ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PRIVATE LIMITED versus THE COMMISSIONER OF INCOME TAX & ANR. on 2 March 2021

[2021] 2 S.C.R. 321

ENGINEERING ANALYSIS CENTRE OF EXCELLENCEPRIVATE LIMITED

v.

THE COMMISSIONER OF INCOME TAX & ANR.

(Civil Appeal Nos. 8733-8734 of 2018)

MARCH 02, 2021

[R. F. NARIMAN, HEMANT GUPTA AND B. R. GAVAI, JJ.]

Income Tax Act, 1961: s.195 – Amount paid by resident inIndia to non-resident foreign software suppliers – Liability to deducttax at source – Held: In view of the definition of royalties containedin Article 12 of the DTAAs, there is no obligation on the personsmentioned in s. 195 of the Income Tax Act to deduct tax at source,as the distribution agreements/EULAs in the facts of these cases donot create any interest or right in such distributors/end-users, whichwould amount to the use of or right to use any copyright – Theamounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers, asconsideration for the resale/use of the computer software throughEULAs/distribution agreements, is not the payment of royalty forthe use of copyright in the computer software, and same does notgive rise to any income taxable in India, as a result of which thepersons referred to in s.195 of the Income Tax Act are not liable todeduct any TDS under s.195 of the Income Tax Act.

Income Tax Act, 1961: s.194E and s.195 – Distinction between– Held: s.194E of the Income Tax Act belongs to a set of variousprovisions which deal with TDS, without any reference tochargeability of tax under the Income Tax Act by the concernednon-resident assessee – This section is similar to s.193 and s.194 ofthe Income Tax Act by which deductions have to be made withoutany reference to the chargeability of a sum received by a non-residentassessee under the Income Tax Act – On the other hand, at theheart of s.195 of the Income Tax Act is the fact that deductions canonly be made if the non resident assessee is liable to pay tax underthe provisions of the Income Tax Act in the first place.

AIncome Tax Act, 1961: Applicability of Income Tax Act, 1961when DTAA applies – Held: Once a DTAA applies, the provisions ofthe Income Tax Act can only apply to the extent that they are morebeneficial to the assessee and not otherwise – Further, by explanation4 to s.90 of the Income Tax Act, it has been clarified by theParliament that where any term is defined in a DTAA, the definitionBcontained in the DTAA is to be looked at – It is only where there isno such definition that the definition in the Income Tax Act can thenbe applied.

Income Tax Act, 1961: s.90 – Royalty – Meaning of – Held:As is now reflected by explanation 4 to s.90 of the Income Tax ActCand 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 ins.9 of the Income Tax Act, has to be construed with reference toArticle 12 of the DTAA – This position is also clarified by CBDTDCircular No. 333 dated 02.04.1982 – Thus, by virtue of Article 12(3)of the DTAA, royalties are payments of any kind received asconsideration for “the use of, or the right to use, any copyright” ofa literary work, which includes a computer programme or software.

Statutes

Income Tax Act, 1961: s.9(1)(vi) explanation 4; s.195 – TheEquestion whether persons liable to deduct TDS under s.195 can beheld liable to deduct such sums at a time when explanation 4 wasfactually not on the statute book, all deductions liable to be madeand the assessment years in question being prior to the year 2012 –This question is answered by two latin maxims, lex non cogit adimpossibilia, i.e., the law does not demand the impossible andFimpotentia excusat legem, i.e., when there is a disability that makes itimpossible to obey the law, the alleged disobedience of the law isexcused – The “person” mentioned in s.195 cannot be expected todo the impossible, namely, to apply the expanded definition of“royalty” inserted by explanation 4 to s.9(1)(vi) of the Income TaxGAct, for the assessment years in question, at a time when suchexplanation was not actually and factually in the statute.

Copyright Act, 1957: Copyright – Meaning of – Though theexpression “copyright” has not been defined separately in the“definitions” section of the Copyright Act, yet, s.14 makes it clearHthat “copyright” means the “exclusive right”, subject to the 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 “literarywork” which includes a “computer programme”, creates such work,such author has the exclusive right, subject to the provisions of theCopyright Act, to do or authorise the doing of several acts in respectof such work or any substantial part thereof.

