to
the non-resident. This obligation being limited to the
appropriate proportion of income flows from the words used
in Section 195(1), namely, “chargeable under the provisions
of the Act”. It is for this reason that vide Circular No. 728
dated 30-10-1995 CBDT has clarified that the tax deductor
can take into consideration the effect of DTAA in respect of
payment of royalties and technical fees while deducting
TAS. It may also be noted that Section 195(1) is in identical
terms with Section 18(3-B) of the 1922 Act.
xxx xxx xxx
85
11. While deciding the scope of Section 195(2) it is important
to note that the tax which is required to be deducted at
source is deductible only out of the chargeable sum. This is
the underlying principle of Section 195. Hence, apart from
Section 9(1), Sections 4, 5, 9, 90, 91 as well as the
provisions of DTAA are also relevant, while applying tax
deduction at source provisions.
xxx xxx xxx
13. If the contention of the Department that the moment
there is remittance the obligation to deduct TAS arises is to
be accepted then we are obliterating the words “chargeable
under the provisions of the Act” in Section 195(1). The said
expression in Section 195(1) shows that the remittance has
got to be of a trading receipt, the whole or part of which is
liable to tax in India. The payer is bound to deduct TAS only
if the tax is assessable in India. If tax is not so assessable,
there is no question of TAS being deducted. (See Vijay Ship
Breaking Corpn. v. CIT [(2010) 10 SCC 39 : (2009) 314 ITR
309] .)
14. One more aspect needs to be highlighted. Section 195
falls in Chapter XVII which deals with collection and
recovery. Chapter XVII-B deals with deduction at source by
the payer. On analysis of various provisions of Chapter XVII
one finds the use of different expressions, however, the
expression “sum chargeable under the provisions of the Act”
is used only in Section 195. For example, Section 194-C
casts an obligation to deduct TAS in respect of “any sum
paid to any resident”. Similarly, Sections 194-EE and 194-F
inter alia provide for deduction of tax in respect of “any
amount” referred to in the specified provisions. In none of
the provisions we find the expression “sum chargeable
under the provisions of the Act”, which as stated above, is
86
an expression used only in Section 195(1). Therefore, this
Court is required to give meaning and effect to the said
expression. It follows, therefore, that the obligation to deduct
TAS arises only when there is a sum chargeable under the
Act.
xxx xxx xxx
18. If the contention of the Department that any person
making payment to a non-resident is necessarily required to
deduct TAS then the consequence would be that the
Department would be entitled to appropriate the monies
deposited by the payer even if the sum paid is not
chargeable to tax because there is no provision in the IT Act
by which a payer can obtain refund. Section 237 read with
Section 199 implies that only the recipient of the sum i.e. the
payee could seek a refund. It must therefore follow, if the
Department is right, that the law requires tax to be deducted
on all payments. The payer, therefore, has to deduct and
pay tax, even if the so-called deduction comes out of his own
pocket and he has no remedy whatsoever, even where the
sum paid by him is not a sum chargeable under the Act. The
interpretation of the Department, therefore, not only requires
the words “chargeable under the provisions of the Act” to be
omitted, it also leads to an absurd consequence. The
interpretation placed by the Department would result in a
situation where even when the income has no territorial
nexus with India or is not chargeable in India, the
Government would nonetheless collect tax. In our view,
Section 195(2) provides a remedy by which a person may
seek a determination of the “appropriate proportion of such
sum so chargeable” where a proportion of the sum so
chargeable is liable to tax.
xxx xxx xxx
87
20. We find no merit in these contentions. As stated
hereinabove, Section 195(1) uses the expression “sum
chargeable under the provisions of the Act”. We need to give
weightage to those words. Further, Section 195 uses the
word “payer” and not the word “assessee”. The payer is not
an assessee. The payer becomes an assessee-in-default
only when he fails to fulfil the statutory obligation under
Section 195(1). If the payment does not contain the element
of income the payer cannot be made liable. He cannot be
declared to be an assessee-in-default.
21. The abovementioned contention of the Department is
based on an apprehension which is ill-founded. The payer is
also an assessee under the ordinary provisions of the IT Act.
When the payer remits an amount to a non-resident out of
India he claims deduction or allowances under the Income
Tax Act for the said sum as an “expenditure”. Under Section
40(a)(i), inserted vide the Finance Act, 1988 w.e.f. 1-4-1989,
payment in respect of royalty, fees for technical services or
other sums chargeable under the Income Tax Act would not
get the benefit of deduction if the assessee fails to deduct
TAS in respect of payments outside India which are
chargeable under the IT Act. This provision ensures
effective compliance with Section 195 of the IT Act relating
to tax deduction at source in respect of payments outside
India in respect of royalties, fees or other sums chargeable
under the IT Act. In a given case where the payer is an
assessee he will definitely claim deduction under the IT Act
for such remittance and on inquiry if the AO finds that the
sums remitted outside India come within the definition of
royalty or fees for technical service or other sums
chargeable under the IT Act then it would be open to the AO
to disallow such claim for deduction. Similarly, vide the
Finance Act, 2008 w.e.f. 1-4-2008 sub-section (6) has been
88
inserted in Section 195 which requires the payer to furnish
information relating to payment of any sum in such form and
manner as may be prescribed by the Board. This provision
is brought into force only from 1-4-2008. It will not apply for
the period with which we are concerned in these cases
before us. Therefore, in our view, there are adequate
safeguards in the Act which would prevent revenue leakage.
xxx xxx xxx
24. In our view, Section 195(2) is based on the “principle of
proportionality”. The said sub-section gets attracted only in
cases where the payment made is a composite payment in
which a certain proportion of payment has an element of
“income” chargeable to tax in India. It is in this context that
the Supreme Court stated: (Transmission Corpn. case
[(1999) 7 SCC 266 : (1999) 239 ITR 587] , SCC p. 274, para
10)
“10. … If no such application is filed income tax on
such sum is to be deducted and it is the statutory
obligation of the person responsible for paying
such ‘sum’ to deduct tax thereon before making
payment. He has to discharge the obligation [to
TDS].”
(emphasis supplied)
If one reads the observation of the Supreme Court, the
words “such sum” clearly indicate that the observation refers
to a case of composite payment where the payer has a doubt
regarding the inclusion of an amount in such payment which
is exigible to tax in India. In our view, the above observations
of this Court in Transmission Corpn. case [(1999) 7 SCC 266
: (1999) 239 ITR 587] which is put in italics has been
completely, with respect, misunderstood by the Karnataka
89
High Court to mean that it is not open for the payer to
contend that if the amount paid by him to the non-resident is
not at all “chargeable to tax in India”, then no TAS is required
to be deducted from such payment. This interpretation of the
High Court completely loses sight of the plain words of
Section 195(1) which in clear terms lays down that tax at
source is deductible only from “sums chargeable” under the
provisions of the IT Act i.e. chargeable under Sections 4, 5
and 9 of the IT Act.
25. Before concluding we may clarify that in the present case
on facts ITO(TDS) had taken the view that since the sale of
the software concerned, included a licence to use the same,
the payment made by the appellant(s) to foreign suppliers
constituted “royalty” which was deemed to accrue or arise in
India and, therefore, TAS was liable to be deducted under
Section 195(1) of the Act. The said finding of ITO(TDS) was
upheld by CIT(A). However, in the second appeal, ITAT held
that such sum paid by the appellant(s) to the foreign
software suppliers was not a “royalty” and that the same did
not give rise to any “income” taxable in India and, therefore,
the appellant(s) was not liable to deduct TAS. However, the
High Court did not go into the merits of the case and it went
straight to conclude that the moment there is remittance an
obligation to deduct TAS arises, which view stands hereby
overruled.”
55. What is made clear by the judgment in GE Technology (supra) is the
fact that the “person” spoken of in section 195(1) of the Income Tax Act
is liable to make the necessary deductions only if the non-resident is
liable to pay tax as an assessee under the Income Tax Act, and not
otherwise. This judgment also clarifies, after referring to CBDT Circular
90
No. 728 dated 30.10.1995, that the tax deductor must take into
consideration the effect of the DTAA provisions. The crucial link,
therefore, is that a deduction is to be made only if tax is payable by the
non-resident assessee, which is underscored by this judgment, stating
that the charging and machinery provisions contained in sections 9 and
195 of the Income Tax Act are interlinked.
56. This conclusion is also echoed in Vodafone International Holdings
BV v. Union of India, (2012) 6 SCC 613, wherein the following
observations were made on the scope and applicability of section 195
of the Income Tax Act:
“171. Section 195 casts an obligation on the payer to deduct
tax at source (“TAS”, for short) from payments made to nonresidents which payments are chargeable to tax. Such
payment(s) must have an element of income embedded in it
which is chargeable to tax in India. If the sum paid or credited
by the payer is not chargeable to tax then no obligation to
deduct the tax would arise. Shareholding in companies
incorporated outside India (CGP) is property located outside
India. Where such shares become subject-matter of offshore
transfer between two non-residents, there is no liability for
capital gains tax. In such a case, question of deduction of
TAS would not arise.
172. If in law the responsibility for payment is on a nonresident, the fact that the payment was made, under the
instructions of the non-resident, to its agent/nominee in India
or its PE/Branch Office will not absolve the payer of his
liability under Section 195 to deduct TAS. Section 195(1)
91
casts a duty upon the payer of any income specified therein
to a non-resident to deduct therefrom TAS unless such
payer is himself liable to pay income tax thereon as an agent
of the payee. Section 201 says that if such person fails to so
deduct TAS he shall be deemed to be an assessee-indefault in respect of the deductible amount of tax (Section
201).
173. Liability to deduct tax is different from “assessment”
under the Act. Thus, the person on whom the obligation to
deduct TAS is cast is not the person who has earned the
income. Assessment has to be done after liability to deduct
TAS has arisen. The object of Section 195 is to ensure that
tax due from non-resident persons is secured at the earliest
point of time so that there is no difficulty in collection of tax
subsequently at the time of regular assessment.”
(emphasis supplied)
57. The absurd consequence that the resident in India, after making the
deduction/payment, would not then get any excess payment made by
way of refund when regular assessment takes place, as the nonresident assessee alone would be entitled to such refund, is also
pointed out in paragraph 18 of the judgment in GE Technology (supra).
It was after keeping all this in view that this Court then set aside the
judgment of the High Court of Karnataka dated 24.09.2009 and
remanded the case to the High Court for a decision of the question “on
merits”, i.e., on the sole question as to whether the ITAT was justified
in holding that the amounts paid by the appellants to the foreign
92
software suppliers did not amount to royalty, as a result of which, no
liability to deduct TDS arose.
58. Even otherwise, a look at Article 12(2) of the India-Singapore DTAA
would demonstrate the fallacy of the aforesaid submission of the
learned Additional Solicitor General. Under Article 12(2) of the IndiaSingapore DTAA, royalties may be taxed in the Contracting State in
which they arise (India) and according to the laws of that Contracting
State (Indian laws), if the recipient is a beneficial owner of the royalties,
and the tax so charged is capped at the rate of 10% or 15%. If the
learned Additional Solicitor General is correct in his submission, as the
DTAA would then not apply, royalty would be liable to be taxed in India
at the rate mentioned in the Income Tax Act which can be much higher
than the DTAA rate, as a result of which, the deduction made under
section 195 of the Income Tax Act by the “person responsible” would
have to be a proportion of a much higher sum than the tax that is
ultimately payable by the non-resident assessee. This equally absurd
result cannot be countenanced given the fact that the person liable to
deduct tax is only liable to deduct tax first and foremost if the nonresident person is liable to pay tax, and second, that if so liable, is then
liable to deduct tax depending on the rate mentioned in the DTAA.
93
59. Further, tearing an article of a specific DTAA, namely Article 30 of the
India-USA DTAA, out of context in order to buttress his submission, in
a manner far removed from the actual rationale behind that provision,
does not commend itself to us.
59. i) Article 30 of the India-USA DTAA, relied upon by the learned
Additional Solicitor General, reads:
“1. Each Contracting State shall notify the other Contracting
State in writing, through diplomatic channels, upon the
completion of their respective legal procedures to bring this
Convention into force.
2. The Convention shall enter into force on the date of the
latter of such notifications and its provisions shall have
effect:
(a) in the United States
(i) in respect of taxes withheld at source, for
amounts paid or credited on or after the first day of
January next following the date on which the
Convention enters into force;
(ii) in respect of other taxes, for taxable periods
beginning on or after the first day of January next
following the date on which the Convention enters
into force; and
(b) in India, in respect of income arising in any taxable
year beginning on or after the first day of April next
following the calendar year in which the Convention
enters into force.”
94
59. ii) By way of contrast, under the Convention between the Republic of
India and the Kingdom of Netherlands for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with respect to Taxes
on Income and on Capital,32 [“India-Netherlands DTAA”], Article 29
reads:
“1. Each of the States shall notify to the other the completion
of the procedures required by its law for the bringing into
force of this Convention. This Convention shall enter into
force on the thirtieth day after the latter of the dates on which
the respective Governments have notified each other in
writing that the formalities constitutionally required in their
respective States have been complied with, and its
provisions shall have effect:
(a) in the Netherlands for taxable years and periods
beginning on or after the first day of January next
following the calendar year in which the latter of the
notifications is given ;
(b) in India in respect of income arising in any fiscal year
beginning on or after the first day of April next following
the calendar year in which the latter of the notifications
is given.
2. Notwithstanding the provisions of paragraph 1, the
provisions of Article 8 shall have effect:
32 Notification No. GSR 382(E), dated 27-3-1989, as amended by Notification No. S.O.
693(E), dated 30-8-1999.
95
(a) in the Netherlands for taxable years and periods
beginning on or after the first day of January, 1987 ;
(b) in India in respect of income arising in any fiscal year
beginning on or after the first day of April, 1987.”
59. iii) Under the Convention between the Government of Japan and the
Government of the Republic of India for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with respect to Taxes
on Income,33 [“India-Japan DTAA”] Article 28 is set out in the
following terms:
“1. This Convention shall be ratified and the instruments of
ratification shall be exchanged at Tokyo as soon as possible.
2. This Convention shall enter into force on the thirtieth day
after the date of the exchange of instruments of ratification
and shall have effect :
(a) In Japan : as regards income for any taxable year
beginning on or after the first day of January of the
calendar year next following that in which this
Convention enters into force ; and
(b) in India : as regards income for any 'previous year'
beginning on or after the first day of April of the calendar
year next following that in which this Convention enters
into force.
33 Notification : No. GSR 101(E), dated 1-3-1990, as amended by Notification Nos. SO
753(E), dated 16-8-2000 (w.r.e.f. 1-10-1999), SO 1136(E), dated 19-7-2006, w.r.e.f.
28- 6-2006 and SO 2528(E), dated 8-10-2008, w.e.f. 1-10-2008.
96
3. The Agreement between Japan and India for the
Avoidance of Double Taxation in respect of Taxes on
Income signed at New Delhi on January 5, 1960 shall
terminate and cease to have effect in respect of income to
which this Convention applies under the provisions of
paragraph 2.”
59. iv) Under the Convention between the Government of the Republic of
India and the Government of the United Kingdom of Great Britain
and Northern Ireland for the Avoidance of Double Taxation and the
Prevention of Fiscal Evasion with respect to Taxes on Income and
Capital Gains,34 [“India-UK DTAA”] Article 30 reads as follows:
(1) Each of the Contracting States shall notify to the other
the completion of the procedures required by its law for the
bringing into force of this Convention. This Convention shall
enter into force on the date of the later of these notifications
and shall thereupon have effect:
(a) in the United Kingdom:
(i) in respect of income tax and capital gains tax,
for any year of assessment beginning on or after
6th April in the calendar year next following that in
which the later of the notifications is given;
(ii) in respect of corporation tax, for any financial
year beginning on or after 1st April in the calendar
year next following that in which the later of the
notifications is given;
34 GSR 91(E), dated 11-2-1994, as amended by Notification No. 10/2014 [F.No.
505/1986 FTD-I], dated 10-2-2014.
97
(iii) in respect of petroleum revenue tax, for any
chargeable period beginning on or after 1st
January in the calendar year next following that in
which the later of the notifications is given;
(b) in India, in respect of income arising in any fiscal
year beginning on or after the first day of April next
following the calendar year in which the later of the
notifications is given.
(2) Subject to the provisions of paragraph (3) of this Article,
the Convention between the Government of the United
Kingdom of Great Britain and Northern Ireland and the
Government of India for the Avoidance of Double Taxation
and the Prevention of Fiscal Evasion with Respect to Taxes
on Income and Capital Gains signed in New Delhi on 16th
April 1981 (hereinafter referred to as "the 1981 Convention")
shall terminate and cease to be effective from the date upon
which this Convention has effect in respect of the taxes to
which this Convention applies in accordance with the
provisions of paragraph (1) of this Article.
(3) Where any provisions of the 1981 Convention would
have afforded any greater relief from tax than is due under
this Convention, any such provision as aforesaid shall
continue to have effect: (a) in the United Kingdom, for any
year of assessment or financial year; and (b) in India, for any
fiscal year; beginning, in either case, before the entry into
force of this Convention.”
59. v) Article 28 of the Agreement between the Government of the
Republic of India and the Government of the People's Republic of
China for the Elimination of Double Taxation with respect to Taxes
98
on Income and the Prevention of Tax Evasion and Avoidance,35
[“India-China DTAA”], is again worded differently, as follows:
“This Agreement shall enter into force on the thirtieth day
after the date on which diplomatic notes indicating the
completion of internal legal procedures necessary in each
country for the entry into force of this Agreement have been
exchanged. This Agreement shall have effect :
(a) in China, in respect of income arising in any taxable
year beginning on or after the first day of January next
following the calendar year in which this Agreement
enters into force;
(b) in India, in respect of income arising in any previous
year beginning on or after the first day of April next
following the calendar year in which this Agreement
enters into force.”
60. Obviously, the logic behind Article 30 of the India-USA DTAA is for
reasons connected with USA’s municipal taxation laws, and has nothing
to do with Indian municipal law governing the liability of persons to
deduct tax at source under section 195 of the Income Tax Act. This is
reinforced by the fact that the OECD Commentary on Articles 30 and
31 acknowledges the fact that the “entry into force” provisions, unlike
35 Notification No. GSR 331(E), dated 5-4-1995, as amended by Notification No. S.O.
2562(E) [No.54/2019/F.No. 503/02/2008-FTD-II], dated 17-7-2019.
99
the rest of the provisions in the OECD Model Tax Convention on Income
and on Capital, depend on the domestic laws of Contracting States, as
follows:
“COMMENTARY ON ARTICLES 30 AND 31
CONCERNING THE ENTRY INTO FORCE AND THE
TERMINATION OF THE CONVENTION
xxx xxx xxx
3. It is open to Contracting States to agree that the
Convention shall enter into force when a specified period
has elapsed after the exchange of the instruments of
ratification or after the confirmation that each State has
completed the procedures required for such entry into force.
4. No provisions have been drafted as to the date on which
the Convention shall have effect or cease to have effect,
since such provisions would largely depend on the domestic
laws of the Contracting States concerned. Some of the
States assess tax on the income received during the current
year, others on the income received during the previous
year, others again have a fiscal year which differs from the
calendar year. Furthermore, some conventions provide, as
regards taxes levied by deduction at the source, a date for
the application or termination which differs from the date
applying to taxes levied by assessment.”
(emphasis supplied)
61. For all these reasons, we do not permit the learned Additional Solicitor
General to have a second bite at the same cherry, albeit through the
100
ingenious argument made by him based on Article 30 of the India-USA
DTAA.
DEFINITION OF ROYALTY IN THE DTAAs VIS-À-VIS THE INCOME
TAX ACT
62. In order to ascertain whether the question which was posed by this
Court in GE Technology (supra) was correctly answered by the High
Court of Karnataka vide the impugned judgment dated 15.10.2011,36
the first expression that has to be considered by us is the expression
“royalty”.
63. Firstly, it will be seen that when Article 12 of the India-Singapore DTAA
defines the term “royalties” in sub-article (3) thereof, it does so stating
that such definition is exhaustive – it uses the expression “means”.
Secondly, the term “royalties” refers to payments of any kind that are
received as a consideration for the use of or the right to use any
copyright in a literary work. As opposed to this, the definition contained
in explanation 2 to section 9(1)(vi) of the Income Tax Act, is wider in at
least three respects:
36
CIT v. Samsung Electronics Co. Ltd., (2012) 345 ITR 494.
101
i. It speaks of “consideration”, but also includes a lump-sum
consideration which would not amount to income of the recipient
chargeable under the head “capital gains”;
ii. When it speaks of the transfer of “all or any rights”, it expressly
includes the granting of a licence in respect thereof; and
iii. It states that such transfer must be “in respect of” any copyright
of any literary work.
64. However, even where such transfer is “in respect of” copyright, the
transfer of all or any rights in relation to copyright is a sine qua non
under explanation 2 to section 9(1)(vi) of the Income Tax Act. In short,
there must be transfer by way of licence or otherwise, of all or any of
the rights mentioned in section 14(b) read with section 14(a) of the
Copyright Act.
65. In State of Madras v. Swastik Tobacco Factory, (1966) 3 SCR 79,
this Court construed the words “in respect of” used in rule 5(1)(i) of the
Madras General Sales Tax (Turnover and Assessment) Rules 1939, as
follows:
“The House of Lords in Inland Revenue Commissioners v.
Coutts & Co. [(1963) 2 All ER 722, 732], in the context of
payment of estate duty, construed the words “in respect of”
in Section 5(2) of the Finance Act, 1894 (57 & 58 Vict, c. 30)
102
and observed that the phrase denoted some imprecise kind
of nexus between the property and the estate duty. The
House of Lords in Asher v. Seaford Court Estates Ltd. [LR
1950 AC 608] in construing the provisions of Section 2, subsection (3) of Increase of Rent and Mortgage Interest
(Restrictions) Act, 1920 (10 & 11 Geo. 5, c. 17), held that the
expression “in respect of” must be read as equivalent to
“attributable”. The Privy Council in Bicher Ltd. v. CIT [(1962)
3 All ER 294] observed that the said words could mean more
than “consisting of” or “namely”.
It is not necessary to refer to other decisions. It may be
accepted that the said expression received a wide
interpretation, having regard to the object of the provisions
and the setting in which the said words appeared. On the
other hand, Indian tax laws use the expression “in respect
of” as synonymous with the expression “on”: see Article 288
of the Constitution of India; Section 3 of the Indian Income
Tax Act, 1922; Sections 3(2) and 3(5), Second Proviso, of
the Madras General Sales Tax Act, 1939; Section 3(1-A) of
the Central Excise and Salt Act, 1944; and Section 9 of the
Kerala Sales Tax Act. We should not be understood to have
construed the said provisions, but only have referred to them
to state the legislative practice. Consistent with the said
practice, Rule 5(1)(i) of the Rules uses the same expression.