Copyright Act, 1957: s.14(b) – Right to use computer software– When, under a non-exclusive licence, an end-user gets the rightto use computer software in the form of a CD, the end-user onlyreceives a right to use the software and nothing more – The end-user does not get any of the rights that the owner continues to retainunder s.14(b) of the Copyright Act read with sub-section (a)(i)-(vii)thereof – Thus, the conclusion that when computer software islicensed for use under an EULA, what is also licensed is the right touse the copyright embedded therein, is wholly incorrect – The licencefor the use of a product under an EULA cannot be construed as thelicence spoken of in s.30 of the Copyright Act, as such EULA onlyimposes restrictive conditions upon the end-user and does not partwith any interest relatable to any rights mentioned in ss.14(a) and14(b) of the Copyright Act.

Copyright Act, 1957: ss.14, 16, 30, 52(1)(aa), 52(1)(b),52(1)(ad) – Infringement of copyright – Held: No copyright existsin India outside the provisions of the Copyright Act or any otherspecial law for the time being in force, vide s.16 of the CopyrightAct – When the owner of copyright in a literary work assigns whollyor in part, all or any of the rights contained in s.14(a) and (b) ofthe Copyright Act, in the said work for a consideration, the assigneeof such right becomes entitled to all such rights comprised in thecopyright that is assigned, and shall be treated as the owner of thecopyright of what is assigned to him – Also, under s.30 of theCopyright Act, the owner of the copyright in any literary work maygrant any interest in any right mentioned in s.14(a) of the CopyrightAct by licence in writing by him to the licensee, under which, forparting with such interest, royalty may become payable – When suchlicence is granted, copyright is infringed when any use, relatableto the said interest/right that is licensed, is contrary to the conditionsof the licence so granted – Infringement of copyright takes placewhen a person “makes for sale or hire or sells or lets for hire” or A

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A“offers for sale or hire” or “distributes…so as to affect prejudiciallythe owner of the copyright”, vide s.51(b) of the Copyright Act –Importantly, the making of copies or adaptation of a computerprogramme in order to utilise the said computer programme for thepurpose for which it was supplied, or to make up back-up copiesas a temporary protection against loss, destruction or damage soBas to be able to utilise the computer programme for the purpose forwhich it was supplied, does not constitute an act of infringement ofcopyright under s.52(1)(aa) of the Copyright Act – In short, what isreferred to in s.52(1)(aa) of the Copyright Act would not amount toreproduction so as to amount to an infringement of copyright –Cs.52(1)(ad) is independent of s.52(1)(aa) of the Copyright Act, andstates that the making of copies of a computer programme from apersonally legally obtained copy for non-commercial personal usewould not amount to an infringement of copyright – s.52(1)(ad) ofthe Copyright Act cannot be read to negate the effect of s.52(1)(aa),since it deals with a subject matter that is separate and distinct fromDthat contained in s.52(1)(aa) of the Copyright Act.

Copyright Act, 1957: Copyright owner’s distribution right andthe right of the purchaser to further resale – Doctrine of first sale/principle of exhaustion – Applicability of – Held: s.14(b)(ii) of theCopyright Act was amended twice, first in 1994 and then again inE1999, with effect from 15.01.2000 – After the 1999 Amendment,what is conspicuous by its absence is the phrase “regardless ofwhether such copy has been sold or given on hire on earlieroccasions” – This is a statutory recognition of the doctrine of firstsale/principle of exhaustion.F

Words and Phrases: Expression ‘in respect of’ – Meaning of– Also in context of explanation 2(v) to s.9(1)(vi) of the Income TaxAct – Held: The expression “in respect of”, when used in a taxationstatute, is only synonymous with the words “on” or “attributableto” – Such meaning accords with the meaning to be given to theGexpression “in respect of” contained in explanation 2(v) to s.9(1)(vi)of the Income Tax Act, and would not in any manner make theexpression otiose.

Disposing of the appeals, the Court

HELD: 1. Under section 5(2) of the Income Tax Act, theHtotal income of a person who is a non-resident, includes all income from whatever source derived, which accrues or arises or isdeemed to accrue or arise to such person in India during suchyear. This, however, is subject to the provisions of the IncomeTax Act. Certain income is deemed to arise or accrue in India,under section 9 of the Income Tax Act, notwithstanding the factthat such income may accrue or arise to a non-resident outsideIndia. One such income is income by way of royalty, which, undersection 9(1)(vi) of the Income Tax Act, means the transfer of allor any rights, including the granting of a licence, in respect of anycopyright in a literary work. That such transaction may begoverned by a DTAA is then recognized by section 5(2) readwith section 90 of the Income Tax Act, making it clear that theCentral Government may enter into any such agreement withthe government of another country so as to grant relief in respectof income tax chargeable under the Income Tax Act or under anycorresponding law in force in that foreign country, or for theavoidance of double taxation of income under the Income TaxAct and under the corresponding law in force in that country.What is of importance is that once a DTAA applies, the provisionsof the Income Tax Act can only apply to the extent that they aremore beneficial to the assessee and not otherwise. Further, byexplanation 4 to section 90 of the Income Tax Act, it has beenclarified by the Parliament that where any term is defined in aDTAA, the definition contained in the DTAA is to be looked at.It is only where there is no such definition that the definition inthe Income Tax Act can then be applied. [Paras 25, 26][361-C-G]

2. The machinery provision contained in section 195 of theIncome Tax Act is inextricably linked with the charging provisioncontained in section 9 read with section 4 of the Income Tax Act,as a result of which, a person resident in India, responsible forpaying a sum of money, “chargeable under the provisions of [the]Act”, to a non-resident, shall at the time of credit of such amountto the account of the payee in any mode, deduct tax at source atthe rate in force which, under section 2(37A)(iii) of the IncomeTax Act, is the rate in force prescribed by the DTAA. Suchdeduction is only to be made if the non resident is liable to paytax under the charging provision contained in section 9 read with AB

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Asection 4 of the Income Tax Act, read with the DTAA. Thus, it isonly when the non-resident is liable to pay income tax in India onincome deemed to arise in India and no deduction of TDS is madeunder section 195(1) of the Income Tax Act, or such person has,after applying section 195(2) of the Income Tax Act, not deductedsuch proportion of tax as is required, that the consequences of aBfailure to deduct and pay, reflected in section 201 of the IncomeTax Act, follow, by virtue of which the resident-payee is deemedan “assessee in default”, and thus, is made liable to pay tax,interest and penalty thereon. [Para 27][362-E-H; 363-A-B]

GE India Technology Centre (P) Ltd. v. CIT (2010) 10CSCC 29:[2010] 10 SCR 1142 – relied on.

3. It will be seen that section 194E of the Income Tax Actbelongs to a set of various provisions which deal with TDS,without any reference to chargeability of tax under the IncomeTax Act by the concerned nonresident assessee. This section isDsimilar to sections 193 and 194 of the Income Tax Act by whichdeductions have to be made without any reference to thechargeability of a sum received by a non-resident assessee underthe Income Tax Act. On the other hand, at the heart of section195 of the Income Tax Act is the fact that deductions can only beEmade if the nonresident assessee is liable to pay tax under theprovisions of the Income Tax Act in the first place. [Para 31][364-E-F]

PILCOM v. CIT, West Bengal VII, 2020 SCC OnlineSC 426 – held inapplicable.F4.1 Under section 2(o) of the Copyright Act, a literary workincludes a computer programme and a computer programme hasbeen defined under section 2(ffc) of the Copyright Act to mean aset of instructions expressed in words, codes, schemes or in anyother form capable of causing a computer to perform a particularGtask or achieve a particular result. 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 theprovisions of the Act, to do or authorise the doing of certain acts“in respect of a work”. When an “author” in relation to a “literaryH

work” which includes a “computer programme”, creates suchwork, such author has the exclusive right, subject to theprovisions of the Copyright Act, to do or authorise the doing ofseveral acts in respect of such work or any substantial part thereof.In the case of a computer programme, section 14(b) specificallyspeaks of two sets of acts – the seven acts enumerated in sub-clause (a) and the eighth act of selling or giving on commercialrental or offering for sale or for commercial rental any copy of thecomputer programme. Insofar as the seven acts that are set outin sub-clause (a) are concerned, they all delineate how theexclusive right that is with the owner of the copyright may beparted with, i.e., if there is any parting with the right to reproducethe work in any material form; the right to issue copies of thework to the public, not being copies already in circulation; theright to perform the work in public or communicate it to the public;the right to make any cinematograph film or sound recording inrespect 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 doany of the specified acts in relation to a translation or anadaptation. [Paras 34 and 35][370-F-H; 371-A-D]