When the said Rule says “excise duty paid in respect of the
goods”, the excise duty referred to is the excise duty paid
under Section 3(1), read with the Schedule of the Central
Excises and Salt Act, 1944 (1 of 1944). Under the said
Section, read with the Schedule, excise duty is levied on the
goods described in the Schedule. Therefore, when Rule
5(1)(i) of the Rules refers to the duty paid in respect of the
goods to the Central Government, it necessarily refers to the
duty paid on the goods mentioned in the Schedule. As the
duty exempted from the gross turnover is the duty so paid
103
under the Central Act, read with the Schedule, the
expression “in respect of” in the context can only mean
excise duty paid on goods. In our view, the expression “in
respect of the goods” in Rule 5(1)(i) of the Rules means only
“on the goods”. Even if the word “attributable” is substituted
for the words “in respect of”, the result will not be different,
for the duty paid shall be attributable to the goods. If it was
paid on the raw material it can be attributable only to raw
material and not to the goods. We, therefore, hold that only
excise duty paid on the goods sold by the assessee is
deductible from the gross turnover under Rule 5(1)(i) of the
Rules.”
(pages 82-83)
(emphasis supplied)
66. The aforesaid meaning accords with the meaning to be given to the
expression “in respect of” contained in explanation 2(v) to section
9(1)(vi) of the Income Tax Act.
ROYALTY UNDER THE INCOME TAX ACT
67. The insertion of sub-sections (v), (vi) and (vii) in section 9(1) of the
Income Tax Act, by way of an amendment through the Finance Act
1976,37 was to introduce source-based taxation for income in the hands
of a non-resident by way of interest, royalty and fees for technical
services. In Carborandum & Co. v. CIT, (1977) 2 SCC 862, this Court,
applying residence-based rules of taxation, held that the technical
37 Act 66 of 1976, (w.e.f 1-6-1976).
104
service fees received by the non-resident assessee (relatable to the
assessment year 1957-1958) could only be deemed to accrue in India
if such income could be attributed to a business connection in India. In
the facts of that case, since no part of the foreign assessee’s operations
were carried on in India, the technical services being rendered wholly in
foreign territory, it was held that no part of the technical service fees
received by the foreign assessee accrued in India.
68. This position of law was altered by the Finance Act 1976, which
introduced a “source-rule” to tax income by way of royalty in the hands
of a non-resident, noted in the Memorandum explaining the provisions
of the Finance Bill 1976, as follows:
38. “Source rule” regarding place of accrual of income by
way of interest, royalty and fees for technical services. - A
non-resident taxpayer is chargeable to tax in India in respect
of income from whatever source derived which is received
or is deemed to be received in India or which accrues or
arises or is deemed to accrue or arise to him in India. The
existing provisions in the Income-tax Act which provide that
certain incomes will be deemed to accrue or arise in India
are couched in general language. The absence of a clearcut source rule sometimes creates uncertainty about the
chargeability of certain types of incomes in the case of nonresidents. In order to avoid any doubt or dispute in regard to
the accrual of income by way of interest, royalty and fees for
technical services in the case of non-residents, it is
proposed to make certain provisions in the Income-tax Act
105
clearly specifying the circumstances in which such income
shall be deemed to accrue or arise in India.
xxx xxx xxx
40. Income by way of royalty payable by the Government
will be deemed to accrue or arise in India. Royalty payable
by a person who is resident in India will also be deemed to
accrue or arise in India, except in cases where the royalty is
payable for the transfer of any right or the use of any
property or information or for utilising the services of the
recipient for the purposes of a business or profession carried
on outside India or for the purposes of making or earning
any income from a source outside India. Royalty payable by
a non-resident will be deemed to accrue or arise in India only
in cases where the royalty is payable in respect of any right,
property or information used or services utilised for the
purposes of a business or profession carried on by the nonresident in India or for the purposes of making or earning
any income from any source in India.”
69. Consequently, section 9(1)(vi) of the Income Tax Act was brought into
force. The definition of royalty contained in explanation 2(v) of section
9(1)(vi) of the Income Tax Act includes the transfer of all or any rights
(including the granting of a licence) “in respect of any copyright, literary,
artistic or scientific work”.
70. The comma after the word “copyright” does not fit as copyright is
obviously spoken of as existing in a literary, artistic or scientific work. As
a matter of fact, this drafting error was rectified in the Draft Taxes Code
106
2010,38 under Chapter XIX in Part H thereof, which set out the definition
of “royalty” as follows:
“PART H - CHAPTER XIX
INTERPRETATIONS AND CONSTRUCTIONS
xxx xxx xxx
(314)(220) “royalty” means consideration (including any
lump-sum consideration but excluding any consideration
which would be the income of the recipient chargeable under
the head “Capital gains”) for—
xxx xxx xxx
(g) the transfer of all or any rights (including the granting
of a licence) in respect of — (i) any copyright of literary,
artistic or scientific work; (ii) cinematographic films or
work on films, tapes or any other means of
reproduction; or (iii) live coverage of any event”
(emphasis supplied)
71. The transfer of “all or any rights (including the granting of a licence) in
respect of any copyright”, in the context of computer software, is
referable to sections 14(a), 14(b) and 30 of the Copyright Act. As has
been held hereinabove, the expression “in respect of” is equivalent to
“in” or “attributable to”. Thus, explanation 2(v) to section 9(1)(vi) of the
Income Tax Act, when it speaks of “all of any rights…in respect of
38 This Code has, however, remained in draft form and was never enacted.
107
copyright” is certainly more expansive than the DTAA provision, which
speaks of the “use of, or the right to use” any copyright. This has been
recognised by the High Court of Delhi in CIT v. DCM Limited, ITA Nos.
87-89/1992 in its judgment dated 10.03.2011, as follows:
“9. A bare perusal of Article XIII(3) would show that the
expression “payments of any kind” is circumscribed by the
latter part of the definition which speaks of consideration
received (including in the form of rentals) for "use of" or "right
to use" intellectual properties. The Tribunal, in our view,
rightly observed that the CIT(A) had erred in coming to the
conclusion that the expression “payments of any kind” was
broad enough to include even an outright sale. To drive
home this point the Tribunal, once again, has correctly
drawn a distinction between the definition of royalty as
appearing in the DTAA and that which finds mention in
explanation 2 to section 9(1)(vi) of the I.T. Act. A perusal of
the provisions of the said explanation would show that it
brings within the ambit of royalty a wider range of
transactions which would include payments made for
"transfer of all" or "any right" in patents, inventions, model,
design, etc. apart from payments based for use of such right,
patent, innovation, model, design, secret formula or process
or trade mark or similar property. As a matter of fact, a
perusal of clause (i) of explanation 2 of section 9(1)(vi) of the
I.T. Act would show that "transfer of all" or "any right" could
take place by execution of licences as well, which was the
methodology adopted by Tate and the assessee in the
present case…”
72. However, when it comes to the expression “use of, or the right to use”,
the same position would obtain under explanation 2(v) of section 9(1)(vi)
108
of the Income Tax Act, inasmuch as, there must, under the licence
granted or sale made, be a transfer of any of the rights contained in
sections 14(a) or 14(b) of the Copyright Act, for explanation 2(v) to
apply. To this extent, there will be no difference in the position between
the definition of “royalties” in the DTAAs and the definition of “royalty” in
explanation 2(v) of section 9(1)(vi) of the Income Tax Act.
73. Even if we were to consider the ambit of “royalty” only under the Income
Tax Act on the footing that none of the DTAAs apply to the facts of these
cases, the definition of royalty that is contained in explanation 2 to
section 9(1)(vi) of the Income Tax Act would make it clear that there has
to be a transfer of “all or any rights'' which includes the grant of a licence
in respect of any copyright in a literary work. The expression “including
the granting of a licence” in clause (v) of explanation 2 to section 9(1)(vi)
of the Income Tax Act, would necessarily mean a licence in which
transfer is made of an interest in rights “in respect of” copyright, namely,
that there is a parting with an interest in any of the rights mentioned in
section 14(b) read with section 14(a) of the Copyright Act. To this
extent, there will be no difference between the position under the DTAA
and explanation 2 to section 9(1)(vi) of the Income Tax Act.
109
74. However, the learned Additional Solicitor General presses the
application of the amendment made vide the Finance Act 2012 with
retrospective effect from 01.06.1976, which added explanation 4 to
section 9(1)(vi) of the Income Tax Act.
75. The Memorandum explaining the provisions in the Finance Bill 2012
states:
“Section 9(1)(vi) provides that any income payable by way
of royalty in respect of any right, property or information is
deemed to be accruing or arising in India. The term “royalty”
has been defined in Explanation 2 which means
consideration received or receivable for transfer of all or any
right in respect of certain rights, property or information.
Some judicial decisions have interpreted this definition in a
manner which has raised doubts as to whether
consideration for use of computer software is royalty or not;
whether the right, property or information has to be used
directly by the payer or is to be located in India or control or
possession of it has to be with the payer. Similarly, doubts
have been raised regarding the meaning of the term
processed.
Considering the conflicting decisions of various courts in
respect of income in nature of royalty and to restate the
legislative intent, it is further proposed to amend the Income
Tax Act in following manner:-
(i) To amend Section 9(1)(vi) to clarify that the
consideration for use or right to use of computer
software is royalty by clarifying that transfer of all or any
rights in respect of any right, property or information as
110
mentioned in Explanation 2, includes and has always
included transfer of all or any right for use or right to use
a computer software (including granting of a licence)
irrespective of the medium through which such right is
transferred.
(ii) To amend section 9(1)(vi) to clarify that royalty
includes and has always included consideration in
respect of any right, property or information, whether or
not
(a) The possession or control of such right,
property or information is with the payer;
(b) Such right, property or information is used
directly by the payer;
(c) The location of such right, property or
information is in India
(iii) To amend section 9(1)(vi) to clarify that the term
“process” includes and shall be deemed to have always
included transmission by satellite (including up-linking,
amplification, conversion for down-linking of any
signal), cable, optic fibre or by any other similar
technology, whether or not such process is secret.
These amendments will take effect retrospectively from 1st
June, 1976 and will accordingly apply in relation to the
assessment year 1977-78 and subsequent assessment
years.”
76. Shri Pardiwala argued that explanation 4, that was inserted with
retrospective effect, uses the language that is contained in section
9(1)(vi)(b) of the Income Tax Act, namely, that the expression “any right,
property or information” occurring in section 9(1)(vi)(b) alone is the
111
subject matter of explanation 4, explanation 4 not expanding the scope
of the definition of royalty contained in explanation 2, which does not
contain the aforesaid expression. A reference to the Memorandum
explaining the provisions in the Finance Bill 2012 set out hereinabove,
would make it clear that the expression “as mentioned in Explanation 2”
in sub-para (i) of the aforesaid Memorandum shows that explanation 4
was inserted retrospectively to expand the scope of explanation 2(v).
In any case, explanation 2(v) contains the expression, “the transfer of
all or any rights” which is an expression that would subsume “any right,
property or information” and is wider than the expression “any right,
property or information”. It is therefore difficult to accept Shri
Pardiwala’s argument that explanation 4 does not expand the scope of
the expression “royalty” as contained in explanation 2 to section 9(1)(vi)
of the Income Tax Act.
77. It is equally difficult to accept the learned Additional Solicitor General’s
submission that explanation 4 to section 9(1)(vi)of the Income Tax Act
is clarificatory of the position as it always stood, since 01.06.1976, for
which he strongly relied upon CBDT Circular No. 152 dated 27.11.1974.
Quite obviously, such a circular cannot apply as it would then be
explanatory of a position that existed even before section 9(1)(vi) was
112
actually inserted in the Income Tax Act vide the Finance Act 1976.
Secondly, insofar as section 9(1)(vi) of the Income Tax Act relates to
computer software, explanation 3 thereof, refers to “computer software”
for the first time with effect from 01.04.1991, when it was introduced,
which was then amended vide the Finance Act 2000. Quite clearly,
explanation 4 cannot apply to any right for the use of or the right to use
computer software even before the term “computer software” was
inserted in the statute. Likewise, even qua section 2(o) of the Copyright
Act, the term “computer software” was introduced for the first time in the
definition of a literary work, and defined under section 2(ffc) only in 1994
(vide Act 38 of 1994).
78. Furthermore, it is equally ludicrous for the aforesaid amendment which
also inserted explanation 6 to section 9(1)(vi) of the Income Tax Act, to
apply with effect from 01.06.1976, when technology relating to
transmission by a satellite, optic fibre or other similar technology, was
only regulated by the Parliament for the first time through the Cable
Television Networks (Regulation) Act, 1995, much after 1976. For all
these reasons, it is clear that explanation 4 to section 9(1)(vi) of the
Income Tax Act is not clarificatory of the position as of 01.06.1976, but
113
in fact, expands that position to include what is stated therein, vide the
Finance Act 2012.
79. The learned Additional Solicitor General then relied upon the Finance
Minister’s statement made before the Lok Sabha on 07.09.1990, which
allowed lump sum payments to be made without the deduction of tax at
source under section 195(1) of the Income Tax Act and did away with
the dual levy, both by way of customs duty and income tax, on royalty
payments for the licensing of software. This statement, again, in no
manner furthers the case of the Revenue that explanation 4 is merely
clarificatory of the legal position as it always stood. Likewise,
Notification No. 21/2012 dated 13.06.2012, which deals with section
194J of the Income Tax Act, does no more than providing that a
transferee is exempt from deducting TDS under section 194J when TDS
has already been deducted under section 195 on the payment made in
the previous transfer of the same software which the transferee
acquires without any modification. In any case, this notification being
issued on 13.06.2012, i.e., after explanation 4 was inserted vide the
Finance Act 2012, it would not assist the Revenue in asserting that
explanation 4 clarifies the legal position as it always stood.
114
80. The learned Additional Solicitor General then argued that being covered
by explanation 4 of section 9(1)(vi) of the Income Tax Act, the persons
liable to deduct TDS under section 195 of the Income Tax Act ought to
have deducted tax at source on the footing that explanation 4 existed
on the statute book with effect from 1976. We have, therefore, to
examine as to whether persons liable to deduct TDS under section 195
of the Income Tax Act can be held liable to deduct such sums at a time
when explanation 4 was factually not on the statute book, all deductions
liable to be made and the assessment years in question being prior to
the year 2012.
81. This question is answered by two latin maxims, lex non cogit ad
impossibilia, i.e., the law does not demand the impossible and
impotentia excusat legem, i.e., when there is a disability that makes it
impossible to obey the law, the alleged disobedience of the law is
excused. Recently, in the judgment in Arjun Panditrao Khotkar v.
Kailash Kushanrao Gorantyal, (2020) 7 SCC 1 delivered by this
Court, this Court applied the said maxims in the context of the
requirement of a certificate to produce evidence by way of electronic
record under section 65B of the Evidence Act, 1872 and held that
having taken all possible steps to obtain the certificate and yet being
115
unable to obtain it for reasons beyond his control, the respondent in the
facts of the case, was relieved of the mandatory obligation to furnish a
certificate. In so holding, this Court referred to previous judgments
dealing with the doctrine of impossibility and concluded as follows:
“47. However, a caveat must be entered here. The facts of
the present case show that despite all efforts made by the
respondents, both through the High Court and otherwise, to
get the requisite certificate under Section 65-B(4) of the
Evidence Act from the authorities concerned, yet the
authorities concerned wilfully refused, on some pretext or
the other, to give such certificate. In a fact-circumstance
where the requisite certificate has been applied for from the
person or the authority concerned, and the person or
authority either refuses to give such certificate, or does not
reply to such demand, the party asking for such certificate
can apply to the court for its production under the provisions
aforementioned of the Evidence Act, CPC or CrPC. Once
such application is made to the court, and the court then
orders or directs that the requisite certificate be produced by
a person to whom it sends a summons to produce such
certificate, the party asking for the certificate has done all
that he can possibly do to obtain the requisite certificate.
Two Latin maxims become important at this stage. The first
is lex non cogit ad impossibilia i.e. the law does not demand
the impossible, and impotentia excusat legem i.e. when
there is a disability that makes it impossible to obey the law,
the alleged disobedience of the law is excused. This was
well put by this Court in Presidential Poll, In re [Presidential
Poll, In re, (1974) 2 SCC 33] as follows : (SCC pp. 49-50,
paras 14-15)
116
“14. If the completion of election before the
expiration of the term is not possible because of the
death of the prospective candidate it is apparent
that the election has commenced before the
expiration of the term but completion before the
expiration of the term is rendered impossible by an
act beyond the control of human agency. The
necessity for completing the election before the
expiration of the term is enjoined by the
Constitution in public and State interest to see that
the governance of the country is not paralysed by
non-compliance with the provision that there shall
be a President of India.
15. The impossibility of the completion of the
election to fill the vacancy in the office of the
President before the expiration of the term of office
in the case of death of a candidate as may appear
from Section 7 of the 1952 Act does not rob Article
62(1) of its mandatory character. The maxim of law
impotentia excusat legem is intimately connected
with another maxim of law lex non cogit ad
impossibilia. Impotentia excusat legem is that
when there is a necessary or invincible disability to
perform the mandatory part of the law that
impotentia excuses. The law does not compel one
to do that which one cannot possibly perform.
‘Where the law creates a duty or charge, and the
party is disabled to perform it, without any default
in him, and has no remedy over it, there the law will
in general excuse him.’ Therefore, when it appears
that the performance of the formalities prescribed
by a statute has been rendered impossible by
circumstances over which the persons interested
had no control, like the act of God, the
117
circumstances will be taken as a valid excuse.
Where the act of God prevents the compliance with
the words of a statute, the statutory provision is not
denuded of its mandatory character because of
supervening impossibility caused by the act of
God. (See Broom's Legal Maxims, 10th Edn. at pp.
162-63 and Craies on Statute Law, 6th Edn. at p.
268.)”
It is important to note that the provision in question in
Presidential Poll, In re [Presidential Poll, In re, (1974) 2 SCC
33] was also mandatory, which could not be satisfied owing
to an act of God, in the facts of that case. These maxims
have been applied by this Court in different situations in
other election cases — See Chandra Kishore Jha v. Mahavir
Prasad [Chandra Kishore Jha v. Mahavir Prasad, (1999) 8
SCC 266] (at paras 17 and 21); Special Reference No. 1 of
2002, In re (Gujarat Assembly Election matter) [Special
Reference No. 1 of 2002, In re (Gujarat Assembly Election
matter), (2002) 8 SCC 237] (at paras 130 and 151) and Raj
Kumar Yadav v. Samir Kumar Mahaseth [Raj Kumar Yadav
v. Samir Kumar Mahaseth, (2005) 3 SCC 601] (at paras 13
and 14).
48. These Latin maxims have also been applied in several
other contexts by this Court. In Cochin State Power & Light
Corpn. Ltd. v. State of Kerala [Cochin State Power & Light
Corpn. Ltd. v. State of Kerala, (1965) 3 SCR 187 : AIR 1965
SC 1688] , a question arose as to the exercise of an option
of purchasing an undertaking by the State Electricity Board
under Section 6(4) of the Electricity Act, 1910. The provision
required a notice of at least 18 months before the expiry of
the relevant period to be given by such State Electricity
Board to the State Government. Since this mandatory
provision was impossible of compliance, it was held that the
118
State Electricity Board was excused from giving such notice,
as follows : (1965) 3 SCR 187, at p. 193 : AIR pp. 1691-92,
para 8
“8. Sub-section (1) of Section 6 expressly vests in
the State Electricity Board the option of purchase
on the expiry of the relevant period specified in the
licence. But the State Government claims that
under sub-section (2) of Section 6 it is now vested
with the option. Now, under sub-section (2) of
Section 6, the State Government would be vested
with the option only ‘where a State Electricity Board
has not been constituted, or if constituted, does not
elect to purchase the undertaking’. It is common
case that the State Electricity Board was duly
constituted. But the State Government claims that
the State Electricity Board did not elect to purchase
the undertaking. For this purpose, the State
Government relies upon the deeming provisions of
sub-section (4) of Section 6, and contends that as
the Board did not send to the State Government
any intimation in writing of its intention to exercise
the option as required by the sub-section, the
Board must be deemed to have elected not to
purchase the undertaking. Now, the effect of subsection (4) read with sub-section (2) of Section 6 is
that on failure of the Board to give the notice
prescribed by sub-section (4), the option vested in
the Board under sub-section (1) of Section 6 was
liable to be divested. Sub-section (4) of Section 6
imposed upon the Board the duty of giving after the
coming into force of Section 6 a notice in writing of
its intention to exercise the option at least 18
months before the expiry of the relevant period.
Section 6 came into force on 5-9-1959, and the
119
relevant period expired on 3-12-1960. In the
circumstances, the giving of the requisite notice of
18 months in respect of the option of purchase on
the expiry of 2-12-1960, was impossible from the
very commencement of Section 6. The
performance of this impossible duty must be
excused in accordance with the maxim, lex non
cogitia ad impossibilia (the law does not compel the
doing of impossibilities), and sub-section (4) of
Section 6 must be construed as not being
applicable to a case where compliance with it is
impossible. We must, therefore, hold that the State
Electricity Board was not required to give the notice
under sub-section (4) of Section 6 in respect of its
option of purchase on the expiry of 25 years. It
must follow that the Board cannot be deemed to
have elected not to purchase the undertaking
under sub-section (4) of Section 6. By the notice
served upon the appellant, the Board duly elected
to purchase the undertaking on the expiry of 25
years. Consequently, the State Government never
became vested with the option of purchasing the
undertaking under sub-section (2) of Section 6.
The State Government must, therefore, be
restrained from taking further action under its
notice, Ext. G, dated 20-11-1959.”
49. In Raj Kumar Dey v. Tarapada Dey [Raj Kumar Dey v.
Tarapada Dey, (1987) 4 SCC 398] , the maxim lex non cogit
ad impossibilia was applied in the context of the applicability
of a mandatory provision of the Registration Act, 1908, as
follows : (SCC pp. 402-03, paras 6-7)
“6. We have to bear in mind two maxims of equity
which are well settled, namely, actus curiae
120
neminem gravabit — An act of the court shall
prejudice no man. In Broom's Legal Maxims, 10th
Edn., 1939 at p. 73 this maxim is explained that this
maxim was founded upon justice and good sense;
and afforded a safe and certain guide for the
administration of the law. The above maxim
should, however, be applied with caution. The
other maxim is lex non cogit ad impossibilia
(Broom's Legal Maxims, p. 162) — The law does
not compel a man to do that which he cannot
possibly perform. The law itself and the
administration of it, said Sir W. Scott, with
reference to an alleged infraction of the revenue
laws, must yield to that to which everything must
bend, to necessity; the law, in its most positive and
peremptory injunctions, is understood to disclaim,
as it does in its general aphorisms, all intention of
compelling impossibilities, and the administration
of laws must adopt that general exception in the
consideration of all particular cases.
7. In this case indisputably during the period from
26-7-1978 to December 1982 there was subsisting
injunction preventing the arbitrators from taking
any steps. Furthermore, as noted before the award
was in the custody of the court, that is to say, 28-1-
1978 till the return of the award to the arbitrators on
24-11-1983, arbitrators or the parties could not
have presented the award for its registration during
that time. The award as we have noted before was
made on 28-11-1977 and before the expiry of the
four months from 28-11-1977, the award was filed
in the court pursuant to the order of the court. It was
argued that the order made by the court directing
the arbitrators to keep the award in the custody of
121
the court was wrong and without jurisdiction, but no
arbitrator could be compelled to disobey the order
of the court and if in compliance or obedience with
court of doubtful jurisdiction, he could not take back
the award from the custody of the court to take any
further steps for its registration then it cannot be
said that he has failed to get the award registered
as the law required. The aforesaid two legal
maxims — the law does not compel a man to do
that which he cannot possibly perform and an act
of the court shall prejudice no man would, apply
with full vigour in the facts of this case and if that is
the position then the award as we have noted
before was presented before the Sub-Registrar,
Arambagh on 25-11-1983 the very next one day of
getting possession of the award from the court. The
Sub-Registrar pursuant to the order of the High
Court on 24-6-1985 found that the award was
presented within time as the period during which
the judicial proceedings were pending that is to
say, from 28-1-1978 to 24-11-1983 should be
excluded in view of the principle laid down in
Section 15 of the Limitation Act, 1963. The High
Court [Tarapada Dey v. District Registrar, Hooghly,
1986 SCC OnLine Cal 101 : AIR 1987 Cal 107] ,
therefore, in our opinion, was wrong in holding that
the only period which should be excluded was from
26-7-1978 till 20-12-1982. We are unable to accept
this position. 26-7-1978 was the date of the order
of the learned Munsif directing maintenance of
status quo and 20-12-1982 was the date when the
interim injunction was vacated, but still the award
was in the custody of the court and there is ample
evidence as it would appear from the narration of
events hereinbefore made that the arbitrators had
122
tried to obtain the custody of the award which the
court declined to give to them.”
(emphasis in original)
50. These maxims have also been applied to tenancy
legislation — see B.P. Khemka (P) Ltd. v. Birendra Kumar
Bhowmick [B.P. Khemka (P) Ltd. v. Birendra Kumar
Bhowmick, (1987) 2 SCC 407] (at para 12), and have also
been applied to relieve authorities of fulfilling their obligation
to allot plots when such plots have been found to be
unallottable, owing to the contravention of the Central
statutes — see Hira Tikkoo v. State (UT of Chandigarh) [Hira
Tikkoo v. State (UT of Chandigarh), (2004) 6 SCC 765] (at
paras 23 and 24).
51. On an application of the aforesaid maxims to the present
case, it is clear that though Section 65-B(4) is mandatory,
yet, on the facts of this case, the respondents, having done
everything possible to obtain the necessary certificate,
which was to be given by a third party over whom the
respondents had no control, must be relieved of the
mandatory obligation contained in the said sub-section.”
82. As a matter of fact, even under the Income Tax Act, the High Court of
Bombay has taken a view, applying the aforestated maxims in the
context of the provisions of the relevant DTAAs, to hold that persons
are not obligated to do the impossible, i.e., to apply a provision of a
statute when it was not actually and factually on the statute book.
83. In CIT v. NGC Networks (India) Pvt. Ltd., ITA No. 397/2015, a
question arose as to the applicability of explanation 6 to Section 9(1)(vi),
123
in the context of section 194J of the Income Tax Act, which explanation
was inserted with retrospective effect. The High Court of Bombay,
applying the aforesaid maxim, held:
“(d) We find that [the] view taken by the impugned order
dated 9th July, 2014 of the Tribunal that a party cannot be
called upon to perform an impossible act i.e. to comply with
a provision not in force at the relevant time but introduced
later by retrospective amendment. This is in accord with the
view taken by this Court in CIT v/s. Cello Plast (2012) 209
Taxmann 617 – wherein this Court has applied the legal
maxim lex non cogit ad impossibilia (law does not compel a
man to do what he cannot possibly perform).
(e) In the present facts, the amendment by introduction of
Explanation-6 to Section 9(1)(vi) of the Act took place in the
year 2012 with retrospective effect from 1976. This could not
have been contemplated by the Respondent when he made
the payment which was subject to tax deduction at source
under Section 194C of the Act during the subject
Assessment Year, would require deduction under Section
194J of the Act due to some future amendment with
retrospective effect.”
84. In CIT v. Western Coalfields Ltd., ITA No. 93/2008, the High Court of
Bombay dealt with the insertion of an explanation to section 17(2)(ii) of
the Income Tax Act with retrospective effect and held:
“11) We see no merit in the above contentions. The Apex
Court in Arun Kumar's case (supra) while upholding the
validity of Rule 3 has held that in the absence of any
“deeming fiction” in the Act, it is open to the assessee to
124
contend that there is no concession in the matter of
accommodation provided by the employer to the employees
and the case is not covered by Section 17(2)(ii) of the Act.
In other words, even after the substitution of Rule 3 with
effect from 1/4/2001, in the absence of any specific provision
under the Act, it was open to the assessee not to deduct tax
at source relating to the accommodation given to the
employees on the ground that no concession in rent has
been given to the employees. This contention of the
assessee has been in fact upheld by the Apex Court in the
case of Arun Kumar (supra). To overcome the above
decision, the law has been amended by Finance Act, 2007
with retrospective effect from 1/4/2002. The retrospective
amendment merely takes away the above argument, which
was available to the assessee. Once the salary is paid by
the employer after deducting tax at source as per the law
prevailing on the date of paying the salary, then any
subsequent amendment in law brought about
retrospectively cannot require the employer to deduct tax at
source for the past period, because the salary for that period
has already been paid. Consequently, the employer cannot
be made liable for the consequences set out in Section 201
of the Act on account of the retrospective amendment to
Section 17(2) of the Act.”
85. It is thus clear that the “person” mentioned in section 195 of the Income
Tax Act cannot be expected to do the impossible, namely, to apply the
expanded definition of “royalty” inserted by explanation 4 to section
9(1)(vi) of the Income Tax Act, for the assessment years in question, at
a time when such explanation was not actually and factually in the
statute.
125
RULINGS OF THE AAR AND JUDGMENTS OF HIGH COURTS
86. The question of law posed before us in these appeals has been
answered in several rulings – some by the AAR, some by the High Court
of Karnataka, and some by the High Court of Delhi. These authorities
will now be dealt with sequentially.
87. The first and most comprehensive authority dealing with the question
raised in these appeals is by the AAR in its ruling in Dassault Systems,
K.K., In Re., (2010) 322 ITR 125 (AAR) [“Dassault (AAR)”]. In that
case, the applicant was a company incorporated under the laws of
Japan, which marketed licensed computer software products, through
a distribution channel comprising value added resellers [“VAR”], who
were independent third-party resellers in the business of selling
software to end-users. The question posed by the AAR to itself was as
follows:
“Whether on the facts and circumstances of the case and in
law the payment received by Dassault Systems K.K.
(hereinafter referred to as the “the applicant”) from sale of
software products to independent third party resellers will be
taxable as business profits under Article 7 of the India-Japan
Double Taxation Avoidance Agreement (“India-Japan
DTAA” or “Treaty”) and will not constitute ‘royalties and fee
for technical services’ as defined in Article 12 of India-Japan
DTAA?”
(pages 129-130)
126
88. After setting out Article 12 of the India-Japan DTAA, which is in the
same terms as Article 12 of the India-Singapore DTAA and the other
DTAAs that we are concerned with, and after adverting to the definition
of “royalty” that is contained in explanation 2 to section 9(1)(vi) of the
Income Tax Act, the AAR then set out, from the locus classicus on
copyright law, the following passage:
“Before entering into a discussion on the applicability of the
royalty definition, it is appropriate to recapitulate certain
basic principles concerning the copyright as a legal concept.
We may, in this connection, refer to some passages from the
classic treatise of Copinger and Skone James on Copyright
(1999 Edn):
“Copyright gives the owner of the copyright in a
work of any description the exclusive right to
authorize or prohibit the Copyright, Designs and
Patents Act, 1988 of UK exploitation of the
copyright work by third parties. This includes the
right to copy the work itself and also to use the work
in other ways protected under the law”.(p. 26)
Copyright is often described as a negative right. This idea is
conveyed by Copinger in the following words:
“Copyright, however, does not essentially mean a
right to do something, but rather a right to restrict
others from doing certain acts, and, when copyright
is referred to as “an exclusive right,” the emphasis
is on the word ‘exclusive’. Thus, the 1988 Act,
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whilst not defining “copyright” otherwise than as a
property right, which is transmissible as personal
or moveable property, provides that the owner of
the copyright in a work has the exclusive right to do
the acts restricted by the copyright in a work of that
description specified in the 1988 Act. [Copyright,
Designs and Patents Act, 1988 of UK.]” (p. 27)
The following passage also deserves notice:
“It is important to recognize that ownership of
copyright in a work is different from the ownership
of the physical material in which the copyright work
may happen to be embodied. Just as the owner of
the physical material on which a copyright work is
first recorded is not necessarily the first owner of
the copyright, so the transfer of title to the original
physical material does not by itself operate to
transfer the title to the copyright… Thus, to take an
obvious example, the purchaser of a book or video
recording becomes the owner of the physical
article but he does not thereby become the owner
of any part of the copyright in the works reproduced
in it. The copyright in the literary work remains with
the copyright owner, who enjoys and is entitled to
enforce all the exclusive rights of copying,
publication, adaptation, sale, rental and so on
conferred on him by copyright law. The purchaser
does not acquire by his purchase any right, either
by way of assignment or licence, to exercise any of
those exclusive rights. (p. 217)”
Referring to the position of a licensee and an exclusive
licensee, the legal position was stated as follows at p. 310:
128
“A mere licence from the copyright owner confers
no proprietary interest on the licensee enabling
him, for example, to bring proceedings in his own
name, unless coupled with the grant of some other
interest, for example, the right to take property
away. Statute apart, even an exclusive licence,
which is merely the leave to do a thing coupled with
a promise not to do, or give anyone else
permission to do that thing, gives the licensee no
right to sue in his own name for infringement nor
any other proprietary interest. In copyright law this
general rule is altered by statute in the case of
exclusive licences which comply with prescribed
formalities. The 1988 Act confers on such a
licensee a procedural status which enables him to
bring proceedings but otherwise the rule is
unchanged: an exclusive licensee has no
proprietary interest in the copyright.””
(pages 132-134)
89. After setting out various provisions of the Copyright Act, the terms of
the Distribution Agreement between the applicant and the VAR, as well
as the provisions of the EULA, the AAR then held:
“In the instant case, the end-user is not given the authority
to do any of the acts contemplated in sub-clauses (i) to (vii)
of clause (a) of Section 14, not to speak of the exclusive right
to do the said acts. In fact, the restrictions placed on the enduser and the VAR which have been referred to earlier
coupled with a declaration that the intellectual property rights
in the licensed programmes will remain exclusively with the
applicant (or its licensors) and the non-exclusive and nontransferable character of licence are all meant to ensure that
129
none of the rights vesting in the applicant as copyrightholder can be claimed or enjoyed by the licensee and that
they will remain intact and are preserved. The entire tenor of
the Agreement and the various stipulations contained
therein make it clear that no rights in derogation of the
applicant's exclusive rights in relation to the copyright have
been conferred on the licensee i.e., the end-user or VAR.
The core of the transaction is to authorize the end-user to
have access to and make use of the licensed software
products over which the applicant has exclusive copyright,
without giving any scope for dealing with them any further.
Passing on a right to use and facilitating the use of a product
for which the owner has a copyright is not the same thing as
transferring or assigning rights in relation to the copyright.
The enjoyment of some or all the rights which the copyright
owner has, is necessary to trigger the royalty definition.
Viewed from this angle, a non-exclusive and nontransferable licence enabling the use of a copyrighted
product cannot be construed as an authority to enjoy any or
all of the enumerated rights ingrained in a copyright. Where
the purpose of the licence or the transaction is only to
establish access to the copyrighted product for internal
business purpose, it would not be legally correct to state that
the copyright itself has been transferred to any extent. It
does not make any difference even if the computer
programme passed on to the user is a highly specialized
one. The parting of intellectual property rights inherent in
and attached to the software product in favour of the
licencee/customer is what is contemplated by the definition
clause in the Act as well as the Treaty. As observed earlier,
those rights are incorporated in Section 14. Merely
authorizing or enabling a customer to have the benefit of
data or instructions contained therein without any further
right to deal with them independently does not, in our view,
130
amount to transfer of rights in relation to copyright or
conferment of the right of using the copyright. However,
where, for example, the owner of copyright over a literary
work grants an exclusive license to make out copies and
distribute them within a specified territory, the grantee will
practically step into the shoes of the owner/grantor and he
enjoys the copyright to the extent of its grant to the exclusion
of others. As the right attached to copyright is conveyed to
such licencee, he has the authority to commercially deal with
it. In case of infringement of copyright, he can maintain a suit
to prevent it. Different considerations will arise if the grant is
non-exclusive, that too confined to the user purely for inhouse or internal purpose. The transfer of rights in or over
copyright or the conferment of the right of use of copyright
implies that the transferee/licencee should acquire rights -
either in entirety or partially co-extensive with the
owner/transferor who divests himself of the rights he
possesses pro tanto. That is what, in our view, follows from
the language employed in the definition of ‘royalty’ read with
the provisions of Copyright Act, viz., Section 14 and other
complementary provisions.
We may refer to one more aspect here. In the definition of
royalty under the Act, the phrase “including the granting of a
licence” is found. That does not mean that even a nonexclusive licence permitting user for in-house purpose would
be covered by that expression. Any and every licence is not
what is contemplated. It should take colour from the
preceding expression “transfer of rights in respect of
copyright”. Apparently, grant of ‘licence’ has been referred
to in the definition to dispel the possible controversy [that a]
licence — whatever be its nature, can be characterized as
transfer.”
(pages 144-145)
131
90. The AAR then concluded:
“As stated in Copinger's treatise on Copyright, “the exclusive
right to prevent copying or reproduction of a work is the most
fundamental and historically oldest right of a copyright
owner”. We do not think that such a right has been passed
on to the end-user by permitting him to download the
computer programme and storing it in the computer for his
own use. The copying/reproduction or storage is only
incidental to the facility extended to the customer to make
use of the copyrighted product for his internal business
purpose. As admitted by the Revenue's representative, that
process is necessary to make the programme functional and
to have access to it and is qualitatively different from the right
contemplated by the said provision because it is only integral
to the use of copyrighted product. Apart from such incidental
facility, the customer has no right to deal with the product
just as the owner would be in a position to do. In so far as
the licensed material reproduced or stored is confined to the
four corners of its business establishment, that too on a nonexclusive basis, the right referred to in sub-clause (i) of
Section 14(a) would be wholly out of place. Otherwise, in
respect of even off the shelf software available in the market,
it can be very well said that the right of reproduction which
is a facet of copyright vested with the owner is passed on to
the customer. Such an inference leads to unintended and
irrational results. We may in this context refer to Section
52(aa) of C.R. Act (extracted supra) which makes it clear
that “the making of copies or adaptation” of a computer
program by the lawful possessor of a copy of such program,
from such copy (i) in order to utilize the computer program,
for the purpose for which it was supplied or (ii) to make back
up copies purely as a temporary protection against loss,
destruction, or damage in order to utilize the computer
program for the purpose of which it was supplied” will not
constitute infringement of copyright. Consequently,
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customization or adaptation, irrespective of the degree, will
not constitute ‘infringement’ as long as it is to ensure the
utilization of the computer program for the purpose for which
it was supplied. Once there is no infringement, it is not
possible to hold that there is transfer or licensing of
‘copyright’ as defined in CR Act and as understood in
common law. This is because, as pointed out earlier,
copyright is a negative right in the sense that it is a right
prohibiting someone else to do an act, without authorization
of the same, by the owner.
It seems to us that reproduction and adaptation envisaged
by Section 14(a)(i) and (vi) can contextually mean only
reproduction and adaptation for the purpose of commercial
exploitation. Copyright being a negative right (in the sense
explained in para 9 supra), it would only be appropriate and
proper to test it in terms of infringement. What has been
excluded under S. 52(aa) is not commercial exploitation, but
only utilizing the copyrighted product for one's own use. The
exclusion should be given due meaning and effect;
otherwise, Section 52(aa) will be practically redundant. In
fact, as the law now stands, the owner need not necessarily
grant licence for mere reproduction or adaptation of work for
one's own use. Even without such licence, the buyer of
product cannot be said to have infringed the owner's
copyright. When the infringement is ruled out, it would be
difficult to reach the conclusion that the buyer/licensee of
product has acquired a copyright therein.
The following observations of the Constitution Bench of the
Supreme Court in Tata Consultancy Services v. The State
of Andhra Pradesh case are quite apposite, though made in
a different context:
“a software programme may consist of various
commands which enable the computer to perform
133
a designated task. The copyright in that
programme may remain with the originator of the
programme. But the moment copies are made and
marketed, [they become] goods, which are
susceptible to sales tax.”
Viewed from any angle, we have no hesitation in rejecting
the contention of the Revenue referred to in para 18 supra.”
(pages 147-148)
91. Referring to section 14(b)(ii) of the Copyright Act, the AAR then held:
“Next, it has been argued on behalf of the Revenue that the
right to sell or offer for sale the applicant's software product
has been conferred on the VAR and therefore such authority
given to VAR amounts to conferment of rights in or over the
copyright in view of cl. (b)(ii) of Section 14. We are unable to
sustain this contention. First of all, this contention of
Revenue goes contrary to its stand that the product was
licensed but not sold. Be that as it may, even for other
reasons, the contention has to be rejected. VAR has not
been given an independent right to sell or offer for sale the
software products of the applicant to the end-users. What
the VAR does in the course of carrying out its marketing
function is to canvass for orders, collect the purchase order
from the interested customer and forward that offer to the
applicant. It is the applicant that accepts or rejects that offer.
For this purpose, a non-exclusive and non-transferable
license to distribute the product has been given to VAR. The
transaction emanating from the order of the end-user
followed up by back to back order of VAR is finalized by the
applicant and unless the purchase order is accepted by the
applicant, the transaction does not materialize. The VAR's
role is only to forward the order to the applicant with the
necessary documents. It is upto the applicant to accept it or
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not to accept it. Once the product is delivered to the enduser, the sale if any by VAR takes place simultaneously and
that transaction is a different one. In the absence of an
independent right to conclude the sale or offer for sale, subclause (ii) of clause (b) of Section 14 cannot be invoked to
bring the case within the fold of Art. 12.3 of the Treaty or
Section 9(1)(vi) of the Act. It is also noteworthy that VAR is
not an exclusive distributor for a territory and he does not
pay any consideration to the applicant distinctly for acquiring
the distribution rights. He gets the discount for each
individual transaction at the agreed rate.”
(pages 148-149)
92. Consequently, the question posed to itself was answered by the AAR
as follows:
“The answer to the question framed by the applicant is
broadly in the negative. It is ruled that the payment received
by the applicant from VARs. (“third party re-sellers”) on
account of supplies of software products to the endcustomers (from whom the licence fee is collected and
appropriated by VAR) does not result in income in the nature
of royalty to the applicant and moreover payments received
by the applicant cannot be taxed as business profits in India
in the absence of permanent establishment as envisaged by
Article 7 of the India-Japan Tax Treaty.”
(pages 157-158)
93. Close on the heels of this determination, the AAR followed this
determination in Geoquest Systems B.V. Gevers Deynootweg, In
Re., (2010) 327 ITR 1 (AAR) [“Geoquest (AAR)”] qua an applicant
which was a company incorporated in the Netherlands and sold certain
135
software packages to the Oil and Natural Gas Corporation in India. After
referring to and relying upon the determination in Dassault (AAR)
(supra), the AAR concluded that the amount payable to the applicant
did not amount to “royalties” within the meaning of Article 12 of the IndiaNetherlands DTAA.
94. However, a discordant note was soon struck by the AAR in Citrix
Systems Asia Pacific Ptyl. Ltd., In Re., (2012) 343 ITR 1 (AAR)
[“Citrix Systems (AAR)”], which ruling is impugned in C.A. No.
8990/2018 before us. In this case, the same question that arose before
the AAR in the earlier two cases, namely Dassault (AAR) (supra) and
Geoquest (AAR) (supra), arose. The case concerned an applicant
incorporated in Australia that had entered into a distribution agreement
with an independent Indian company engaged in the business of
distribution of computer software and hardware. “Ingram” was
appointed as the non-exclusive distributor of the products of the
applicant in India. This time, the AAR, after referring to the provisions of
the Income Tax Act and the Convention between the Government of
the Republic of India and the Government of Australia for the Avoidance
of Double Taxation and the Prevention of Fiscal Evasion with respect to
136
Taxes on Income,39 [“India-Australia DTAA”], together with the
provisions of the Copyright Act, arrived at a conclusion diametrically
opposite to that contained in the rulings in Dassault (AAR) (supra) and
Geoquest (AAR) (supra). The AAR held as follows:
“Thus, a reference to the Copyright Act indicates that use of
a copyright either by an owner or a licensee, would not be
an infringement of a copyright. The transfer of ownership
can be by an assignment to another of the copyright either
wholly or partially, either generally or with special limitations
and either for the whole term of the copyright or any part
thereof. Similarly, a license can be granted by the owner of
the copyright of any interest in the right. An exclusive right
also can be granted excluding even oneself from the right to
use the copyright owned. So, a transgression of the
limitations of an assignment or of a license would prime facie
be an infringement of the copyright and invite the
consequences provided for under the Act. Similarly, the act
of taking copies or act of adaptation will not be an
infringement only if it is done by a lawful possessor of a copy
of the computer programme. A lawful possessor can only be
an assignee, an exclusive licensee or a licensee of the
programme. When he acquires a computer programme, he
also gets the right to use that programme to a limited extent.
This in our view, is on the basis that in so acquiring the
computer programme, he has also got a right, absolute or
limited to use the copyright.
When a software is created by a person who acquires a
copyright for it, he becomes the owner of that copyright. He
39 Notification No. GSR 60(E), dated 22-1-1992 as amended by Notification
No.74/2013 [F.No.503/1/2009-FTD-II]/SO 2820(E), dated 20-9-2013.
137
can transfer or license that right either by himself or through
an agent. When he sells or licenses the software for use, he
is also selling or licensing the right to use the copyright
embedded therein. If a software is used without being
lawfully acquired either by purchase or by license, that would
amount to an infringement of the copyright obviously
because of the copyright embedded in the software. The
software is a literary work and clearly the copyright of the
creator over the software is an important and commercially
valuable right. So, whenever a software is assigned or
licensed for use, there is involved an assignment of the right
to use the embedded copyright in the software or a license
to use the embedded copyright, the Intellectual Property
Right in the software. Therefore, it appears to us that it is not
possible to divorce the software from the Intellectual
Property Right of the creator of the software embedded
therein. The amendment to Section 14(1)(b) of the Copyright
Act, by Act 49 of 1999, clarifying that in the case of a
computer programme, copyright means the right to sell or
give on commercial rental or offer for sale or commercial
rental any copy of the computer programme, seems to be
significant. This addition would suggest that even the right
to sell or give on rental, would amount to a copyright and
would be a right to be dealt with as a copyright.”