4.2 In essence, such right is referred to as copyright, andincludes 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 madeeven clearer by the definition of an “infringing copy” containedin section 2(m) of the Copyright Act, which in relation to acomputer programme, i.e., a literary work, means reproductionof the said work. Thus, the right to reproduce a computerprogramme and exploit the reproduction by way of sale,transfer, license etc. is at the heart of the said exclusive right.[Para 36][371-D-F]

5. Importantly, no copyright exists in India outside theprovisions of the Copyright Act or any other special law for thetime being in force, vide section 16 of the Copyright Act. Whenthe owner of copyright in a literary work assigns wholly or inpart, all or any of the rights contained in section 14(a) and (b) ofthe Copyright Act, in the said work for a consideration, theassignee of such right becomes entitled to all such rights AB

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Acomprised in the copyright that is assigned, and shall be treatedas the owner of the copyright of what is assigned to him. Also,under section 30 of the Copyright Act, the owner of the copyrightin any literary work may grant any interest in any right mentionedin section 14(a) of the Copyright Act by licence in writing by himto the licensee, under which, for parting with such interest, royaltyBmay become payable. When such licence is granted, copyright isinfringed when any use, relatable to the said interest/right that islicensed, is contrary to the conditions of the licence so granted.Infringement of copyright takes place when a person “makes forsale or hire or sells or lets for hire” or “offers for sale or hire” orC“distributes…so as to affect prejudicially the owner of thecopyright”, vide section 51(b) of the Copyright Act. Importantly,the making of copies or adaptation of a computer programme inorder to utilise the said computer programme for the purposefor which it was supplied, or to make up back-up copies as atemporary protection against loss, destruction or damage so asDto be able to utilise the computer programme for the purpose forwhich it was supplied, does not constitute an act of infringementof copyright under section 52(1)(aa) of the Copyright Act. In short,what is referred to in section 52(1)(aa) of the Copyright Act wouldnot amount to reproduction so as to amount to an infringement ofEcopyright. [Para 38][372-A-F]

6. Section 52(1)(ad) is independent of section 52(1)(aa) ofthe Copyright Act, and states that the making of copies of acomputer programme from a personally legally obtained copy fornon-commercial personal use would not amount to anFinfringement of copyright. Section 52(1)(ad) of the Copyright Actcannot be read to negate the effect of section 52(1)(aa), since itdeals with a subject matter that is separate and distinct from thatcontained in section 52(1)(aa) of the Copyright Act. [Para 39][372-F-H]G7. As is now reflected by explanation 4 to section 90 of theIncome Tax Act and under Article 3(2) of the DTAA, the definitionof the term “royalties” shall have the meaning assigned to it bythe DTAA, meaning thereby that the expression “royalty”, whenoccurring in section 9 of the Income Tax Act, has to be construedwith reference to Article 12 of the DTAA. This position is alsoH

clarified by CBDT Circular No. 333 dated 02.04.1982. Thus, byvirtue of Article 12(3) of the DTAA, royalties are payments ofany kind received as consideration for “the use of, or the right touse, any copyright” of a literary work, which includes a computer programme or software. [Paras 42, 43] [376-A-C, G-H]

8. A reading of the distribution agreement would show thatwhat is granted to the distributor is only a non-exclusive, non-transferable licence to resell computer software, it beingexpressly stipulated that no copyright in the computer programmeis transferred either to the distributor or to the ultimate end-user. This is further amplified by stating that apart from a right touse the computer programme by the end-user himself, there isno further right to sub-license or transfer, nor is there any rightto reverse-engineer, modify, reproduce in any manner otherwisethan permitted by the licence to the end-user. What is paid byway of consideration, therefore, by the distributor in India to theforeign, non-resident manufacturer or supplier, is the price ofthe computer programme as goods, either in a medium whichstores the software or in a medium by which software is embeddedin hardware, which may be then further resold by the distributorto the end-user in India, the distributor making a profit on suchresale. Importantly, the distributor does not get the right to usethe product at all. When it comes to an end-user who is directlysold the computer programme, such end-user can only use it byinstalling it in the computer hardware owned by the end-user andcannot in any manner reproduce the same for sale or transfer,contrary to the terms imposed by the EULA. In all these cases,the “licence” that is granted vide the EULA, is not a licence interms of section 30 of the Copyright Act, which transfers aninterest in all or any of the rights contained in sections 14(a) and14(b) of the Copyright Act, but is a “licence” which imposesrestrictions or conditions for the use of computer software. Thus,it cannot be said that any of the EULAs in these cases arereferable to section 30 of the Copyright Act, inasmuch as section30 of the Copyright Act speaks of granting an interest in any ofthe rights mentioned in sections 14(a) and 14(b) of the CopyrightAct. The EULAs in all the appeals do not grant any such right or A