(pages 13-14)
95. The AAR disagreed with the determination in Dassault (AAR) (supra),
stating:
“In Dassault (AAR 821 of 2009), it was noticed that the core
of the transaction in that case was to authorise the end-user
to have access to and make use of the licensed software
products over which the applicant had exclusive copyright
without giving any scope for dealing with them any further.
138
The reasoning or the line of reasoning in Factset on
applicability of the Copyright Act, in this context, was
followed. It was also noticed that in Tata Consultancy
Services (271 ITR 401), the Supreme Court had held that “a
software programme may consist of various commands
which enable the computer to perform a designated task.
The copyright in that programme may remain with the
originator of the programme. But, the moment copies are
made and marketed it becomes goods which are susceptible
to sales-tax.” The Supreme Court was speaking in the
context of the Sales-tax Act. The Court had no occasion to
consider what was involved in the sale of a software
programme. The Court had no occasion to consider what all
are the rights that pass on to the grantee when a software
programme is transferred or licensed to him. It was
concluded in Dassault, that in the absence of an
independent right to conclude a sale or offer for sale, section
14 could not be invoked to bring the case within Section
9(1)(vi) of the Act by invoking sub-clause (ii) of Clause (b) of
that section. It was concluded that no right to use the
copyright as such has been conferred on the licensee. In our
view whenever software is transferred or licensed for use, it
takes within it the copyright embedded in the software and
the one cannot be divorced from the other.”
(page 17)
96. The AAR then reasoned that the fact that a licence had been granted
would be sufficient to conclude that there was a transfer of copyright,
and that there was no justification for the use of the doctrine of noscitur
a sociis to confine the transfer by way of a licence to only include a
licence which transferred rights in respect of copyright, by referring to
explanation 2 to section 9(1)(vi) of the Income Tax Act. It then held:
139
“Considerable arguments are raised on the so-called
distinction between a copyright and copyrighted articles.
What is a copyrighted article? It is nothing but an article
which incorporates the copyright of the owner, the assignee,
the exclusive licensee or the licencee. So, when a
copyrighted article is permitted or licensed to be used for a
fee, the permission involves not only the physical or
electronic manifestation of a programme, but also the use of
or the right to use the copyright embedded therein. That
apart, the Copyright Act or the Income-tax Act or the DTAC
does not use the expression ‘copyrighted article’, which
could have been used if the intention was as claimed by the
applicant. In the circumstances, the distinction sought to be
made appears to be illusory.”
(page 19)
97. This ruling of the AAR flies in the face of certain principles. When, under
a non-exclusive licence, an end-user gets the right to use computer
software in the form of a CD, the end-user only receives a right to use
the software and nothing more. The end-user does not get any of the
rights that the owner continues to retain under section 14(b) of the
Copyright Act read with sub-section (a)(i)-(vii) thereof. Thus, the
conclusion that when computer software is licensed for use under an
EULA, what is also licensed is the right to use the copyright embedded
therein, is wholly incorrect. The licence for the use of a product under
an EULA cannot be construed as the licence spoken of in section 30 of
the Copyright Act, as such EULA only imposes restrictive conditions
140
upon the end-user and does not part with any interest relatable to any
rights mentioned in sections 14(a) and 14(b) of the Copyright Act.
98. As a matter of fact, even otherwise, on first principles, the extract from
Copinger and Skone James on Copyright (14
th Edition) (1999) referred
to in Dassault (AAR) (supra) makes it clear that the ownership of
copyright in a work is different from the ownership of the physical
material in which the copyrighted work may happen to be embedded.
This important passage correctly relied upon by the AAR in the
Dassault (AAR) (supra) ruling has been completely missed.
99. Further, it is difficult to understand the reasoning contained in this
determination. It is self-contradictory when it says that the DTAA which
defines “royalties” must somehow be given a go-bye, as this term must
be understood as it is commonly understood. It is also difficult to
understand the holding that the AAR need not be constrained by the
definition of “copyright” contained in section 14 of the Copyright Act,
when construing a DTAA, when we have already seen how section 16
of the Copyright Act makes it clear that no person shall be entitled to
copyright otherwise than under the provisions of the Copyright Act or
any other law in force.
141
100.Also, any ruling on the more expansive language contained in the
explanations to section 9(1)(vi) of the Income Tax Act would have to be
ignored if it is wider and less beneficial to the assessee than the
definition contained in the DTAA, as per section 90(2) of the Income
Tax Act read with explanation 4 thereof, and Article 3(2) of the DTAA.
Further, the expression “copyright” has to be understood in the context
of the statute which deals with it, it being accepted that municipal laws
which apply in the Contracting States must be applied unless there is
any repugnancy to the terms of the DTAA. For all these reasons, the
determination of the AAR in Citrix Systems (AAR) (supra) does not
state the law correctly and is thus set aside.
101.The High Court of Karnataka, in a judgment impugned in various
appeals before us, namely, CIT v. Samsung Electronics Co. Ltd.,
(2012) 345 ITR 494, also held that what was sold/licensed by way of
computer software, included the grant of a right or interest in copyright,
and thus gave rise to the payment of royalty, which then required the
deduction of TDS. The reasoning of this judgment under appeal is set
out as follows:
“…Accordingly, we hold that right to make a copy of the
software and use it for internal business by making copy of
the same and storing the same in the hard disk of the
designated computer and taking back up copy would itself
142
amount to copyright work under section 14(1) of the Act and
licence is granted to use the software by making copies,
which [would], but for the licence granted, have constituted
infringement of copyright and the licensee is in possession
of the legal copy of the software under the licence.
Therefore, the contention of the learned senior counsel
appearing for the respondents that there is no transfer of any
part of copyright or copyright and transaction only involves
sale of copy of the copyright software cannot be accepted.
It is also to be noted that what is supplied is the copy of the
software of which the respondent-supplier continues to be
the owner of the copyright and what is granted under the
licence is only right to copy the software as per the terms of
the agreement, which, but for the licence would amount to
infringement of copyright and in view of the licence granted,
the same would not amount to infringement under section
52 of the Copyright Act as referred to above.
Therefore, the amount paid to the non-resident supplier
towards supply of shrink-wrapped software, or off-the-shelf
software is not the price of the C.D. alone nor software alone
nor the price of licence granted. This is a combination of all
and in substance, unless licence is granted permitting the
end user to copy, and download the software, the dumb C.D.
containing the software would not in any way be helpful to
the end user as software would become operative, only if it
is downloaded to the hardware of the designated computer
as per the terms and conditions of the agreement and that
makes, the difference between the computer software and
copyright, in respect of books or prerecorded music [C.D.],
as book and prerecorded music C.D. can be used once they
are purchased, but so far as software stored in dumb C.D.
is concerned, the transfer of dumb C.D. by itself would not
confer any, right, upon the end user and the purpose of the
143
C.D. is only to enable the end user to take a copy of the
software and to store it in the hard disk of the designated
computer if licence is granted in that behalf and in the
absence of licence, the same would amount to infringement
of copyright, which is exclusively owned by non-resident
suppliers, who would continue to be the proprietor of
copyright. Therefore, there is no similarity between the
transaction of purchase of the book or prerecorded music
C.D. or the C.D. containing software and in view of the same,
the Legislature in its wisdom, has treated the literary work
like books and other articles separately from “computer”
software within the meaning of the “copyright” as referred to
above under section 14 of the Copyright Act.
It is also clear from the abovesaid analysis of the DTAA, the
Income-tax Act, the Copyright Act that the payment would
constitute “royalty” within the meaning of article 12(3) of the
DTAA and even as per the provisions of section 9(1)(vi) of
the Act as the definition of “royalty” under clause 9(1)(vi) of
the Act is broader than the definition of “royalty” under the
DTAA as the right that is transferred in the present case is
the transfer of copyright including the right to make copy of
software for internal business, and payment made in that
regard would constitute “royalty” for imparting of any
information concerning technical, industrial, commercial or
scientific knowledge, experience or skill as per clause (iv)
of Explanation 2 to section 9(1)(vi) of the Act. In any view of
the matter, in view of the provisions of section 90 of the Act,
agreements with foreign countries DTAA would override the
provisions of the Act. Once it is held that payment made by
the respondents to the non-resident companies would
amount to “royalty” within the meaning of article 12 of the
DTAA with the respective country, it is clear that the payment
made by the respondents to the non-resident supplier would
amount to royalty. In view of the said finding, it is clear that
144
there is obligation on the part of the respondents to deduct
tax at source under section 195 of the Act and
consequences would follow as held by the hon'ble Supreme
Court while remanding these appeals to this court.
Accordingly, we answer the substantial question of law in
favour of the Revenue and against the assessee by holding
that on the facts and in the circumstances of the case, the
Income-tax Appellate Tribunal was not justified in holding
that the amount(s) paid by the respondents) to the foreign
software suppliers was not “royalty” and that the same did
not give rise to any “income” taxable in India and wherefore,
the respondent(s) were not liable to deduct any tax at source
and pass the following order:
All the appeals are allowed. The order passed by the
Income-tax Appellate Tribunal, Bangalore Bench “A”
impugned in these appeals is set aside and the order passed
by the Commissioner of Income-tax (Appeals) confirming
the order passed by the Assessing Officer (TDS)-I is
restored.”
(pages 527-528)
102.The reasoning of this judgment also does not commend itself to us. The
same error as was made by the AAR in Citrix Systems (AAR) (supra),
was made in this judgment, i.e., no distinction was made between
computer software that was sold/licensed on a CD/other physical
medium and the parting of copyright in respect of any of the rights or
interest in any of the rights mentioned in sections 14(a) and 14(b) of the
Copyright Act. This being the case, the reasoning of this judgment
suffers from the same fundamental defect that the ruling in Citrix
145
Systems (AAR) (supra) suffers from. By no stretch of imagination, can
the payment for such computer software amount to royalty within the
meaning of Article 12 of the DTAA or section 9(1)(vi) of the Income Tax
Act.
103.In another judgment of the High Court of Karnataka, dated 03.08.2020,
in CIT v. Synopsis International Old Ltd., ITA Nos. 11-15/2008
[“Synopsis Intl.”],40 the High Court relied upon the expression “in
respect of” in section 9(1)(vi) of the Income Tax Act, holding:
“27. The words "in respect of" [denote] the intention of the
Parliament to give a broader meaning. The words “in respect
of” admit of a wide connotation, than the word "in" or "on".
The expression "in respect of" means “attributable to". If it is
given a wider meaning "relating to or with reference to", it
has been used in the sense of being “connected with”.
Whether it is a fiscal legislation or any legislation for that
matter, the golden rule of interpretation equally applies to all
of them, i.e., the words in a statute should be given its literal
meaning. In respect of fiscal legislation those words should
be strictly construed. If those words are capable of two
meanings that meaning which is beneficial to an assessee
should be given. However, when the meaning of the words
used are clear, unambiguous, merely because it is a fiscal
legislation, the meaning cannot be narrowed down and it
cannot be interpreted so as to give benefit to the assessee
only. Then it would be re-writing the section, under the guise
of interpreting a fiscal legislation, which is totally
40 This judgment has been relied upon by several judgments of the High Court of
Karnataka impugned in the appeals before us.
146
impermissible in law. When the legislature has advisedly
used the words “in respect of”, the intention is clear and
manifest. The said phrase being capable of a broader
meaning, the same is used in the section to bring within the
tax net all the incomes from the transfer of all or any of the
rights in respect of a copyright. In a taxing statute provisions
enacted to prevent tax evasion are to be given a liberal
construction to effectuate the purpose of suppressing tax
evasion, although provisions imposing a charge are
construed strictly there being no a priori liability to pay a tax
and the purpose of charging section being only to levy a
charge on persons and activities brought within its clear
terms. Therefore, the specific words used in a taxing statute,
charging tax cannot be ignored. It is not the consideration
for transfer of all or any of the rights in the copyright. Without
transferring a right in the copyright it is possible to receive
consideration for the use of the intellectual property for
which the owner possesses a copyright. Ultimately, the
consideration paid is for the usefulness of the material object
in respect of which there exists a copyright. Therefore, the
intention was not to exclude the consideration paid for the
use of such material object which is popularly called as
copyrighted article. Even in respect of a copyrighted article
the same is transferred, no doubt the right in the copyright is
not transferred, but a right in respect of a copyright contained
in the copyrighted article is transferred. Therefore, the
Parliament thought it fit to use the phrase “in respect of” as
contra distinct from the word “in” copyright. The meaning is
clear, intention is clear, there is no ambiguity. Therefore,
there is no scope for interpretation of this expressed term
inasmuch as in the context in which it is used in the
provision. Any other interpretation would lead to the
aforesaid provision becoming otiose.”
147
104.After so holding, the High Court of Karnataka went on to state:
“32. … Therefore, the expression 'copyright' used in the Act
cannot be the same as used in the Income-tax Act, when the
legislature advisedly used the word 'in respect of a copyright'
it cannot be construed as a right in the copyright and assign
the meaning assigned in the Copyright Act to the second
explanation. The language in Explanation (2) explicitly
makes it clear for the purpose of clause (vi) of sub-section
(1) of section 9 royalty means consideration for transfer of
all or any rights including the granting of a licence in respect
of any copyright, literary, artistic or scientific work.
Therefore, the word exclusive right used in section 14 of the
Act do not fit into the meaning of the word 'royalty' in
Explanation 2 because royalty means the consideration for
the transfer of all or any rights including the granting of a
licence which is certainly not an exclusive right or transfer of
all rights in the copyright or literary work. Payments made
for the acquisition of partial rights in the copyright without the
transfer fully alienating the copyright rights will represent a
royalty where the consideration is for granting of lights to use
the program[m]e in a manner that would, without such
license, constitute an infringement of copyright. In these
circumstances, the payments are for the right to use the
copyright in the program i.e., to exploit the rights that would
otherwise be the sole prerogative of the copyright holder.
Therefore, to constitute royalty under the Income-tax Act it
is not necessary that there should be transfer of exclusive
right in copyright, it is sufficient if there is transfer of any
interest in the right and also a licence and consideration paid
for grant of a licence constitutes royalty for the purpose of
the said clause in the Income-tax Act. It is in this
background, the discussion whether the payment is for a
copyright or for a copyright article would be totally irrelevant.
The crux of the issue is whether any consideration is paid
148
for any right, or for granting of licence in respect of a
copyright. The word 'in respect of’ gives a broader meaning.
It has been used in the sense of being connected with. When
the legislature has advisedly used the words 'in respect of',
the intention is clear and manifest. The said phrase being
capable of a broader meaning, the same is used in the
section to bring within the tax net all the incomes from the
transfer of all or any of the rights in respect of the copyright.
xxx xxx xxx
35. The copyright subsists in a computer program. It is not
only unauthorised reproduction but also the storage of a
program in a computer constitutes copyright infringement.
Copying a literary work (such as a computer program)
includes storing the work in any medium by electronic
means. Copying includes the making of copies which are
transient or some other use of the work.
xxx xxx xxx
39. It is no doubt true the provisions of the DTAA overrides
the provisions of the Income-tax Act. In the DTAA the term
'royalty' means payments of any kind received as a
consideration for the use or the right to use any copyright of
literary, artistic or scientific work whereas in the Income-tax
Act, royalty means consideration for the transfer of all or any
rights including the granting of a licence. Therefore, under
the DTAA to constitute royalty there need not be any transfer
of or any rights in respect of any copyright. It is sufficient if
consideration is received for use of or the right to use any
copyright. Therefore, if the definition of royalty in the DTAA
is taken into consideration it is not necessary there should
be a transfer of any exclusive right. A mere right to use or
the use of a copyright falls within the mischief of Explanation
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(2) to clause (v) of sub-section (1) of section 9 and is liable
to tax. Therefore, we do not see any substance in the said
contention.
xxx xxx xxx
43. A licence is a permission to do something that would
otherwise be unlawful. The question arises, therefore, as to
what legal permission is granted by a software licence. The
answer is, briefly, that in some cases the licence will be a
permission to use confidential information, and in virtually
[...] all cases it will be a permission to copy a copyright work.
If the software has been kept secret by the producer, or only
supplied on conditions of confidentiality and has not been
published too widely, then the software licence will be akin
to a licence of confidential information or know-how. The
owner or licensor of a copyright, has a right to grant
permission to use the software or a computer programme,
in respect of which they have a copyright, without
transferring the right in copyright. It is one of the right[s] of a
copyright owner or licensor. Without such right being
transferred, the end-user has no right to use the software or
computer programme. If he uses it, it amounts to
infringement of copyright. For transfer of such right if
consideration is paid, it is not a consideration for transfer of
a copyright but for use of intellectual property embedded in
the copyright, and therefore it is for transfer of one of those
rights of the owner of the copyright. It is not a right in
copyright but it is in respect of a copyright. When a
copyrighted article is sold also, the end-user gets the right to
use the intellectual property embedded in the copyright and
not a right in the copyright as such. Therefore the mode
adopted or the terminology given is not decisive to decide
the nature of transfer. Ultimately, it is the substance which
has to be looked into.”
150
105.The reasoning of the High Court of Karnataka in Synopsis Intl. (supra)
does not commend itself to us. First and foremost, as held in State of
Madras v. Swastik Tobacco Factory, (1966) 3 SCR 79, the
expression “in respect of”, when used in a taxation statute, is only
synonymous with the words “on” or “attributable to”. Such meaning
accords with the meaning to be given to the expression “in respect of”
contained in explanation 2(v) to section 9(1)(vi) of the Income Tax Act,
and would not in any manner make the expression otiose, as has
wrongly been held by the High Court of Karnataka.
106.Secondly, section 16 of the Copyright Act, which states that “no person
shall be entitled to copyright…otherwise than under and in accordance
with the provisions of this Act or of any other law for the time being in
force” has been completely missed, thus making it clear that the
expression “copyright” has to be understood only as is stated in section
14 of the Copyright Act and not otherwise.
107.Thirdly, when it comes to computer programmes, the High Court in
Synopsis Intl. (supra) was wholly incorrect in stating that the storage
of a computer programme per se would constitute infringement of
copyright. This, again, would directly be contrary to the terms of section
52(1)(aa) of the Copyright Act.
151
108.Fourthly, the High Court is not correct in referring to section 9(1)(vi) of
the Income Tax Act after considering it in the manner that it has and
then applying it to interpret the provisions under the Convention
between the Government of the Republic of India and the Government
of Ireland for the Avoidance of Double Taxation and for the Prevention
of Fiscal Evasion with respect to Taxes on Income And Capital Gains,41
[“India-Ireland DTAA”]. Article 12 of the aforesaid treaty defining
“royalties” would alone be relevant to determine taxability under the
DTAA, as it is more beneficial to the assessee as compared to section
9(1)(vi) of the Income Tax Act, as construed by the High Court. Here
again, section 90(2) of the Income Tax Act, read with explanation 4
thereof, has not been properly appreciated.
109.Fifthly, the finding that when a copyrighted article is sold, the end-user
gets the right to use the intellectual property rights embodied in the
copyright which would therefore amount to transfer of an exclusive right
of the copyright owner in the work, is also wholly incorrect.
For all these reasons, therefore, the judgment of the High Court of
Karnataka in Synopsis Intl. (supra) also does not state the law
correctly.
41 Notification : No. GSR 105(E) [45/2002 (F. No. 503/6/99-FTD)], dated 20-2-2002.
152
110.A series of judgments by the High Court of Delhi have dealt with the
same question that now lies before us. In Director of Income Tax v.
Ericsson A.B., (2012) 343 ITR 470 [“Ericsson A.B.”], which happens
to be impugned in C.A. Nos. 6386-6387/2016 before us, the assessee
was a company incorporated in Sweden which entered into an
agreement with Indian cellular operators, pursuant to which the
assessee supplied various equipment (hardware) embedded with
software to the said cellular operators. The High Court in this case,
found:
“Once we proceed on the basis of aforesaid factual findings,
it is difficult to hold that payment made to the assessee was
in the nature of royalty either under the Income-Tax Act or
under the DTAA. We have to keep in mind what was sold by
the assessee to the Indian customers was a GSM which
consisted both of the hardware as well as the software,
therefore, the Tribunal is right in holding that it was not
permissible for the Revenue to assess the same under two
different articles. The software that was loaded on the
hardware did not have any independent existence. The
software supply is an integral part of the GSM mobile
telephone system and is used by the cellular operator for
providing the cellular services to its customers. There could
not be any independent use of such software. The software
is embodied in the system and the revenue accepts that it
could not be used independently. This software merely
facilitates the functioning of the equipment and is an integral
part thereof. On these facts, it would be useful to refer to the
judgment of the Supreme Court in TATA Consultancy
153
Services v. State of Andhra Pradesh, 271 ITR 401, wherein
the Apex Court held that software which is incorporated on
a media would be goods and, therefore, liable to sales tax.
Following discussion in this behalf is required to be noted:-
“In our view, the term “goods” as used in Article
366(12) of the Constitution of India and as defined
under the said Act are very wide and include all
types of movable properties, whether those
properties be tangible or intangible. We are in
complete agreement with the observations made
by this Court in Associated Cement Companies
Ltd. (supra). A software programme may consist of
various commands which enable the computer to
perform a designated task. The copyright in that
programme may remain with the originator of the
programme. But the moment copies are made and
marketed, it becomes goods, which are susceptible
to sales tax. Even intellectual property, once it is
put on to a media, whether it be in the form of books
or canvas (In case of painting) or computer discs
or cassettes, and marketed would become
“goods”. We see no difference between a sale of a
software programme on a CD/floppy disc from a
sale of music on a cassette/CD or a sale of a film
on a video cassette/CD. In all such cases, the
intellectual property has been incorporated on a
media for purposes of transfer. Sale is not just of
the media which by itself has very little value. The
software and the media cannot be split up. What
the buyer purchases and pays for is not the disc or
the CD. As in the case of paintings or books or
music or films the buyer is purchasing the
intellectual property and not the media i.e. the
paper or cassette or disc or CD. Thus a transaction
154
sale of computer software is clearly a sale of
“goods” within the meaning of the term as defined
in the said Act. The term “all materials, articles and
commodities” includes both tangible and
intangible/incorporeal property which is capable of
abstraction, consumption and use and which can
be transmitted, transferred, delivered, stored,
possessed etc. The software programmes have all
these attributes.”
In Advent Systems Ltd. v. Unisys Corpn, 925 F. 2d 670 (3rd
Cir. 1991), relied on by Mr. Sorabjee, the court was
concerned with interpretation of uniform civil code which
“applied to transactions in goods”. The goods therein were
defined as “all things (including specially manufactured
goods) which are moveable at the time of the identification
for sale”. It was held:
“Computer programs are the product of an
intellectual process, but once implanted in a
medium are widely distributed to computer owners.