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Ainterest, least of all, a right or interest to reproduce the computersoftware. Such reproduction is expressly interdicted, and it isalso expressly stated that no vestige of copyright is at alltransferred, either to the distributor or to the end-user. Thus,what is “licensed” by the foreign, non-resident supplier to thedistributor and resold to the resident end-user, or directly suppliedBto the resident end-user in these cases is in fact the sale of aphysical object which contains an embedded computerprogramme. [Paras 45, 46, 47 and 52][386-C-H; 387-A-B;392-G-H]

State Bank of India v. Collector of Customs, (2000) 1CSCC 727: [2000] 1 SCR 137 – relied on.

Sundaram Finance Ltd. v. State of Kerala, [1966] 2 SCR828 – referred to

9. There is no doubt that section 9 of the Income Tax ActDrefers to persons who are non-residents and taxes their incomeas income which is deemed to accrue or arise in India, thus,making such persons assessees under the Income Tax Act, whoare liable to pay tax. There is also no doubt that the “personresponsible for paying” spoken of in section 195 of Income TaxAct is not a non-resident assessee, but a person resident in India,Ewho is liable to make deductions under section 195 when paymentsare made by it to the non-resident assessee. [Para 54][393-E-F]

Vodafone International Holdings BV v. Union of India,(2012) 6 SCC 613 : [2012] 1 SCR 573 – relied on.

FVIS THE INCOME TAX ACT

10.1 When Article 12 of the India-Singapore DTAA definesthe term “royalties” in sub-article (3) thereof, it does so statingthat such definition is exhaustive – it uses the expression“means”. Secondly, the term “royalties” refers to payments ofGany kind that are received as a consideration for the use of or theright to use any copyright in a literary work. As opposed to this,the definition contained in explanation 2 to section 9(1)(vi) of theIncome Tax Act, is wider in at least three respects: It speaks of“consideration”, but also includes a lump-sum consideration H

which would not amount to income of the recipient chargeableunder the head “capital gains”; When it speaks of the transfer of“all or any rights”, it expressly includes the granting of a licencein respect thereof; and It states that such transfer must be “inrespect of” any copyright of any literary work. However, evenwhere such transfer is “in respect of” copyright, the transfer ofall or any rights in relation to copyright is a sine qua non underexplanation 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 orany of the rights mentioned in section 14(b) read with section14(a) of the Copyright Act. [Paras 63 and 64][404-H; 405-A-E]

State of Madras v. Swastik Tobacco Factory, [1966] 3SCR 79 – referred to 10.2 The insertion of sub-sections (v), (vi) and (vii) in section9(1) of the Income Tax Act, by way of an amendment through theFinance Act 1976 was to introduce source-based taxation forincome in the hands of a non-resident by way of interest, royaltyand fees for technical services. Consequently, section 9(1)(vi) ofthe Income Tax Act was brought into force. The definition ofroyalty contained in explanation 2(v) of section 9(1)(vi) of theIncome Tax Act includes the transfer of all or any rights (includingthe granting of a licence) “in respect of any copyright, literary,artistic or scientific work”. The comma after the word “copyright”does not fit as copyright is obviously spoken of as existing in aliterary, artistic or scientific work. As a matter of fact, this draftingerror was rectified in the Draft Taxes Code 2010, under ChapterXIX in Part H thereof. [Paras 67, 69, 70][407-A-B; 408-C-E]

Carborandum & Co. v. CIT, (1977) 2 SCC 862 : [1977]3 SCR 475 – referred to.

10.3 The transfer of “all or any rights (including the grantingof a licence) in respect of any copyright”, in the context ofcomputer software, is referable to sections 14(a), 14(b) and 30 ofthe Copyright Act. As has been held, the expression “in respectof” is equivalent to “in” or “attributable to”. Thus, explanation2(v) to section 9(1)(vi) of the Income Tax Act, when it speaks of“all of any rights…in respect of copyright” is certainly more AB

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Aexpansive than the DTAA provision, which speaks of the “useof, or the right to use” any copyright. However, when it comes tothe expression “use of, or the right to use”, the same positionwould obtain under explanation 2(v) of section 9(1)(vi) of theIncome Tax Act, inasmuch as, there must, under the licencegranted or sale made, be a transfer of any of the rights containedBin sections 14(a) or 14(b) of the Copyright Act, for explanation2(v) to apply. To this extent, there will be no difference in theposition between the definition of “royalties” in the DTAAs andthe definition of “royalty” in explanation 2(v) of section 9(1)(vi)of the Income Tax Act. [Paras 71, 72][409-A-B; G-H; 410-A-B]

CCIT v. DCM Limited, ITA Nos. 87-89/1992 – referredto.

11. The question whether persons liable to deduct TDSunder section 195 of the Income Tax Act can be held liable todeduct such sums at a time when explanation 4 was factually notDon the statute book, all deductions liable to be made and theassessment years in question being prior to the year 2012. Thisquestion is answered by two latin maxims, lex non cogit adimpossibilia, i.e., the law does not demand the impossible andimpotentia excusat legem, i.e., when there is a disability that makesEit impossible to obey the law, the alleged disobedience of the lawis excused. The “person” mentioned in section 195 of the IncomeTax Act cannot be expected to do the impossible, namely, to applythe expanded definition of “royalty” inserted by explanation 4 tosection 9(1)(vi) of the Income Tax Act, for the assessment yearsin question, at a time when such explanation was not actually andFfactually in the statute. [Paras 80, 81 and 85][413-D-F; 420-H;421-A-B]

Arjun Panditrao Khotkar v. Kailash KushanraoGorantyal,(2020) 7 SCC 1; Citrix Systems Asia PacificPtyl. Ltd., In Re., (2012) 343 ITR 1 (AAR) – referredGto.

Dassault Systems, K.K., In Re., (2010) 322 ITR 125(AAR); Geoquest Systems B.V. Gevers Deynootweg, InRe., (2010) 327 ITR 1 (AAR); Director of Income Taxv. A.P. Moller Maersk AS, (2017) 5 SCC 651 –Happroved.

12. When, under a non-exclusive licence, an end-user getsthe 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 ownercontinues to retain under section 14(b) of the Copyright Act readwith sub-section (a)(i)-(vii) thereof. Thus, the conclusion that whencomputer software is licensed for use under an EULA, what isalso licensed is the right to use the copyright embedded therein,is wholly incorrect. The licence for the use of a product under anEULA cannot be construed as the licence spoken of in section30 of the Copyright Act, as such EULA only imposes restrictiveconditions upon the end-user and does not part with any interestrelatable to any rights mentioned in sections 14(a) and 14(b) ofthe Copyright Act. [Para 97][431-E-G]

CIT v. Samsung Electronics Co. Ltd. (2012) 345 ITR494 – not correct law.

CIT v. Samsung Electronics Co. Ltd. (2012) 345 ITR494 – not correct law.

13. The expression “in respect of”, when used in a taxationstatute, is only synonymous with the words “on” or “attributableto”. Such meaning accords with the meaning to be given to theexpression “in respect of” contained in explanation 2(v) to section9(1)(vi) of the Income Tax Act, and would not in any manner makethe expression otiose. Secondly, section 16 of the Copyright Act,which states that “no person shall be entitled tocopyright…otherwise than under and in accordance with theprovisions of this Act or of any other law for the time being inforce” has been completely missed, thus making it clear that theexpression “copyright” has to be understood only as is stated insection 14 of the Copyright Act and not otherwise. Thirdly, thestorage of a computer programme per se would not constituteinfringement of copyright. This, again, would directly be contraryto the terms of section 52(1)(aa) of the Copyright Act. [Paras105, 106 and 107][439-B-E]

State of Madras v. Swastik Tobacco Factory [1966] 3SCR 79 – relied on Director of Income Tax v. Ericsson A.B., (2012) 343ITR 470; Director of Income Tax v. Nokia Networks A

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334SUPREME COURT REPORTS

AOY, (2013) 358 ITR 259; Director of Income Tax v.Infrasoft Ltd., (2014) 264 CTR 329; CIT v. ZTECorporation, (2017) 392 ITR 80 – approved.