An analogy can be drawn to a compact disc
recording of an orchestral rendition. The music is
produced by the artistry of musicians and in itself is
not a “good”, but when transferred to a laserreadable disc becomes a readily merchantable
commodity. Similarly, when a professor delivers a
lecture, it is not a good, but, when transcribed as a
book, it becomes a good.
That a computer program may be copyrightable as
intellectual property does not alter the fact that
once in the form of a floppy disc or other medium,
the program is tangible, moveable and available in
the marketplace. The fact that some programs may
155
be tailored for specific purposes need not alter their
status as “goods” because the Code definition
includes “specially manufactured goods.”
A fortiorari when the assessee supplies the software which
is incorporated on a CD, it has supplied tangible property
and the payment made by the cellular operator for acquiring
such property cannot be regarded as a payment by way of
royalty.
(pages 499-500)
“Be that as it may, in order to qualify as royalty payment,
within the meaning of Section 9(1)(vi) and particularly clause
(v) of Explanation-II thereto, it is necessary to establish that
there is transfer of all or any rights (including the granting of
any license) in respect of copyright of a literary, artistic or
scientific work. Section 2(o) of the Copyright Act makes it
clear that a computer programme is to be regarded as a
‘literary work’. Thus, in order to treat the consideration paid
by the cellular operator as royalty, it is to be established that
the cellular operator, by making such payment, obtains all or
any of the copyright rights of such literary work. In the
presence case, this has not been established. It is not even
the case of the Revenue that any right contemplated under
Section 14 of the Copyright Act, 1957 stood vested in this
cellular operator as a consequence of Article 20 of the
Supply Contract. Distinction has to be made between the
acquisition of a “copyright right” and a “copyrighted article”.
Mr. Dastur is right in this submission which is based on the
commentary on the OECD Model Convention. Such a
distinction has been accepted in a recent ruling of the
Authority for Advance Ruling (AAR) in Dassault Systems KK
229 CTR 125. We also find force in the submission of Mr.
Dastur that even assuming the payment made by the cellular
156
operator is regarded as a payment by way of royalty as
defined in Explanation 2 below Section 9(1)(vi),
nevertheless, it can never be regarded as royalty within the
meaning of the said term in article 13, para 3 of the DTAA.
This is so because the definition in the DTAA is narrower
than the definition in the Act. Article 13(3) brings within the
ambit of the definition of royalty a payment made for the use
of or the right to use a copyright of a literary work. Therefore,
what is contemplated is a payment that is dependent upon
user of the copyright and not a lump sum payment as is the
position in the present case.
We thus hold that payment received by the assessee was
towards the title and GSM system of which software was an
inseparable parts incapable of independent use and it was
a contract for supply of goods. Therefore, no part of the
payment therefore can be classified as payment towards
royalty.”
(pages 501-502)
111.This judgment was followed in Director of Income Tax v. Nokia
Networks OY, (2013) 358 ITR 259 [“Nokia Networks OY”],42 with the
High Court of Delhi, adverting, this time, to the further expanded
definition of “royalty” that is contained in the retrospective amendment
that inserted explanation 4 to section 9(1)(vi) of the Income Tax Act. In
this case, the High Court was concerned with the Agreement between
the Republic of India and the Republic of Finland for the Avoidance of
42 This judgment has been relied upon by various judgments of the High Court of Delhi
impugned in the appeals before us.
157
Double Taxation and the Prevention of Fiscal Evasion with respect to
Taxes on Income,43 [“India-Finland DTAA”]. After setting out the
rationale for the clarificatory amendment made vide the Finance Act
2012, the High Court held :
“He, thus submitted that the question of “copyrighted article”
or actual copyright does not arise in the context of software
both in the DTAA and in the Income Tax Act since the right
to use simpliciter of a software program itself is a part of the
copyright in the software irrespective of whether or not a
further right to make copies is granted. The decision of the
Delhi Bench of the ITAT has dealt with this aspect in its
judgment in Gracemac Co. v. ADIT 134 TTJ (Delhi) 257
pointing out that even software bought off the shelf, does not
constitute a “copyrighted article” as sought to be made out
by the Special Bench of the ITAT in the present case.
However, the above argument misses the vital point namely
the assessee has opted to be governed by the treaty and the
language of the said treaty differs from the amended Section
9 of the Act. It is categorically held in CIT v. Siemens
Aktiongesellschaft, 310 ITR 320 (Bom) that the amendments
cannot be read into the treaty. On the wording of the treaty,
we have already held in Ericsson (supra) that a copyrighted
article does not fall within the purview of Royalty. Therefore,
we decide question of law no. 1 & 2 in favour of the assessee
and against the Revenue.”
(page 281)
43 Notification No. 36/2010 [F. No. 501/13/1980-FTD-I], dated 20-5-2010.
158
The High Court then followed its own judgment in Ericsson A.B.
(supra), deciding the case in favour of the assessee.
112.In Director of Income Tax v. Infrasoft Ltd., (2014) 264 CTR 329
[“Infrasoft”],44 a Division Bench of the High Court of Delhi, by an
exhaustive analysis of the provisions contained the India-USA DTAA,
the Income Tax Act and the Copyright Act, dealt with a situation in which
the assessee who was primarily into the business of developing and
manufacturing civil engineering software, licensed the said software to
persons engaged in civil engineering work in India. The High Court
referred to a decision of the Special Bench of the ITAT (New Delhi) in
Motorola Inc. v. Deputy CIT, dated 22.06.2005 [“Motorola (ITAT)”] as
follows:
“65. The issue whether consideration for software was
royalty came up for consideration before the Special Bench
of the Tribunal in Delhi in the case of Motorola Inc v. Deputy
Cit And Deputy Cit V. Nokia (2005) 147 TAXMAN 39
(DELHI). The Tribunal has held as under:
155. It appears to us from a close examination of
the manner in which the case has proceeded
before the Income-tax authorities and the
arguments addressed before us that the crux of the
issue is whether the payment is for a copyright or
44 This judgment has been relied upon by various judgments of the High Court of Delhi
impugned in the appeals before us.
159
for a copyrighted article. If it is for copyright, it
should be classified as royalty both under the
Income-tax Act and under the DTAA and it would
be taxable in the hands of the Assessee on that
basis. If the payment is really for a copyrighted
article, then it only represents the purchase price
of the article and, therefore, cannot be considered
as royalty either under the Act or under the DTAA.
This issue really is the key to the entire controversy
and we may now proceed to address this issue.
156. We must look into the meaning of the word
“copyright” as given in the Copyright Act, 1957.
Section 14 of this Act defines “Copyright” as “the
exclusive right subject to the provisions of this Act,
to do or authorize the doing of any of the following
acts in respect of a work or any substantial part
thereof [ … ]
It is clear from the above definition that a computer
programme mentioned in Clause (b) of the section
has all the rights mentioned in Clause (a) and in
addition also the right to sell or give on commercial
rental or offer for sale or for commercial rental any
copy of the computer programme. This additional
right was substituted w.e.f. 15.1.2000. The
difference between the earlier provision and the
present one is not of any relevance. What is to be
noted is that the right mentioned in Sub-clause (ii)
of Clause (b) of Section 14 is available only to the
owner of the computer programme. It follows that if
any of the cellular operators does not have any of
the rights mentioned in Clauses (a) and (b) of
Section 14, it would mean that it does not have any
right in a copyright. In that case, the payment made
by the cellular operator cannot be characterized as
160
royalty either under the Income-tax Act or under
the DTAA. The question, therefore, to be answered
is whether any of the operators can exercise any of
the rights mentioned in the above provisions with
reference to the software supplied by the
Assessee.
157. We may first look at the supply contract itself
to find out what JTM, one of the cellular operators,
can rightfully do with reference to the software. We
may remind ourselves that JTM is taken as a
representative of all the cellular operators and that
it was common ground before us that all the
contracts with the cellular operators are
substantially the same. Clause 20.1 of the
Agreement, under the title “License”, says that JTM
is granted a non-exclusive restricted license to use
the software and documentation but only for its
own operation and maintenance of the system and
not otherwise. This clause appears to militate
against the position, if it were a copyright, that the
holder of the copyright can do anything with
respect to the same in the public domain. What
JTM is permitted to do is only to use the software
for the purpose of its own operation and
maintenance of the system. There is a clear bar on
the software being used by JTM in the public
domain or for the purpose of commercial
exploitation.
158. Secondly, under the definition of “copyright” in
Section 14 of the Copyright Act, the emphasis is
that it is an exclusive right granted to the holder
thereof. This condition is not satisfied in the case
of JTM because the license granted to it by the
161
Assessee is expressly stated in Clause 20.1 as a
“non exclusive restricted license”. This means that
the supplier of the software, namely, the Assessee,
can supply similar software to any number of
cellular operators to which JTM can have no
objection and further all the cellular operators can
use the software only for the purpose of their own
operation and maintenance of the system and not
for any other purpose. The user of the software by
the cellular operators in the public domain is totally
prohibited, which is evident from the use of the
words in Article 20.1 of the agreement, “restricted”
and “not otherwise”. Thus JTM has a very limited
right so far as the use of software is concerned. It
needs no repetition to clarify that JTM has not been
given any of the seven rights mentioned in Clause
(a) of Section 14 or the additional right mentioned
in Sub-clause (ii) of Clause (b) of the section which
relates to a computer programme and, therefore,
what JTM or any other cellular operator has
acquired under the agreement is not a copyright
but is only a copyrighted article.””
(pages 362-364)
113.Further, the Court noted that the same argument that found favour with
the AAR in Citrix Systems (AAR) (supra) was pressed into service by
the learned senior counsel who appeared for the Revenue in the case
of Motorola (ITAT) (supra), and this was correctly turned down as
follows:
“163. We may now briefly deal with the objections of Mr.
G.C. Sharma, the learned senior counsel for the
162
Department. He contended that if a person owns a
copyrighted article then he automatically has a right over the
copyright also. With respect, this objection does not appear
to us to be correct. Mr. Dastur filed an extract from Iyengar's
Copyright Act (3rd Edition) edited by R.G. Chaturvedi. The
following observations of the author are on the point:
“(h) Copyright is distinct from the material object,
copyrighted:
It is an intangible incorporeal right in the nature of
a privilege, quite independent of any material
substance, such as a manuscript. The copyright
owner may dispose of it on such terms as he may
see fit. He has an individual right of exclusive
enjoyment. The transfer of the manuscript does
not, of itself, serve to transfer the copyright therein.
The transfer of the ownership of a physical thing in
which copyright exists gives to the purchaser the
right to do with it (the physical thing) whatever he
pleases, except the right to make copies and issue
them to the public” (underline is ours).”
The above observations of the author show that one cannot
have the copyright right without the copyrighted article but at
the same time just because one has the copyrighted article,
it does not follow that one has also the copyright in it. Mr.
Sharma's objection cannot be accepted.”
(pages 365-366)
114.Referring to the High Court’s earlier judgments in Ericsson A.B. (supra)
and Nokia Networks OY (supra) and the determinations of the AAR in
163
Dassault (AAR) (supra) and Geoquest (AAR) (supra), the High Court
concluded:
“87. In order to qualify as royalty payment, it is necessary to
establish that there is transfer of all or any rights (including
the granting of any licence) in respect of copyright of a
literary, artistic or scientific work. In order to treat the
consideration paid by the Licensee as royalty, it is to be
established that the licensee, by making such payment,
obtains all or any of the copyright rights of such literary work.
Distinction has to be made between the acquisition of a
“copyright right” and a “copyrighted article”. Copyright is
distinct from the material object, copyrighted. Copyright is an
intangible incorporeal right in the nature of a privilege, quite
independent of any material substance, such as a
manuscript. Just because one has the copyrighted article, it
does not follow that one has also the copyright in it. It does
not amount to transfer of all or any right including licence in
respect of copyright. Copyright or even right to use copyright
is distinguishable from sale consideration paid for
“copyrighted” article. This sale consideration is for purchase
of goods and is not royalty.
88. The license granted by the Assessee is limited to those
necessary to enable the licensee to operate the program.
The rights transferred are specific to the nature of computer
programs. Copying the program onto the computer's hard
drive or random access memory or making an archival copy
is an essential step in utilizing the program. Therefore, rights
in relation to these acts of copying, where they do no more
than enable the effective operation of the program by the
user, should be disregarded in analyzing the character of the
transaction for tax purposes. Payments in these types of
164
transactions would be dealt with as business income in
accordance with Article 7.
89. There is a clear distinction between royalty paid on
transfer of copyright rights and consideration for transfer of
copyrighted articles. Right to use a copyrighted article or
product with the owner retaining his copyright, is not the
same thing as transferring or assigning rights in relation to
the copyright. The enjoyment of some or all the rights which
the copyright owner has, is necessary to invoke the royalty
definition. Viewed from this angle, a non-exclusive and nontransferable licence enabling the use of a copyrighted
product cannot be construed as an authority to enjoy any or
all of the enumerated rights ingrained in Article 12 of DTAA.
Where the purpose of the licence or the transaction is only
to restrict use of the copyrighted product for internal
business purpose, it would not be legally correct to state that
the copyright itself or right to 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/customer is what is contemplated by
the Treaty. Merely authorizing or enabling a customer to
have the benefit of data or instructions contained therein
without any further right to deal with them independently
does not, amount to transfer of rights in relation to copyright
or conferment of the right of using the 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 who divests himself of the rights he
possesses pro tanto.”
(pages 385-386)
115.The High Court of Delhi also expressed its disagreement with the
impugned judgment of the High Court of Karnataka dated 15.10.2011,
165
in CIT v. Samsung Electronics Co. Ltd., (2012) 345 ITR 494, as
follows:
“96. The amount received by the Assessee under the licence
agreement for allowing the use of the software is not royalty
under the DTAA.
97. What is transferred is neither the copyright in the
software nor the use of the copyright in the software, but
what is transferred is the right to use the copyrighted
material or article which is clearly distinct from the rights in
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
copyrighted material and the same does not give rise to any
royalty income and would be business income.
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 work under section 14(1) of the
Copyright Act and the payment made for the grant of the
licence for the said purpose would constitute royalty. The
license granted to the licensee permitting him to download
the computer programme and 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 purpose. The said process was necessary
to make the programme functional and to have access to it
and is qualitatively different from the right contemplated by
the said provision because it is only integral to the use of
copyrighted product. The right to make a backup copy purely
as a temporary protection against loss, destruction or
damage has been held by the Delhi High Court in DIT v.
166
Nokia Networks OY (Supra) as not amounting to acquiring a
copyright in the software.”
(page 388)
116.Likewise, in CIT v. ZTE Corporation, (2017) 392 ITR 80 [“ZTE”],45 a
Division Bench of the High Court of Delhi dealt with the India-China
DTAA and after referring to its earlier judgments, held as follows:
“The misconception that the revenue harbors stems from its
flawed appreciation of a copyright license. True, “copyright”
is not defined; yet what works are capable of copyright
protection is spelt out in the Copyright Act. Sections 13 and
14 of the Copyright Act flesh out the essential ingredients
that make copyright a property right.”
(page 93)
“Thus, Section 14 categorically provides that copyright
“means the exclusive right to do or authorizing the doing of
any of the acts mentioned in Section 14 (a) to (e) or any
“substantial part thereof”. The content of copyright in respect
of computer programmes is spelt out in Section 14 (b). A
joint reading of the controlling provisions of the earlier part
of Section 14 with clause (b) implies that in the case of
computer programs, copyright would mean the doing or
authorizing the doing-in respect of work (i.e. the programme)
or any substantial part thereof —
(b) In the case of a computer programme,-
(i) to do any of the acts specified in clause (a)
45
This judgment has been relied upon by various judgments of the High Court of Delhi
impugned in the appeals before us.
167
(ii) to sell or give on commercial rental or offer for
sale or for commercial rental any copy of the
computer programme:
Provided that such commercial rental does not
apply in respect of computer programmes where
the programme itself is not the essential object of
the rental.
The reference to clause (a) and (b) means that all the
rights which are in literary works i.e.“(i) to reproduce the work
in any material form including the storing of it in any medium
by electronic means; (ii) to issue copies of the work to the
public not being copies already in circulation; (iii) to perform
the work in public, or communicate it to the public; (iv) to
make any cinematograph film or sound recording in respect
of the work; (v) to make any translation of the work; (vi) to
make any adaptation of the work; (vii) to do, in relation to a
translation or an adaptation of the work, any of the acts
specified in relation to the work in sub clauses (i) to (vi)”
inhere in the owner of copyright of a computer programme.
Therefore, the copyright owner's rights are spelt out
comprehensively by this provision. In the context of the facts
of this case, the assessee is the copyright proprietor; it made
available, through one time license fee, the software to its
customers; this software without the hardware which was
sold, is useless. Conversely the hardware sold by the
assessee to its customers is also valueless and cannot be
used without such software. This analysis is to show that
what was conveyed to its customers by the assessee bears
a close resemblance to goods-significantly enough, Section
14(1) talks of sale or rental of a “copy”. The question of
conveying or parting with copyright in the software itself
would mean that the copyright proprietor has to assign it,
divesting itself of the title implying that it has divested itself
of all the rights under Section 14. This would mean an
168
outright sale of the copyright or assignment, under Section
18 of the Act. Section 16 of the Copyright Act enacts that
there cannot be any other kind of right termed as “copyright”.
In the present case, the facts are closely similar to Ericsson.
The supplies made (of the software) enabled the use of the
hardware sold. It was not disputed that without the software,
hardware use was not possible. The mere fact that separate
invoicing was done for purchase and other transactions did
not imply that it was royalty payment. In such cases, the
nomenclature (of license or some other fee) is indeterminate
of the true nature. Nor is the circumstance that updates of
the software are routinely given to the assessee's
customers. These facts do not detract from the nature of the
transaction, which was supply of software, in the nature of
articles or goods. This court is also not persuaded with the
submission that the payments, if not royalty, amounted to
payments for the use of machinery or equipment. Such a
submission was never advanced before any of the lower tax
authorities; moreover, even in Ericsson (supra), a similar
provision existed in the DTAA between India and Sweden.”
(pages 95-96)
117.The conclusions that can be derived on a reading of the aforesaid
judgments are as follows:
i) Copyright is an exclusive right, which is negative in nature, being a
right to restrict others from doing certain acts.
ii) Copyright is an intangible, incorporeal right, in the nature of a
privilege, which is quite independent of any material substance.
Ownership of copyright in a work is different from the ownership of
169
the physical material in which the copyrighted work may happen to
be embodied. An obvious example is the purchaser of a book or a
CD/DVD, who becomes the owner of the physical article, but does
not become the owner of the copyright inherent in the work, such
copyright remaining exclusively with the owner.
iii) Parting with copyright entails parting with the right to do any of the
acts mentioned in section 14 of the Copyright Act. The transfer of
the material substance does not, of itself, serve to transfer the
copyright therein. The transfer of the ownership of the physical
substance, in which copyright subsists, gives the purchaser the right
to do with it whatever he pleases, except the right to reproduce the
same and issue it to the public, unless such copies are already in
circulation, and the other acts mentioned in section 14 of the
Copyright Act.
iv) A licence from a copyright owner, conferring no proprietary interest
on the licensee, does not entail parting with any copyright, and is
different from a licence issued under section 30 of the Copyright Act,
which is a licence which grants the licensee an interest in the rights
mentioned in section 14(a) and 14(b) of the Copyright Act. Where
the core of a transaction is to authorize the end-user to have access
to and make use of the “licensed” computer software product over
170
which the licensee has no exclusive rights, no copyright is parted
with and consequently, no infringement takes place, as is
recognized by section 52(1)(aa) of the Copyright Act. It makes no
difference whether the end-user is enabled to use computer
software that is customised to its specifications or otherwise.
v) A non-exclusive, non-transferable licence, merely enabling the use
of a copyrighted product, is in the nature of restrictive conditions
which are ancillary to such use, and cannot be construed as a
licence to enjoy all or any of the enumerated rights mentioned in
section 14 of the Copyright Act, or create any interest in any such
rights so as to attract section 30 of the Copyright Act.
vi) The right to reproduce and the right to use computer software are
distinct and separate rights, as has been recognized in SBI v.
Collector of Customs, 2000 (1) SCC 727 (see paragraph 21), the
former amounting to parting with copyright and the latter, in the
context of non-exclusive EULAs, not being so.
118.Consequently, the view contained in the determinations of the AAR in
Dassault (AAR) (supra) and Geoquest (AAR) (supra) and the
judgments of the High Court of Delhi in Ericsson A.B. (supra), Nokia
Networks OY (supra), Infrasoft (supra), ZTE (supra), state the law
correctly and have our express approval. We may add that the view
171
expressed in the aforesaid judgments and determinations also accords
with the OECD Commentary on which most of India’s DTAAs are
based.
DOCTRINE OF FIRST SALE/PRINCIPLE OF EXHAUSTION
119.The learned Additional Solicitor General argued that on the facts of
these cases, the doctrine of first sale/principle of exhaustion would have
no application inasmuch as this doctrine is not statutorily recognised in
section 14(b)(ii) of the Copyright Act. This being so, since the
distributors of copyrighted software “license” or sell such computer
software to end-users, there would be a parting of a right or interest in
copyright inasmuch as such “license” or sale would then be hit by
section 14(b)(ii) of the Copyright Act.
120.As has been mentioned hereinabove, section 14(b)(ii) of the Copyright
Act was amended twice, first in 1994 and then again in 1999, with effect
from 15.01.2000. Prior to the 1999 Amendment, section 14(b)(ii) of the
Copyright Act read as follows:
“(ii) to sell or give on hire, or offer for sale or hire any copy
of the computer programme, regardless of whether such
copy has been sold or given on hire on earlier occasions;”
(emphasis supplied)
172
After the 1999 Amendment, what is conspicuous by its absence is the
phrase “regardless of whether such copy has been sold or given on hire
on earlier occasions”. This is a statutory recognition of the doctrine of
first sale/principle of exhaustion.
121.The doctrine of first sale/principle of exhaustion is explained by the
locus classicus on this subject, Copinger and Skone James on
Copyright (14th Edition) (1999), as follows:
“The distribution right: general. One of the acts restricted
by the copyright in all work is the issue of the original or
copies of the work to the public, often called the “distribution
right”. This right is provided for in section 18 of the 1988 Act.
Infringement of the distribution right is a primary
infringement under UK law, and so there is no need to prove
knowledge or reason to believe that the copy in question is
infringing. Thus it is a powerful weapon against those at the
top of a chain of distribution. In accordance with general
principles, section 18 must be interpreted so far as possible
in such a way as to conform with relevant EU Directives, in
this instance, the Software Directive and the Information
Society Directive. Recent case law of the CJEU has made a
conforming interpretation more difficult. An important aspect
of the distribution right is that it is exhausted in relation to a
particular article by the first sale (and, in the case of the
Information Society Directive, the first transfer of ownership)
of that article in the Community by the rightholder or with his
consent. For the purposes of the Software Directive, certain
forms of distribution of electronic copies are considered to
exhaust the distribution right in respect of such copies.”
(pages 613-614)
173
“Exhaustion of the distribution right: tangible objects.
Exhaustion applies to the tangible object into which a
protected work or its copy is incorporated if it has been
placed on the market with the copyright holder’s consent. In
the case of artistic works, the consent of the copyright holder
does not cover the distribution of an object incorporating his
work if that object has been altered after its initial marketing
in such a way that it constitutes a new reproduction of the
work; in such an event, the distribution right is exhausted
only upon the first sale or transfer of ownership of that new
object with the consent of the rightholder. Accordingly,
where a defendant (without the licence of the rightholder)
transferred an image of a work of a famous painter from a
poster onto canvas by physically lifting the ink from the
poster, producing a result closer to the original and leaving
a blank piece of paper behind, and this amounted to copying,
the rightholder’s distribution right had not been exhausted.
Exhaustion: computer programs. Similar considerations
apply in relation to tangible copies of computer programs as
to other works: the first sale of a copy of a program by the
rightholder or with his consent exhausts the distribution right
with the exception of the right to control further rental of the
program or a copy thereof. As to copies made available in
intangible form (e.g. by downloading from a website), for
these purposes the word “sale” is to be given an
autonomous Community interpretation. Where a seller
makes a program available for download under a licence for
an unlimited period in return for a licence fee, the intention
is to make the copy usable by the customer, permanently, in
return for payment of a fee designed to enable the copyright
owner to obtain a remuneration corresponding to the
economic value of the copy of the work. Accordingly, that
amounts to a transfer of the right of ownership of the copy in
question and thus a sale for the purposes of the exhaustion
174
of the distribution right. The same applies if the copy is made
available by means of a material medium such as a CDROM or DVD and if the download is free but the licence is
granted and paid for separately. It does not matter if the
software is the subject of a maintenance agreement: the
exhaustion applies to the copy as corrected and updated
pursuant to the agreement. Any other interpretation would
undermine the effectiveness of article 4(2) of the Directive
since suppliers would merely have to call a contract a licence
rather than a sale in order to circumvent the rule of
exhaustion and divest it of all scope. The result is that a
purchaser from the original licensee and any subsequent
acquirer are lawful acquirers of the software for the purposes
of article 5(1) of the Software Directive and benefit from the
right of reproduction provided for in that provision.”
(pages 621-622)
122.In Warner Bros. Entertainment Inc. v. Santosh V.G., CS (OS) No.
1682/2006 [“Warner Bros.”] reported in 2009 SCC OnLine Del 835, a
Single Judge of the High Court of Delhi dealt with copyright in a
cinematograph film, as a result of which, section 14(d)(ii) of the
Copyright Act, before it was amended in 2012,46 came up for
consideration. The said section, prior to being amended in 2012, read
as follows:
“14. Meaning of Copyright.— For the purposes of this Act,
“copyright” means the exclusive right subject to the
provisions of this Act, to do or authorise the doing of any of
46 By Act 27 of 2012, s. 5(ii)(b) (w.e.f. 21.06.2012).
175
the following acts in respect of a work or any substantial part
thereof, namely
xxx xxx xxx
(d) in the case of a cinematograph film,—
xxx xxx xxx
(ii) to sell or give on hire or offer for sale or hire, any
copy of the film, regardless of whether such copy
has been sold or given on hire on earlier occasion”
123.The learned Single Judge of the High Court of Delhi explained the
principle of exhaustion as follows:
“57. The doctrine of exhaustion of copyright enables free
trade in material objects on which copies of protected works
have been fixed and put into circulation with the right
holder's consent. The “exhaustion” principle in a sense
arbitrates the conflict between the right to own a copy of a
work and the author's right to control the distribution of
copies. Exhaustion is decisive with respect to the priority of
ownership and the freedom to trade in material carriers on
the condition that a copy has been legally brought into
trading. Transfer of ownership of a carrier with a copy of a
work fixed on it makes it impossible for the owner to derive
further benefits from the exploitation of a copy that was
traded with his consent. The exhaustion principle is thus
termed legitimate by reason of the profits earned for the
ownership transfer, which should be satisfactory to the
author if the work is not being exploited in a different
exploitation field.
58. Exhaustion of rights is linked to the distribution right. The
right to distribute objects (making them available to the
public) means that such objects (or the medium on which a
176
work is fixed) are released by or with the consent of the
owner as a result of the transfer of ownership. In this way,
the owner is in control of the distribution of copies since he
decides the time and the form in which copies are released
to the public. Content-wise the distribution right are to be
understood as an opportunity to provide the public with
copies of a work and put them into circulation, as well as to
control the way the copies are used. The exhaustion of rights
principle thus limits the distribution right, by excluding control
over the use of copies after they have been put into
circulation for the first time.”
(emphasis in original)
124.The learned Single Judge then arrived at the following conclusion:
“62. … The court is of opinion therefore that the existence or
applicability of the “exhaustion” principle cannot be inferred
automatically; it would have to depend on the situation, and
the structure of the legislation in question.”
125.Coming to section 14(a)(ii) of the Copyright Act, the learned Single
Judge then held:
“63. The defendant in this case, accepts that the
renting/hiring of films carried on by it is without the plaintiffs'
license. The Plaintiffs urge that since the importation, for the
purpose of renting of these cinematographic films has not
been authorized by them in India, the copies are infringing
copies. Hence their import would be barred under Section
51(b)(iv). The defendant's argument, however, is that the
copies were legitimately purchased in the course of trade;
they are rental copies, and can be used for purpose of
renting, in India. He says that the device of zoning, whereby
the plaintiffs restrict the licensee owner to use it in territories
other than what is indicated by them, is artificial, and
177
unenforceable. Such “long arm” conditions are inapplicable.
Particular reference is made to the explanation to Section
14, which describes the content of copyright; it clarifies that
“For the purposes of this section, a copy which has been
sold once shall be deemed to be a copy already in
circulation.” Though attractive, this contention is unfeasible
for more than one reason. The reference to copies in
circulation is in the context of copyright in literary, artistic,
dramatic or musical work, — not computer programme —
(Section 14(a); the statute enables the copyright owner to
“issue copies of the work to the public not being copies
already in circulation”. But for the explanation, it could
arguably be said that the copyright owner lost his domain, or
right to control the manner of further dealing in copies which
were in circulation. Yet, a careful reading of Section 14
would reveal that the content of copyrights in respect of each
nature of work (literary, dramatic, or musical work, on the
one hand, computer programme, artistic work,
cinematograph film, etc on the other) are distinct — evident
from the listing out of such rights, separately, in clauses (a)
to (f) of the section. The reference to “copies in circulation”
has to be therefore, in the context; the phrase is used to limit
the copyright owner's right to dictate further use of a literary,
musical and dramatic work (Section 14(a)(ii)). None of the
owners of other classes of work are subject to that limitation.
The restriction of one class of copyright owner, structured in
the statute serves a dual purpose- it limits the owner of that
class of copyright; and at the same time leaves it open to the
copyright owner of other kinds of work, to place such
restrictions.”
(emphasis in original)
178
126.Contrasting the aforesaid with section 14(d)(ii) of the Copyright Act, as
it stood prior to the amendment in 2012, the learned Single Judge then
went on to hold:
“64. The second reason is that Section 14(1)(d) provides
that the copyright owner has, in case of cinematographic
films, the exclusive right to sell or give on hire or offer for
sale or hire, any copy of the film, regardless of whether such
copy has been sold or given on hire on earlier occasion. The
copyright owner, therefore continues to be entitled to
exercise rights in a particular copy of the film regardless of
whether it has been sold previously- in express contrast to
literary works, which are “already in circulation”. This is
reinforced by Section 51(b)(i), which unambiguously
provides that copyright in a work shall be infringed if a
person does anything the exclusive right do which is by the
Act, conferred upon the owner of the copyright; it is also
emphasized by Section 51(b)(i) which makes for sale or hire,
or sells or lets for hire, or by way of trade displays or offers
for sale or hire, any infringing copies of the work. The
proviso, crucially, exempts from the definition importation of
a single infringing copy for “the private and domestic use of
the importer”. As noted earlier, importation of a copy into
India, in contravention of the Act — for instance, without the
license, or authorization of the copyright owner, is an
infringement; such copy is an infringing copy under Section
2(m).”
(emphasis in original)
127.Thus, the Single Judge concluded:
“67. The express indication in Section 14(a)(ii) that a
copyright owner of literary works cannot exercise domain
over copies in circulation, shows that exhaustion, if one may
179
term it, applies only in relation to the class of copyrights in
Section 14(a) and to the extent specified in clause (ii). Thus,
the copyright owner of a literary work, cannot dictate how
and under what conditions a copy can be re-sold, once it is
“circulated”. This limited “exhaustion” negates the
applicability of the principle in regard to other classes of
copyrights. Thus, Parliament having intervened in one
category of copyrights to grant a limited kind of “exhaustion”
and consciously chosen not to extend it to others, sleight of
judicial reasoning cannot extend its application…”
128.However, the learned Additional Solicitor General relied upon the
judgment of another learned Single Judge of the High Court of Delhi
who had occasion to consider the aforesaid doctrine in John Wiley &
Sons Inc. v. Prabhat Chander Kumar Jain, IA No. 11331/2008 in
CS(OS) No. 1960/2008 reported in 2010 SCC OnLine Del 2000. The
case involved the sale of low-priced editions of books meant for the
Indian market in foreign territories, contrary to the terms prescribed by
the copyright licence. After referring to a number of authorities, the
learned Single Judge held:
“68. The legal propositions which emanate from this
discussion are as under:
a) That the court will measure the infringement of the
copyright from the rights of the owner of the copyright
when the owner is before the court for violation of its
rights.
b) That the rights of the owner may be broader than the
limited rights of the exclusive licencee, although the
180
exclusive licencee has the independent right to sue for
infringement of the copyright.
c) The rights of the owner and exclusive licencee may
not be the same and the rights of the exclusive licensee
shall also be subject to the fetters imposed by the
agreement between the licensor and licencee.
69. Applying these principles to the present case, it can be
seen that the plaintiff no. 1, 3 and 5 are the worldwide
owners of the books and their copyright as mentioned and
averred in the plaint. The plaintiff nos. 2, 4 and 6 are the
exclusive licensees licensed to publish the said books in
India and other territories. The plaintiffs' grievance is that
Defendant no. 3 Technischer Overseas Pvt. Ltd. which is a
bookseller in Delhi is purchasing the said Low Price Editions
of the books meant for the Indian market and the territories
defined from the plaintiffs no. 2, 4, 6 and is offering the said
low prize books from the websites www.alibris.com,
www.biblio.com to territories outside the prescribed ones on
the book is infringing the copyright of the plaintiffs.
70. The said acts of the defendants of purchase of the books
from the exclusive licensees/licensees are legitimate in
nature and do not hinder or take away anyone's rights
including the rights of exclusive licensees/licensee. But once
the said defendant no. 3 offers for sale the books or
publications (which are fettered by territorial restrictions
purchased from exclusive licensees) and puts them into
circulation by selling or offering for sale or by taking orders
for sale to the territories beyond the ones for which
permission has been granted by the owners of the copyright,
the said acts are prima facie tantamount to putting into
circulation or issuance of copies not being in circulation in
other territories where the right to do so is of the owner to
exercise and violates the rights of the owner of the copyright
181
under Section 14 read with Section 51 of the Act, if not the
rights of the exclusive licensee. In other words, the said acts
of selling the books from India or offering for sale from India
through website and thereafter accepting the money and
couriering the books to an unauthorized territory will violate
the right of the owners of the copyright which are plaintiff no.
1, 3, 5 to issue the copies to the public not already in
circulation (not of exclusive licensees) and thus will, prima
facie, infringe their copyright.
xxx xxx xxx
79. The said position of the licensee is equally applicable in
cases of computer software and is seen in normal course
when anyone purchases the software. Computer software
are mostly licensed and are sold and distributed with their
own conditions and limitations. The purchasers of the said
computer software either from the owner or from the
licensee is aware of the arrangement or license agreement
that the said computer software for instance is meant for
single user or multiple usage. The said purchaser is within
notice while making purchase of the said software and is
thus bound by the said conditions of the license. Once the
said purchaser violates the condition of the said license,
he/she becomes liable for infringement of copyright of the
owner.
80. Likewise is the case with the books in the present matter.
Once the defendants purchase the Low Price Editions books
of the plaintiffs from their exclusive licensee, they are
conscious of the fact that the said editions are subject to
territorial restrictions which are meant to be sold within the
limited territories only. The notice on the book itself gives
knowledge to the purchaser about the said territorial
restriction. The said knowledge is also evident when the
182
defendant themselves offer the same books to the
customers outside the territories while representing that “it is
an international edition in paperback. The contents are
identical to the American Edition, word for word. The ISBN
differs from the American Edition and the book is in black
and white but the contents are completely same as the
American Edition at a great price.””
129.The learned Single Judge then embarked upon a discussion of the
doctrine of first sale/principle of exhaustion, finding the absence of an
express provision in the Copyright Act recognising international
exhaustion, and summed up its impact in the context of the facts before
him as follows:
“100. a) At the outset, again, I would like to reiterate the three
propositions a) the meaning of copyright has been defined
under Section 14 of the Copyright Act as is clear from the
opening words of the Section; b) The rights of the owner
have to be looked into as per Section 51 of the Act while
measuring infringement; c) The rights of the owner may be
broader than that of the licensee. In the present case, the
first sale has been effected by the exclusive licensees
plaintiff nos. 2, 4, 6 and their rights are limited and are
subject to the conditions and limitations imposed by the
agreement. That being so, the applicability of the first sale
doctrine qua the sales effected by the exclusive licensee to
the defendants will at best exhaust the rights of the exclusive
licensees to complain and not the rights of the owner. The
right of the owner to complain for remaining infringement in
unauthorised territories for violation of the permission
granted and violation of the rights will remain intact. Thus,
the applicability of first sale doctrine will partially exhaust the
183
rights of the licencee and not of the owner of the copyright
i.e. plaintiff nos. 1, 3 and 5.
xxx xxx xxx
104. The discussion makes it apparent that the learned
single judge has doubted the mode of the applicability of the
first sales doctrine in India as per the existing law. The same
may lead to partial or regional exhaustion or international
exhaustion. As per my opinion, as the express provision for
international exhaustion is absent in our Indian law, it would
be appropriate to confine the applicability of the same to
regional exhaustion. Be that as it may, in the present case,
the circumstances do not even otherwise warrant this
discussion as the rights if at all are exhausted are to the
extent to which they are available with the licensees as the
books are purchased from the exclusive licensees who have
limited rights and not from the owner. In these
circumstances, the question of exhaustion of rights of owner
in the copyright does not arise at all.”
130.Thus, since copies of the low-priced editions could not be said to be
“copies already in circulation” in the foreign territories that they were
resold in, the learned Single Judge concluded that the principle of
exhaustion would not apply. On the other hand, in the facts of the
appeals before us, the distributors resell shrink-wrapped copies of the
computer programmes that are already put in circulation by foreign, nonresident suppliers/manufacturers, since they have been sold and
imported into India via distribution agreements, and are thus not hit by
184
section 14(a)(ii) of the Copyright Act. This is made clear by the
explanation to section 14 of the Copyright Act, which states as follows:
“Explanation.--For the purposes of this section, a copy which
has been sold once shall be deemed to be a copy already in
circulation.”
131.In UsedSoft GmbH v. Oracle International Corp. (Case C-128/11)
[“UsedSoft v. Oracle (ECJ)”], the European Court of Justice [“ECJ”]
was concerned with Article 4 of Directive 2001/29/EC of the European
Parliament and of the Council of 22 May 2001 on the harmonisation of
certain aspects of copyright and related rights in the information society
[“EC Directive 2001/29”], which provides as follows:
“Article 4
Distribution right
1. Member States shall provide for authors, in respect of the
original of their works or of copies thereof, the exclusive right
to authorise or prohibit any form of distribution to the public by
sale or otherwise.
2. The distribution right shall not be exhausted within the
Community in respect of the original or copies of the work,
except where the first sale or other transfer of ownership in the
Community of that object is made by the rightholder or with his
consent.”
132.Coming to Article 4(2) of EC Directive 2001/29, the ECJ posed a
question, thus:
185
“35. By its second question, which should be addressed first,
the referring court essentially seeks to know whether and
under what conditions the downloading from the internet of a
copy of a computer program, authorised by the copyright
holder, can give rise to exhaustion of the right of distribution of
that copy in the European Union within the meaning of Article
4(2) of Directive 2009/24.
36. It should be recalled that under Article 4(2) of Directive
2009/24 the first sale in the European Union of a copy of a
computer program by the rightholder or with his consent
exhausts the distribution right within the European Union of
that copy.
37. According to the order for reference, the copyright holder
itself, in this case Oracle, makes available to its customers in
the European Union who wish to use its computer program a
copy of that program which can be downloaded from its
website.
38. To determine whether, in a situation such as that at issue
in the main proceedings, the copyright holder’s distribution
right is exhausted, it must be ascertained, first, whether the
contractual relationship between the rightholder and its
customer, within which the downloading of a copy of the
program in question has taken place, may be regarded as a
‘first sale … of a copy of a program’ within the meaning of
Article 4(2) of Directive 2009/24.”
133.Concluding that the transfer of a copy of a computer programme,
accompanied by the conclusion of an EULA constituted a “first sale… of
a copy of a program” within the meaning of Article 4(2) of EC Directive
186
2001/29 (see paragraph 48), the ECJ then went on to describe the
principle of exhaustion as follows:
“70. An original acquirer who resells a tangible or intangible
copy of a computer program for which the copyright holder’s
right of distribution is exhausted in accordance with Article 4(2)
of Directive 2009/24 must, in order to avoid infringing the
exclusive right of reproduction of a computer program which
belongs to its author, laid down in Article 4(1)(a) of Directive
2009/24, make his own copy unusable at the time of its resale.
In a situation such as that mentioned in the preceding
paragraph, the customer of the copyright holder will continue
to use the copy of the program installed on his server and will
not thus make it unusable.
71. Moreover, even if an acquirer of additional user rights for
the computer program concerned did not carry out a new
installation — and hence a new reproduction — of the program
on a server belonging to him, the effect of the exhaustion of
the distribution right under Article 4(2) of Directive 2009/24
would in any event not extend to such user rights. In such a
case the acquisition of additional user rights does not relate to
the copy for which the distribution right was exhausted at the
time of that transaction. On the contrary, it is intended solely to
make it possible to extend the number of users of the copy
which the acquirer of additional rights has himself already
installed on his server.
72. On the basis of all the foregoing, the answer to Question 2
is that Article 4(2) of Directive 2009/24 must be interpreted as
meaning that the right of distribution of a copy of a computer
program is exhausted if the copyright holder who has
authorised, even free of charge, the downloading of that copy
from the internet onto a data carrier has also conferred, in
return for payment of a fee intended to enable him to obtain a
187
remuneration corresponding to the economic value of the copy
of the work of which he is the proprietor, a right to use that copy
for an unlimited period.”
134.The ECJ concluded that the copyright owner exhausts his distribution
right in copies of a computer programme upon making the first sale,
provided that the copy is made unusable by the first acquirer, as follows:
“78. Admittedly, as stated in paragraph 70 above, the original
acquirer of a tangible or intangible copy of a computer program
for which the copyright holder’s distribution right is exhausted
in accordance with Article 4(2) of Directive 2009/24 who resells
that copy must, in order to avoid infringing that rightholder’s
exclusive right of reproduction of his computer program under
Article 4(1)(a) of Directive 2009/24, make the copy
downloaded onto his computer unusable at the time of its
resale.
79. As Oracle rightly observes, ascertaining whether such a
copy has been made unusable may prove difficult. However, a
copyright holder who distributes copies of a computer program
on a material medium such as a CD‑ROM or DVD is faced with
the same problem, since it is only with great difficulty that he
can make sure that the original acquirer has not made copies
of the program which he will continue to use after selling his
material medium. To solve that problem, it is permissible for
the distributor — whether ‘classic’ or ‘digital’ — to make use of
technical protective measures such as product keys.
80. Since the copyright holder cannot object to the resale of a
copy of a computer program for which that rightholder’s
distribution right is exhausted under Article 4(2) of Directive
2009/24, it must be concluded that a second acquirer of that
copy and any subsequent acquirer are ‘lawful acquirers’ of it
within the meaning of Article 5(1) of Directive 2009/24.
188
81. Consequently, in the event of a resale of the copy of the
computer program by the first acquirer, the new acquirer will
be able, in accordance with Article 5(1) of Directive 2009/24,
to download onto his computer the copy sold to him by the first
acquirer. Such a download must be regarded as a reproduction
of a computer program that is necessary to enable the new
acquirer to use the program in accordance with its intended
purpose.”
135.The learned Additional Solicitor General, however, strongly relied upon
the decision of the United States Court of Appeals for the Ninth Circuit
in Vernor v. Autodesk, Inc., 621 F.3d 1102 (9th Cir. 2010), wherein it
dealt with the doctrine of first sale/principle of exhaustion. The facts of
the case were set out as follows:
“A. Autodesk's Release 14 software and licensing
practices
The material facts are not in dispute. Autodesk makes
computer-aided design software used by architects,
engineers, and manufacturers. It has more than nine million
customers. It first released its AutoCAD software in 1982. It
holds registered copyrights in all versions of the software
including the discontinued Release 14 version, which is at
issue in this case. It provided Release 14 to customers on
CD-ROMs.
Since at least 1986, Autodesk has offered AutoCAD to
customers pursuant to an accompanying software license
agreement (“SLA”), which customers must accept before
installing the software. A customer who does not accept the
SLA can return the software for a full refund. Autodesk offers
SLAs with different terms for commercial, educational
189
institution[s], and student users. The commercial license,
which is the most expensive, imposes the fewest restrictions
on users and allows them software upgrades at discounted
prices.
The SLA for Release 14 first recites that Autodesk retains
title to all copies. Second, it states that the customer has a
nonexclusive and nontransferable license to use Release
14. Third, it imposes transfer restrictions, prohibiting
customers from renting, leasing, or transferring the software
without Autodesk's prior consent and from electronically or
physically transferring the software out of the Western
Hemisphere. Fourth, it imposes significant use restrictions:
YOU MAY NOT: (1) modify, translate, reverse
engineer, decompile, or disassemble the Software
… (3) remove any proprietary notices, labels, or
marks from the Software or Documentation; (4) use
the Software outside of the Western Hemisphere;
(5) utilize any computer software or hardware
designed to defeat any hardware copy-protection
device, should the software you have licensed be
equipped with such protection; or (6) use the
Software for commercial or other revenuegenerating purposes if the Software has been
licensed or labeled for educational use only.
Fifth, the SLA provides for license termination if the user
copies the software without authorization or does not comply
with the SLA's restrictions. Finally, the SLA provides that if
the software is an upgrade of a previous version:
[Y]ou must destroy the software previously
licensed to you, including any copies resident on
your hard disk drive ․ within sixty (60) days of the
purchase of the license to use the upgrade or
190
update․ Autodesk reserves the right to require you
to show satisfactory proof that previous copies of
the software have been destroyed.
Autodesk takes measures to enforce these license
requirements. It assigns a serial number to each copy of
AutoCAD and tracks registered licensees. It requires
customers to input “activation codes” within one month after
installation to continue using the software.1 The customer
obtains the code by providing the product's serial number to
Autodesk. Autodesk issues the activation code after
confirming that the serial number is authentic, the copy is not
registered to a different customer, and the product has not
been upgraded. Once a customer has an activation code, he
or she may use it to activate the software on additional
computers without notifying Autodesk.”’
(pages 1104-1105)
136.The Court noted that the application of the doctrine turned on the
following question:
“This case requires us to decide whether Autodesk sold
Release 14 copies to its customers or licensed the copies to
its customers. If CTA owned its copies of Release 14, then
both its sales to Vernor and Vernor's subsequent sales were
non-infringing under the first sale doctrine. However, if
Autodesk only licensed CTA to use copies of Release 14,
then CTA's and Vernor's sales of those copies are not
protected by the first sale doctrine and would therefore
infringe Autodesk's exclusive distribution right.”
(page 1107)
(emphasis supplied)
191
137.On these facts, the doctrine of first sale/principle of exhaustion, as
applicable in USA, was set out as follows:
“A. The first sale doctrine
The Supreme Court articulated the first sale doctrine in
1908, holding that a copyright owner's exclusive distribution
right is exhausted after the owner's first sale of a particular
copy of the copyrighted work. See Bobbs-Merrill Co. v.
Straus, 210 U.S. 339, 350-51 (1908). In Bobbs-Merrill, the
plaintiff-copyright owner sold its book with a printed notice
announcing that any retailer who sold the book for less than
one dollar was responsible for copyright infringement. (Id. at
341). Plaintiff sought injunctive relief against defendantsbooksellers who failed to comply with the price restriction.
(Id. at 341-42). The Supreme Court rejected the plaintiff's
claim, holding that its exclusive distribution right applied only
to first sales of copies of the work. (Id. at 350-51). The
distribution right did not permit [the] plaintiff to dictate that
subsequent sales of the work below a particular price were
infringing. Id. The Court noted that its decision solely applied
to the rights of a copyright owner that distributed its work
without a license agreement. (Id. at 350) (“There is no claim
in this case of contract limitation, nor license agreement
controlling the subsequent sales of the book.”).
Congress codified the first sale doctrine the following year.
See 17 U.S.C. § 41 (1909). In its current form, it allows the
“owner of a particular copy” of a copyrighted work to sell or
dispose of his copy without the copyright owner's
authorization. (Id. § 109(a) (enacted 1976)). The first sale
doctrine does not apply to a person who possesses a copy
of the copyrighted work without owning it, such as a
licensee. See id. § 109(d); cf. Quality King Distribs., Inc. v.
L'Anza Research Int'l Inc., 523 U.S. 135, 146-47 (1998)
192
(“[T]he first sale doctrine would not provide a defense to ․
any non-owner such as a bailee, a licensee, a consignee, or
one whose possession of the copy was unlawful.”).”
(pages 1107-1108)
138.Given the restrictions specifically imposed by the software licence
agreement in the facts of the case, the Court held that the copyright
owner retained the title to the copies of the software, and thus the resale
of such copies violated the distribution right of the copyright owner, as
follows:
“B. Analysis
We hold today that a software user is a licensee rather than
an owner of a copy where the copyright owner (1) specifies
that the user is granted a license; (2) significantly restricts
the user's ability to transfer the software; and (3) imposes
notable use restrictions.12 Applying our holding to
Autodesk's SLA, we conclude that CTA was a licensee
rather than an owner of copies of Release 14 and thus was
not entitled to invoke the first sale doctrine or the essential
step defense.
Autodesk retained title to the software and imposed
significant transfer restrictions: it stated that the license is
non-transferable, the software could not be transferred or
leased without Autodesk's written consent, and the software
could not be transferred outside the Western Hemisphere.
The SLA also imposed use restrictions against the use of the
software outside the Western Hemisphere and against
modifying, translating, or reverse-engineering the software,
removing any proprietary marks from the software or
193
documentation, or defeating any copy protection device.
Furthermore, the SLA provided for termination of the license
upon the licensee's unauthorized copying or failure to
comply with other license restrictions. Thus, because
Autodesk reserved title to Release 14 copies and imposed
significant transfer and use restrictions, we conclude that its
customers are licensees of their copies of Release 14 rather
than owners.
CTA was a licensee rather than an “owner of a particular
copy” of Release 14, and it was not entitled to resell its
Release 14 copies to Vernor under the first sale doctrine. 17
U.S.C. § 109(a). Therefore, Vernor did not receive title to the
copies from CTA and accordingly could not pass ownership
on to others. Both CTA's and Vernor's sales infringed
Autodesk's exclusive right to distribute copies of its work. Id.
§ 106(3).”
(pages 1111-1112)
139.As a result, given the conditions of the software licence agreement in
the facts before it, the Court held that the doctrine of first sale would not
apply, as Autodesk, the copyright owner, did not part with title to the
copies of the software. On the other hand, as has been held in
paragraph 52 of this judgment, the EULAs and distribution agreements
that the appeals before us are concerned with, do not grant a licence in
terms of section 30 of the Copyright Act, but do in fact convey title to the
material object embedded with a copy of the computer software to the
distributors/end-users.
194
140.A conspectus of the aforesaid authorities would show that the doctrine
of first sale/principle of exhaustion is dependent, in the first place, upon
legislation which either recognises or refuses to recognise the doctrine
(thereby continuing to vest distribution rights in the copyright owner,
even beyond the first sale of the copyrighted work). Thus, for example,
prior to the amendment of section 14(d)(ii) in 2012, dealing with a
cinematograph film, the distribution right to sell or give on hire or offer
for sale or hire, any copy of the film, would continue to vest in the
copyright owner, “regardless of whether such copy ha[d] been sold or
given on hire on earlier occasion”, which manifested the legislative
intent against the application of the doctrine of first sale/principle of
exhaustion. Post 2012, however, the balance between the copyright
owner’s distribution right and the right of the purchaser to further resale,
was tilted in favour of the latter, the words “regardless of whether such
copy has been sold or given on hire on earlier occasion” being deleted
by the amendment. Likewise, when it comes to section 14(a)(ii) of the
Copyright Act, the distribution right subsists with the owner of copyright
to issue copies of the work to the public, to the extent such copies are
not copies already in circulation, thereby manifesting a legislative intent
to apply the doctrine of first sale/principle of exhaustion, as has been
found by the High Court of Delhi in Warner Bros. (supra).
195
141.Like section 14(d)(ii) of the Copyright Act, section 14(b)(ii), has, after the
1999 Amendment, with effect from 15.01.2000, also deleted the words
“regardless of whether such copy has been sold or given on hire on
earlier occasions'', thereby making it clear that the same tilt that had
been made in section 14(d)(ii) of the Copyright Act vide the amendment
in 2012 in favour of the purchaser, is also to be found post the 1999
Amendment, in section 14(b)(ii) of the Copyright Act.
142.The language of section 14(b)(ii) of the Copyright Act makes it clear that
it is the exclusive right of the owner to sell or to give on commercial
rental or offer for sale or for commercial rental “any copy of the computer
programme”. Thus, a distributor who purchases computer software in
material form and resells it to an end-user cannot be said to be within
the scope of the aforesaid provision. The sale or commercial rental
spoken of in section 14(b)(ii) of the Copyright Act is of “any copy of a
computer programme”, making it clear that the section would only apply
to the making of copies of the computer programme and then selling
them, i.e., reproduction of the same for sale or commercial rental.
143.The object of section 14(b)(ii) of the Copyright Act, in the context of a
computer program, is to interdict reproduction of the said computer
programme and consequent transfer of the reproduced computer
196
programme to subsequent acquirers/end-users. By way of contrast,
once a book is sold, on further resale of the same book, the purchaser
loses the material book altogether, as such purchaser has, for
consideration, parted with the book once and for all. This may not be so
in the case of a computer programme, which is why the ECJ in
UsedSoft v. Oracle (ECJ) (supra) held that unless a further resale of a
computer software stored on a floppy disc/CD is accompanied by the
destruction of the said software on the computer of the reseller/first
acquirer, the copyright owner’s rights would be easily infringed by mere
reproduction thereof. This is also recognised in section 65A of the
Copyright Act which punishes the circumvention of technological
protection measures, such as encryption codes, product keys etc.
designed to ensure that the first acquirer’s copy is made unusable.
Thus, once it is understood that the object of section 14(b)(ii) of the
Copyright Act is not to interdict the sale of computer software that is
“licensed” to be sold by a distributor, but that it is to prevent copies of
computer software once sold being reproduced and then transferred by
way of sale or otherwise, it becomes clear that any sale by the author of
a computer software to a distributor for onward sale to an end-user,
cannot possibly be hit by the said provision. Further, as has rightly been
pointed out by Shri S. Ganesh, learned Senior Advocate appearing on
197
behalf of Sonata Information Technology Ltd. in C.A. Nos. 8737-
8941/2018, the distributor cannot use the computer software at all and
has to pass on the said software, as shrink-wrapped by the owner, to
the end-user for a consideration, the distributor’s profit margin being that
of an intermediary who merely resells the same product to the end-user.
144.For all these reasons, we cannot accede to the argument made by the
learned Additional Solicitor General that the distribution of copyrighted
computer software, on the facts of the appeals before us, would
constitute the grant of an interest in copyright under section 14(b)(ii) of
the Copyright Act, thus necessitating the deduction of tax at source
under section 195 of the Income Tax Act.
INTERPRETATION OF TREATIES, OECD COMMENTARY AND THE
REVENUE’S OWN UNDERSTANDING
145.The DTAAs that have been entered into by India with other Contracting
States have to be interpreted liberally with a view to implement the true
intention of the parties. This Court, in Azadi Bachao Andolan (supra)
put it thus:
“98. In John N. Gladden v. Her Majesty the Queen [85 DTC
5188 at p. 5190] the principle of liberal interpretation of tax
treaties was reiterated by the Federal Court, which
observed:
198
“Contrary to an ordinary taxing statute a tax treaty
or convention must be given a liberal interpretation
with a view to implementing the true intentions of
the parties. A literal or legalistic interpretation must
be avoided when the basic object of the treaty
might be defeated or frustrated insofar as the
particular item under consideration is concerned.””
“Interpretation of treaties
130. The principles adopted in interpretation of treaties are
not the same as those in interpretation of a statutory
legislation. While commenting on the interpretation of a
treaty imported into a municipal law, Francis Bennion
observes:
“With indirect enactment, instead of the substantive
legislation taking the well-known form of an Act of
Parliament, it has the form of a treaty. In other
words, the form and language found suitable for
embodying an international agreement become, at
the stroke of a pen, also the form and language of
a municipal legislative instrument. It is rather like
saying that, by Act of Parliament, a woman shall be
a man. Inconveniences may ensue. One
inconvenience is that the interpreter is likely to be
required to cope with disorganised composition
instead of precision drafting. The drafting of
treaties is notoriously sloppy usually for a very
good reason. To get agreement, politic uncertainty
is called for.
… The interpretation of a treaty imported into
municipal law by indirect enactment was described
by Lord Wilberforce as being ‘unconstrained by
technical rules of English law, or by English legal
199
precedent, but conducted on broad principles of
general acceptation. This echoes the optimistic
dictum of Lord Widgery, C.J. that the words ‘are to
be given their general meaning, general to lawyer
and layman alike … the meaning of the diplomat
rather than the lawyer’.” [Francis Bennion:
Statutory Interpretation, p. 461 [Butterworths, 1992
(2nd Edn.)].]
131. An important principle which needs to be kept in mind
in the interpretation of the provisions of an international
treaty, including one for double taxation relief, is that treaties
are negotiated and entered into at a political level and have
several considerations as their bases. Commenting on this
aspect of the matter, David R. Davis in Principles of
International Double Taxation Relief [ David R. Davis:
Principles of International Double Taxation Relief, p. 4
(London, Sweet & Maxwell, 1985).] , points out that the main
function of a Double Taxation Avoidance Treaty should be
seen in the context of aiding commercial relations between
treaty partners and as being essentially a bargain between
two treaty countries as to the division of tax revenues
between them in respect of income falling to be taxed in both
jurisdictions. It is observed (vide paragraph 1.06):
“The benefits and detriments of a double tax treaty
will probably only be truly reciprocal where the flow
of trade and investment between treaty partners is
generally in balance. Where this is not the case,
the benefits of the treaty may be weighed more in
favour of one treaty partner than the other, even
though the provisions of the treaty are expressed
in reciprocal terms. This has been identified as
occurring in relation to tax treaties between
200
developed and developing countries, where the
flow of trade and investment is largely one-way.
Because treaty negotiations are largely a
bargaining process with each side seeking
concessions from the other, the final agreement
will often represent a number of compromises, and
it may be uncertain as to whether a full and
sufficient quid pro quo is obtained by both sides.”
And, finally, in paragraph 1.08:
“Apart from the allocation of tax between the treaty
partners, tax treaties can also help to resolve
problems and can obtain benefits which cannot be
achieved unilaterally.””
146. Further, the House of Lords in Ostime (Inspector of Taxes) v.
Australian Mutual Provident Society, [1959] AC 259 by a judgment
dated 16.07.1959 remarked upon, what it termed the “international tax
language” of bilateral taxation agreements, as follows :
“Bilateral agreements for regulating some of the problems of
double taxation began, at any rate so far as the United
Kingdom was concerned, in 1946. The form employed,
which, for obvious reasons, employs similar forms and
similar language in all agreements, is derived, I believe, from
a set of model clauses proposed by the financial commission
of the League of Nations. The aim is to provide by treaty for
the tax claims of two governments, both legitimately
interested in taxing a particular source of income either by
resigning to one of the two the whole claim or else by
prescribing the basis on which the tax claim is to be shared
between them. For our purpose it is convenient to note that
the language employed in this agreement is what may be
called international tax language and that such categories
201
as “enterprise,” “commercial or industrial profits” and
“permanent establishment” have no exact counterpart in the
taxing code of the United Kingdom.”
(page 480)
147.All the DTAAs with which we are concerned, have, as their starting point,
either the OECD Model Tax Convention on Income and Capital [“OECD
Model Tax Convention”] and/or the United Nations Model Double
Taxation Convention between Developed and Developing Countries
[“UN Model Convention”] insofar as the taxation of royalty for parting
with copyright is concerned.
148. The OECD Model Tax Convention speaks of the importance of the
OECD Commentary, as follows:
“2. It has long been recognised among the member
countries of the Organisation for Economic Co-operation
and Development that it is desirable to clarify, standardise,
and confirm the fiscal situation of taxpayers who are
engaged in commercial, industrial, financial, or any other
activities in other countries through the application by all
countries of common solutions to identical cases of double
taxation. These countries have also long recognised the
need to improve administrative co-operation in tax matters,
notably through exchange of information and assistance in
collection of taxes, for the purpose of preventing tax evasion
and avoidance.
3. These are the main purposes of the OECD Model Tax
Convention on Income and on Capital, which provides a
means of settling on a uniform basis the most common
202
problems that arise in the field of international juridical
double taxation. As recommended by the Council of OECD,
member countries, when concluding or revising bilateral
conventions, should conform to this Model Convention as
interpreted by the Commentaries thereon and having regard
to the reservations contained therein and their tax authorities
should follow these Commentaries, as modified from time to
time and subject to their observations thereon, when
applying and interpreting the provisions of their bilateral tax
conventions that are based on the Model Convention.”
“29.2 Similarly, taxpayers make extensive use of the
Commentaries in conducting their businesses and planning
their business transactions and investments. The
Commentaries are of particular importance in countries that
do not have a procedure for obtaining an advance ruling on
tax matters from the tax administration as the Commentaries
may be the only available source of interpretation in that
case.”
(OECD Model Tax Convention 2017 - Condensed Version)
(emphasis supplied)
149.The OECD Model Tax Convention, in Article 12 thereof, defines the term
“royalties” as follows:
“Article 12
ROYALTIES
xxx xxx xxx
2. The term “royalties” as used in this Article means
payments of any kind received as a consideration for the use
of, or the right to use, any copyright of literary, artistic or
scientific work including cinematograph films, any patent,
trade mark, design or model, plan, secret formula or
process, or for information concerning industrial, commercial
or scientific experience.”
203
150.When the definition of “royalties” is seen in all the DTAAs that we are
concerned with, it is found that “royalties” is defined in a manner either
identical with or similar to the definition contained in Article 12 of the
OECD Model Tax Convention. This being the case, the OECD
Commentary on the provisions of the OECD Model Tax Convention then
becomes relevant. The OECD Commentary has been referred to and
relied upon in several earlier judgments. See:
i. Union of India v. Azadi Bachao Andolan, (2004) 10 SCC 1 at
pages 42-43;
ii. Formula One World Championship Ltd. v. CIT, (2017) 15 SCC
602 at pages 629-630; and
iii. CIT v. E-Funds IT Solution Inc., (2018) 13 SCC 294 at pages
322-323.
151.The importance of the OECD Commentary, when it comes to DTAAs,
was also underscored by the High Court of Australia in Thiel v. Federal
Commissioner of Taxation, High Court of Australia, [1990] 94 ALR
647, which put it thus:
“Article 31 of the Vienna Convention provides that a treaty is
to be interpreted “in good faith in accordance with the
ordinary meaning to be given to the terms of the treaty in
their context and in the light of its object and purpose''. The
context includes, in addition to the text, any instrument which
was made by one or more parties in connection with the
conclusion of the treaty and accepted by the other parties as
an instrument related to the treaty. For my part, I do not see
204
why the OECD model convention and commentaries should
not be regarded as having been made in connection with
and accepted by the parties to a bilateral treaty
subsequently concluded in accordance with the framework
of the model. However, some doubts have been expressed
about the applicability, as a matter of language, of Art. 31 to
the commentaries in the case of a bilateral treaty such as a
double taxation agreement: see Jones et al., “The
Interpretation of Tax Treaties with Particular Reference to
Article 3(2) of the OECD Model-II'', (1984) British Tax
Review 90 at p. 92.
I turn, therefore, to Art. 32 of the Vienna Convention which
allows recourse to be had to supplementary means of
interpretation, including the preparatory work of the treaty
and the circumstances of its conclusion, in order to confirm
the meaning resulting from the application of Art. 31, or to
determine the meaning when the interpretation according to
Art. 31 leaves the meaning ambiguous or obscure or leads
to a result which is manifestly absurd or unreasonable.
Whilst the model convention and commentaries may not
strictly amount to work preparatory to the double taxation
agreement between Australia and Switzerland, they are
documents which form the basis for the conclusion of
bilateral double taxation agreements of the kind in question
and, as with treaties in pari materia, provide a guide to the
current usage of terms by the parties. They are, therefore, a
supplementary means of interpretation to which recourse
may be had under Art. 32 of the Vienna Convention.”47
(Concurring Opinion of Dawson J., pages 653-654)
47 This Court, in Ram Jethmalani v. Union of India, (2011) 8 SCC 1, noted that
though India is not a party to the Vienna Convention on the Law of Treaties, the
principles of international law and the principle of interpretation contained in Article 31
thereof provide broad guidelines to interpret treaties in the Indian context also. (See
paragraph 69).
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“The Agreement is a treaty and is to be interpreted in
accordance with the rules of interpretation recognised by
international lawyers: Shipping Corporation of India Ltd. v.
Gamlen Chemical Co. (A/Asia) Pty. Ltd. (1980) 147 C.L.R.
142 at p. 159. Those rules have now been codified by the
Vienna Convention on the Law of Treaties to which
Australia, but not Switzerland, is a party. Nevertheless,
because the interpretation provisions of the Vienna
Convention reflect the customary rules for the interpretation
of treaties, it is proper to have regard to the terms of the
Convention in interpreting the Agreement, even though
Switzerland is not a party to that Convention: Fothergill v.
Monarch Airlines Ltd. (1981) A.C. 251 at pp. 276, 282, 290;
Commonwealth v. Tasmania (the Tasmanian Dam case)
(1983) 158 C.L.R. 1 at p. 222; Golder case (1975) 57 I.L.R.
201 at pp. 213-214. Article 31 of the Convention requires a
treaty to be interpreted in accordance with the ordinary
meaning to be given to its terms “in their context and in the
light of its object and purpose''. The context includes the
preamble and annexes to the treaty: Art. 31(2). Recourse
may also be had to “supplementary means of interpretation,
including the preparatory work of the treaty and the
circumstances of its conclusion'' to confirm the meaning
resulting from the application of Art. 31 or to determine the
meaning of the treaty when interpretation according to Art.
31 leaves its meaning obscure or ambiguous or leads to a
result which is manifestly absurd or unreasonable: Art. 32.
The Agreement is one “for the avoidance of double taxation
with respect to taxes on income''. Accordingly, it is
necessary to interpret the words of the Agreement with that
particular purpose in mind. Moreover, the term “enterprise''
in Art. 3 and 7 of the Agreement is ambiguous because, on
the one hand, it can mean a project or activity undertaken
206
and, on the other hand, it can mean a framework for making
and carrying out decisions in respect of activities and
projects. Consequently, it is proper to have regard to any
“supplementary means of interpretation'' in interpreting the
Agreement. In this case, the “supplementary means of
interpretation'' are the 1977 OECD Model Convention for the
Avoidance of Double Taxation with respect to Taxes on
Income and on Capital, which was the model for the
Agreement, and a commentary issued by the OECD in
relation to that model convention. But before referring to
those two documents, it is necessary to describe the
Agreement in more detail.”
(Concurring Opinion of McHugh J., pages 658-659)
152.The OECD Commentary on royalty payments under Article 12 is
instructive, and states as follows :
“12. Whether payments received as consideration for
computer software may be classified as royalties poses
difficult problems but is a matter of considerable importance
in view of the rapid development of computer technology in
recent years and the extent of transfers of such technology
across national borders. In 1992, the Commentary was
amended to describe the principles by which such
classification should be made. Paragraphs 12 to 17 were
further amended in 2000 to refine the analysis by which
business profits are distinguished from royalties in computer
software transactions. In most cases, the revised analysis
will not result in a different outcome.
12.1 Software may be described as a program, or series of
programs, containing instructions for a computer required
either for the operational processes of the computer itself
(operational software) or for the accomplishment of other
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tasks (application software). It can be transferred through a
variety of media, for example in writing or electronically, on
a magnetic tape or disk, or on a laser disk or CD-Rom. It
may be standardised with a wide range of applications or be
tailor-made for single users. It can be transferred as an
integral part of computer hardware or in an independent
form available for use on a variety of hardware.
12.2 The character of payments received in transactions
involving the transfer of computer software depends on the
nature of the rights that the transferee acquires under the
particular arrangement regarding the use and exploitation of
the program. The rights in computer programs are a form of
intellectual property. Research into the practices of OECD
member countries has established that all but one protect
rights in computer programs either explicitly or implicitly
under copyright law. Although the term “computer software”
is commonly used to describe both the program — in which
the intellectual property rights (copyright) subsist — and the
medium on which it is embodied, the copyright law of most
OECD member countries recognises a distinction between
the copyright in the program and software which
incorporates a copy of the copyrighted program. Transfers
of rights in relation to software occur in many different ways
ranging from the alienation of the entire rights in the
copyright in a program to the sale of a product which is
subject to restrictions on the use to which it is put. The
consideration paid can also take numerous forms. These
factors may make it difficult to determine where the
boundary lies between software payments that are properly
to be regarded as royalties and other types of payment. The
difficulty of determination is compounded by the ease of
reproduction of computer software, and by the fact that
acquisition of software frequently entails the making of a
208
copy by the acquirer in order to make possible the operation
of the software.
13. The transferee’s rights will in most cases consist of
partial rights or complete rights in the underlying copyright
(see paragraphs 13.1 and 15 below), or they may be (or be
equivalent to) partial or complete rights in a copy of the
program (the “program copy”), whether or not such copy is
embodied in a material medium or provided electronically
(see paragraphs 14 to 14.2 below). In unusual cases, the
transaction may represent a transfer of “know-how” or secret
formula (paragraph 14.3).
13.1 Payments made for the acquisition of partial rights in
the copyright (without the transferor fully alienating the
copyright rights) will represent a royalty where the
consideration is for granting of rights to use the program in
a manner that would, without such license, constitute an
infringement of copyright. Examples of such arrangements
include licenses to reproduce and distribute to the public
software incorporating the copyrighted program, or to modify
and publicly display the program. In these circumstances,
the payments are for the right to use the copyright in the
program (i.e. to exploit the rights that would otherwise be the
sole prerogative of the copyright holder). It should be noted
that where a software payment is properly to be regarded as
a royalty there may be difficulties in applying the copyright
provisions of the Article to software payments since
paragraph 2 requires that software be classified as a literary,
artistic or scientific work. None of these categories seems
entirely apt. The copyright laws of many countries deal with
this problem by specifically classifying software as a literary
or scientific work. For other countries treatment as a
scientific work might be the most realistic approach.
Countries for which it is not possible to attach software to
209
any of those categories might be justified in adopting in their
bilateral treaties an amended version of paragraph 2 which
either omits all references to the nature of the copyrights or
refers specifically to software.
14. In other types of transactions, the rights acquired in
relation to the copyright are limited to those necessary to
enable the user to operate the program, for example, where
the transferee is granted limited rights to reproduce the
program. This would be the common situation in
transactions for the acquisition of a program copy. The rights
transferred in these cases are specific to the nature of
computer programs. They allow the user to copy the
program, for example onto the user’s computer hard drive or
for archival purposes. In this context, it is important to note
that the protection afforded in relation to computer programs
under copyright law may differ from country to country. In
some countries the act of copying the program onto the hard
drive or random access memory of a computer would,
without a license, constitute a breach of copyright. However,
the copyright laws of many countries automatically grant this
right to the owner of software which incorporates a computer
program. Regardless of whether this right is granted under
law or under a license agreement with the copyright holder,
copying the program onto the computer’s hard drive or
random access memory or making an archival copy is an
essential step in utilising the program. Therefore, rights in
relation to these acts of copying, where they do no more than
enable the effective operation of the program by the user,
should be disregarded in analysing the character of the
transaction for tax purposes. Payments in these types of
transactions would be dealt with as commercial income in
accordance with Article 7.
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14.1 The method of transferring the computer program to the
transferee is not relevant. For example, it does not matter
whether the transferee acquires a computer disk containing
a copy of the program or directly receives a copy on the hard
disk of her computer via a modem connection. It is also of
no relevance that there may be restrictions on the use to
which the transferee can put the software.
14.2 The ease of reproducing computer programs has
resulted in distribution arrangements in which the transferee
obtains rights to make multiple copies of the program for
operation only within its own business. Such arrangements
are commonly referred to as “site licences”, “enterprise
licenses”, or “network licences”. Although these
arrangements permit the making of multiple copies of the
program, such rights are generally limited to those
necessary for the purpose of enabling the operation of the
program on the licensee’s computers or network, and
reproduction for any other purpose is not permitted under
the license. Payments under such arrangements will in most
cases be dealt with as business profits in accordance with
Article 7.
14.3 Another type of transaction involving the transfer of
computer software is the more unusual case where a
software house or computer programmer agrees to supply
information about the ideas and principles underlying the
program, such as logic, algorithms or programming
languages or techniques. In these cases, the payments may
be characterised as royalties to the extent that they
represent consideration for the use of, or the right to use,
secret formulas or for information concerning industrial,
commercial or scientific experience which cannot be
separately copyrighted. This contrasts with the ordinary
211
case in which a program copy is acquired for operation by
the end user.
14.4 Arrangements between a software copyright holder and
a distribution intermediary frequently will grant to the
distribution intermediary the right to distribute copies of the
program without the right to reproduce that program. In
these transactions, the rights acquired in relation to the
copyright are limited to those necessary for the commercial
intermediary to distribute copies of the software program. In
such transactions, distributors are paying only for the
acquisition of the software copies and not to exploit any right
in the software copyrights. Thus, in a transaction where a
distributor makes payments to acquire and distribute
software copies (without the right to reproduce the software),
the rights in relation to these acts of distribution should be
disregarded in analysing the character of the transaction for
tax purposes. Payments in these types of transactions would
be dealt with as business profits in accordance with Article
7. This would be the case regardless of whether the copies
being distributed are delivered on tangible media or are
distributed electronically (without the distributor having the
right to reproduce the software), or whether the software is
subject to minor customisation for the purposes of its
installation.
15. Where consideration is paid for the transfer of the full
ownership of the rights in the copyright, the payment cannot
represent a royalty and the provisions of the Article are not
applicable. Difficulties can arise where there is a transfer of
rights involving:
— exclusive right of use of the copyright during a
specific period or in a limited geographical area;
— additional consideration related to usage;
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— consideration in the form of a substantial lump sum
payment.
16. Each case will depend on its particular facts but in
general if the payment is in consideration for the transfer of
rights that constitute a distinct and specific property (which
is more likely in the case of geographically-limited than time
limited rights), such payments are likely to be business
profits within Article 7 or a capital gain within Article 13 rather
than royalties within Article 12. That follows from the fact that
where the ownership of rights has been alienated, the
consideration cannot be for the use of the rights. The
essential character of the transaction as an alienation
cannot be altered by the form of the consideration, the
payment of the consideration in instalments or, in the view
of most countries, by the fact that the payments are related
to a contingency.
17. Software payments may be made under mixed
contracts. Examples of such contracts include sales of
computer hardware with built-in software and concessions
of the right to use software combined with the provision of
services. The methods set out in paragraph 11 above for
dealing with similar problems in relation to patent royalties
and know-how are equally applicable to computer software.
Where necessary the total amount of the consideration
payable under a contract should be broken down on the
basis of the information contained in the contract or by
means of a reasonable apportionment with the appropriate
tax treatment being applied to each apportioned part.”
(emphasis supplied)
153.However, the learned Additional Solicitor General has taken us
through the positions taken by India (in the capacity of an OECD non-
213
member) with regard to Article 12 of the OECD Model Tax Convention
and the OECD Commentary, first in 2008, reiterated in 2014 and
2017, as follows:
“4.1 India reserves the right to: tax royalties and fees for
technical services at source; define these, particularly by
reference to its domestic law; define the source of such
payments, which may extend beyond the source defined
in paragraph 5 of Article 11, and modify paragraphs 3 and
4 accordingly.”
“17. India reserves its position on the interpretations
provided in paragraphs 8.2, 10.1, 10.2, 14, 14.1, 14.2,
14.4, 15, 16 and 17.3; it is of the view that some of the
payments referred to may constitute royalties”
(Positions on Article 12, OECD Commentary 2014)
154.From these positions taken, which use the language “reserves the right
to” and “is of the view that some of the payments referred to may
constitute royalties”, it is not at all clear as to what exactly the nature of
these positions are. This may be contrasted with the categorical
language used by India in its positions taken with respect to other
aspects (“India does not agree to”), as follows:
“18. India does not agree with the interpretation that
information concerning industrial, commercial or scientific
experience is confined to only previous experience.”
“20. India does not agree with the interpretation in paragraph
9.1 of the Commentary on Article 12 according to which a
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payment for transponder leasing will not constitute royalty.
This notion is contrary to the Indian position that income from
transponder leasing constitutes an equipment royalty
taxable both under India’s domestic law and its treaties with
many countries. It is also contrary to India’s position that a
payment for the use of a transponder is a payment for the
use of a process resulting in a royalty under Article 12. India
also does not agree with the conclusion included in the
paragraph concerning undersea cables and pipelines as it
considers that undersea cables and pipelines are industrial,
commercial or scientific equipment and that payments made
for their use constitute equipment royalties.
21. India does not agree with the interpretation in paragraph
9.2 of the Commentary on Article 12. It considers that a
roaming call constitutes the use of a process. Accordingly,
the payment made for the use of that process constitutes a
royalty for the purposes of Article 12. It is also the position
of India that a payment for a roaming call constitutes a
royalty since it is a payment for the use of industrial,
commercial or scientific equipment.
22. India does not agree with the interpretation in paragraph
9.3 of the Commentary on Article 12. It considers that a
payment for spectrum license constitutes a royalty taxable
both under India’s domestic law and its treaties with many
countries.”
(Positions on Article 12, OECD Commentary 2014)
155.In Director of Income Tax v. New Skies Satellite BV, (2016) 382 ITR
114 [“New Skies Satellite”], a Division Bench of the High Court of Delhi
correctly observed that mere positions taken with respect to the OECD
215
Commentary do not alter the DTAA’s provisions, unless it is actually
amended by way of bilateral re-negotiation. This was put thus:
“68. On a final note, India's change in position to the OECD
Commentary cannot be a fact that influences the
interpretation of the words defining royalty as they stand
today. The only manner in which such change in position
can be relevant is if such change is incorporated into the
agreement itself and not otherwise. A change in executive
position cannot bring about a unilateral legislative
amendment into a treaty concluded between two sovereign
states. It is fallacious to assume that any change made to
domestic law to rectify a situation of mistaken interpretation
can spontaneously further their case in an international
treaty. Therefore, mere amendment to Section 9(1)(vi)
cannot result in a change. It is imperative that such
amendment is brought about in the agreement as well. Any
attempt short of this, even if it is evidence of the State's
discomfort at letting data broadcast revenues slip by, will be
insufficient to persuade this Court to hold that such
amendments are applicable to the DTAAs.”
(emphasis in original)
156.It is significant to note that after India took such positions qua the OECD
Commentary, no bilateral amendment was made by India and the other
Contracting States to change the definition of royalties contained in any
of the DTAAs that we are concerned with in these appeals, in
accordance with its position. As a matter of fact, DTAAs that were
amended subsequently, such as the Convention between the Republic
216
of India and the Kingdom of Morocco for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with respect to Taxes On
Income,48 [“India-Morocco DTAA”], which was amended on
22.10.2019,49 incorporated a definition of royalties, not very different
from the definition contained in the OECD Model Tax Convention, as
follows:
“The term "royalties" as used in this Article means:
(a) payments of any kind received as a consideration for
the use of, or the right to use, any copyright of a literary,
artistic or scientific work, including cinematograph films or
recordings on any means of reproduction for use for radio or
television broadcasting, any patent, trade mark, design or
model, plan, computer software programme, secret formula
or process, or for information concerning industrial,
commercial or scientific experience; and
(b) payments of any kind received as consideration for the
use of, or the right to use, any industrial, commercial or
scientific equipment”
(Article 12.3)
157.Similarly, though the India-Singapore DTAA came into force on
08.08.1994, it has been amended several times, including on
48 Notification : No. GSR 245(E), dated 15-3-2000.
49 Amended by Notification No. S.O. 3789(E) [No.84/2019/F.No.503/09/2009-FTD-II],
Dated 22-10-2019.
217
01.09.2011,50 and 23.03.2017.51 However, the definition of “royalties”
has been retained without any changes. Likewise, the Convention
between the Government of the Republic of India and the
Government of Mauritius for the Avoidance of Double Taxation and
the Prevention of Fiscal Evasion with respect to Taxes on Income and
Capital Gains and for the Encouragement of Mutual Trade and
Investment,52 [“India-Mauritius DTAA”] was entered into on
06.12.1983, and was amended subsequently on 10.08.2016,53
without making any change to the definition of “royalties”.
158.It is thus clear that the OECD Commentary on Article 12 of the OECD
Model Tax Convention, incorporated in the DTAAs in the cases before
us, will continue to have persuasive value as to the interpretation of
the term “royalties” contained therein.
159.Viewed from another angle, persons who pay TDS and/or assessees
in the nations governed by a DTAA have a right to know exactly where
they stand in respect of the treaty provisions that govern them. Such
50 Notification No. S.O. 2031(E).
51
Notification No. S.O. 935(E).
52 Notification No. GSR 920(E).
53 Notification No. S.O. 2680(E) (No.68/2016 (F.No.500/3/2012-FTD-II).
218
persons and/or assessees can thus place reliance upon the OECD
Commentary for provisions of the OECD Model Tax Convention,
which are used without any substantial change by bilateral DTAAs, in
the absence of judgments of municipal courts clarifying the same, or
in the event of conflicting municipal decisions. From this point of view
also, the OECD Commentary is significant, as the Contracting States
to which the persons deducting tax/assessees belong, can conclude
business transactions on the basis that they are to be taxed either on
income by way of royalties for parting with copyright, or income
derived from licence agreements which is then taxed as business
profits depending on the existence of a PE in the Contracting State.
160.The learned Additional Solicitor General, however, relied upon the
HPC Report 2003 and the E-Commerce Report 2016. The HPC
Report 2003, noting the various characterisation issues in relation to
e-commerce payments, recommended as follows:
“...The Committee also recommends that a clear position on
each category of transactions should be taken by the Central
Board of Direct Taxes (“CBDT”). This will ensure uniformity
of approach among all the assessing officers. Since new
categories of transactions are likely to emerge at a fast pace
with advances in technology, it is also recommended that
the CBDT should closely monitor the developments and
issue guidelines to the assessing officers on new emerging
categories of transactions as a continuing process. The
219
monitoring should be through an expert advisory body on
which the tax administration, the profession and the
concerned industry is represented.”
(pages 146-147)
161.The E-Commerce Report 2016 proposed an equalization levy to be
chargeable on specified digital services (see paragraph 11.2) and
noted that its recommendation to impose a withholding tax on digital
transactions would require an express inclusion in tax treaties in order
to be feasible, as follows:
“108. After taking cognizance of these observations, the
Committee considers that the option of “withholding tax”
offers a practical way of allocating partial taxing rights in
respect of income from digital economy, which shares
attributes that may be similar to royalty or fee for technical
services, and which can be complied in respect of B2B
transactions by the process of withholding. However, such a
tax on income would be feasible only if it is included in the
tax treaties, which take precedence over Indian domestic
laws, unless it is designed as a tax on the gross payment.”
(emphasis supplied)
162.These reports also do not carry the matter much further as they are
recommendatory reports expressing the views of the committee
members, which the Government of India may accept or reject. When it
comes to DTAA provisions, even if the position put forth in the
aforementioned reports were to be accepted, a DTAA would have to be
220
bilaterally amended before any such recommendation can become law
in force for the purposes of the Income Tax Act.
163.The learned Additional Solicitor General also sought to rely on a
decision of the Audiencia Nacional (Spanish National Court) in Case
No. 207019/1990 dated 28.02.1995 and a decision of the Tribunal
Supremo (Spanish Supreme Court) in Case No. 8066/1994 dated
02.10.1999. Quite apart from the fact that he only presented certain
extracts and not the entire judgment rendered in these cases, these
authorities have no relevance to the appeals before us, having been
decided on the basis of the taxation law of Spain.
164.The learned Additional Solicitor General then referred to the judgment
of this Court in Commissioner of Customs v. G.M. Exports, (2016) 1
SCC 91, and in particular on the four propositions that were culled out
in the context of the levy of an anti-dumping duty in consonance with the
General Agreement on Tariffs and Trade (GATT), 1994, as follows:
“23. A conspectus of the aforesaid authorities would lead to
the following conclusions:
(1) Article 51(c) of the Constitution of India is a directive
principle of State policy which states that the State shall
endeavour to foster respect for international law and
treaty obligations. As a result, rules of international law
which are not contrary to domestic law are followed by
221
the courts in this country. This is a situation in which
there is an international treaty to which India is not a
signatory or general rules of international law are made
applicable. It is in this situation that if there happens to
be a conflict between domestic law and international
law, domestic law will prevail.
(2) In a situation where India is a signatory nation to an
international treaty, and a statute is passed pursuant to
the said treaty, it is a legitimate aid to the construction
of the provisions of such statute that are vague or
ambiguous to have recourse to the terms of the treaty
to resolve such ambiguity in favour of a meaning that is
consistent with the provisions of the treaty.
(3) In a situation where India is a signatory nation to an
international treaty, and a statute is made in furtherance
of such treaty, a purposive rather than a narrow literal
construction of such statute is preferred. The
interpretation of such a statute should be construed on
broad principles of general acceptance rather than
earlier domestic precedents, being intended to carry out
treaty obligations, and not to be inconsistent with them.
(4) In a situation in which India is a signatory nation to
an international treaty, and a statute is made to enforce
a treaty obligation, and if there be any difference
between the language of such statute and a
corresponding provision of the treaty, the statutory
language should be construed in the same sense as
that of the treaty. This is for the reason that in such
cases what is sought to be achieved by the international
treaty is a uniform international code of law which is to
be applied by the courts of all the signatory nations in a
222
manner that leads to the same result in all the signatory
nations.”
165.The conclusions in the aforestated paragraph have no direct relevance
to the facts at hand as the effect of section 90(2) of the Income Tax Act,
read with explanation 4 thereof, is to treat the DTAA provisions as the
law that must be followed by Indian courts, notwithstanding what may
be contained in the Income Tax Act to the contrary, unless more
beneficial to the assessee.
For all these reasons therefore, these submissions of the learned
Additional Solicitor General are rejected.
166.At this juncture, it is also important to point out that vide Circular No.
10/2002 dated 09.10.2002, the Revenue, after referring to section 195
of the Income Tax Act and deciding that a No Objection Certificate from
the Department would not be necessary if the person making the
remittance is to submit an undertaking along with the certificate of an
accountant to the Reserve Bank of India [“RBI”], has itself made a
distinction in the proforma of the certificate to be issued in Annexure B
to the aforesaid Circular, between remittances for royalties (see Row
No. 5) and remittances for supply of articles or computer software (see
Row No. 7), as follows:
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ANNEXURE ‘B’
CERTIFICATE
1. Name and address of the beneficiary
of the remittance and the name of the
foreign country to which remittance is
being made.
:
2. Amount of remittance is foreign
currency indicating the proposed
date/month and bank through which
remittance is being made.
:
3. Details of tax deducted at source, rate
at which tax has been deducted and
date of deduction.
: Foreign Indian
Amount to be remitted ..... .....
Tax deducted at source ..... ......
Actual Amount remitted ..... .....
Rate at which deducted ..... .....
Date of Deduction ...... .....
4. In case the remittance as indicated in
(2) above is net of taxes, whether tax
payable has been grossed up? If so,
computation thereof may be indicated.
:
5. If the remittance is for royalties, fee for
technical services, interest, dividend,
etc., the clause of the relevant DTAA
under which the remittance is covered
along with reasons and the rate at
which tax is required to be deducted in
terms of such clause of the applicable
DTAA.
:
6. In case that tax has been deducted at
a rate lower than the rate prescribed
under the applicable DTAA, the
reasons thereof.
:
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7. In case remittance is for supply of
articles or things (e.g., plant,
machinery, equipment, etc.) or
computer software, please indicate :—
:
i. Whether there is any permanent
establishment in India through which
the beneficiary of the remittance is
directly or indirectly carrying on such
activity of supply of articles or things?
ii. Whether such remittance is
attributable to or connected with such
permanent establishment?
iii .If so, the amount of income
comprised in such remittance which is
liable to tax.
iv. If not, the reasons in brief therefor.
8. In case remittance is on account of
business income
please indicate :— :
i. Whether such income is liable to tax
in India?
ii. If so, the basis for arriving at the rate
of deduction of tax.
iii. If not, the reasons thereof.
9. In case tax is not deducted at source
for any other reason, details thereof.
:
(emphasis supplied)
167.The Revenue, therefore, when referring to “royalties” under the DTAA,
makes a distinction between such royalties, no doubt in the context of
technical services, and remittances for supply of computer software,
which is then treated as business profits, taxable under the relevant
225
DTAA depending upon whether there is a PE through which the
assessee operates in India. This is one more circumstance to show that
the Revenue has itself appreciated the difference between the payment
of royalty and the supply/use of computer software in the form of goods,
which is then treated as business income of the assessee taxable in
India if it has a PE in India.
CONCLUSION
168.Given the definition of royalties contained in Article 12 of the DTAAs
mentioned in paragraph 41 of this judgment, it is clear that there is no
obligation on the persons mentioned in section 195 of the Income Tax
Act to deduct tax at source, as the distribution agreements/EULAs in
the facts of these cases do not create any interest or right in such
distributors/end-users, which would amount to the use of or right to use
any copyright. The provisions contained in the Income Tax Act (section
9(1)(vi), along with explanations 2 and 4 thereof), which deal with
royalty, not being more beneficial to the assessees, have no application
in the facts of these cases.
169.Our answer to the question posed before us, is that the amounts paid
by resident Indian end-users/distributors to non-resident computer
software manufacturers/suppliers, as consideration for the resale/use
226
of the computer software through EULAs/distribution agreements, is not
the payment of royalty for the use of copyright in the computer software,
and that the same does not give rise to any income taxable in India, as
a result of which the persons referred to in section 195 of the Income
Tax Act were not liable to deduct any TDS under section 195 of the
Income Tax Act. The answer to this question will apply to all four
categories of cases enumerated by us in paragraph 4 of this judgment.
170.The appeals from the impugned judgments of the High Court of
Karnataka are allowed, and the aforesaid judgments are set aside. The
ruling of the AAR in Citrix Systems (AAR) (supra) is set aside. The
appeals from the impugned judgments of the High Court of Delhi are
dismissed.
…………………..………………J.
(R. F. Nariman)
……………..……………………J.
(Hemant Gupta)
……………..……………………J.
(B.R. Gavai)
New Delhi.
March 02, 2021.