14. Copyright is an exclusive right, which is negative innature, being a right to restrict others from doing certain acts.BCopyright is an intangible, incorporeal right, in the nature of aprivilege, which is quite independent of any material substance.Ownership of copyright in a work is different from the ownershipof the physical material in which the copyrighted work may happento be embodied. An obvious example is the purchaser of a bookor a CD/DVD, who becomes the owner of the physical article, butCdoes not become the owner of the copyright inherent in the work,such copyright remaining exclusively with the owner. Parting withcopyright entails parting with the right to do any of the actsmentioned in section 14 of the Copyright Act. The transfer of thematerial substance does not, of itself, serve to transfer theDcopyright therein. The transfer of the ownership of the physicalsubstance, in which copyright subsists, gives the purchaser theright to do with it whatever he pleases, except the right toreproduce the same and issue it to the public, unless such copiesare already in circulation, and the other acts mentioned in section14 of the Copyright Act. A licence from a copyright owner,Econferring no proprietary interest on the licensee, does not entailparting with any copyright, and is different from a licence issuedunder section 30 of the Copyright Act, which is a licence whichgrants the licensee an interest in the rights mentioned in section14(a) and 14(b) of the Copyright Act. Where the core of aFtransaction is to authorize the end-user to have access to andmake use of the “licensed” computer software product over whichthe licensee has no exclusive rights, no copyright is parted withand consequently, no infringement takes place, as is recognizedby section 52(1)(aa) of the Copyright Act. It makes no difference whether the end-user is enabled to use computer software thatGis customised to its specifications or otherwise. A non-exclusive,non-transferable licence, merely enabling the use of a copyrightedproduct, is in the nature of restrictive conditions which areancillary to such use, and cannot be construed as a licence to H

ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v.THE COMMISSIONER OF INCOME TAX

enjoy all or any of the enumerated rights mentioned in section 14of the Copyright Act, or create any interest in any such rights soas to attract section 30 of the Copyright Act. The right toreproduce and the right to use computer software are distinctand separate rights. The former amounting to parting withcopyright and the latter, in the context of non-exclusive EULAs,not being so. [Para 117][452-C-H; 453-A-D]

State Bank of India v. Collector of Customs, (2000) 1SCC 727 : [2000] 1 SCR 1 – relied on 15.1 Section 14(b)(ii) of the Copyright Act was amendedtwice, first in 1994 and then again in 1999, with effect from15.01.2000. After the 1999 Amendment, what is conspicuous byits absence is the phrase “regardless of whether such copy hasbeen sold or given on hire on earlier occasions”. This is astatutory recognition of the doctrine of first sale/principle ofexhaustion. [Para 120][454-A-C]

Copinger and Skone James on Compyright (14[th]Edition) (1999); Warner Bros. Entertainment Inc. v.Santosh V.G., CS (OS) No. 1682/2006 [“Warner Bros.”]2009 SCC OnLine Del 835; John Wiley & Sons Inc. v.Prabhat Chander Kumar Jain, IA No. 11331/2008 inCS(OS) No. 1960/2008 2010 SCC OnLine Del 2000;UseSoft GmbH v. Oracle International Corp. (Case C-128/11) – referred to.

15.2 The doctrine of first sale/principle of exhaustion isdependent, in the first place, upon legislation which eitherrecognises or refuses to recognise the doctrine (therebycontinuing to vest distribution rights in the copyright owner, evenbeyond the first sale of the copyrighted work). Thus, for example,prior to the amendment of section 14(d)(ii) in 2012, dealing witha cinematograph film, the distribution right to sell or give on hireor offer for sale or hire, any copy of the film, would continue tovest in the copyright owner, “regardless of whether such copyha[d] been sold or given on hire on earlier occasion”, whichmanifested the legislative intent against the application of thedoctrine of first sale/principle of exhaustion. Post 2012, however, A

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Athe balance between the copyright owner’s distribution right andthe right of the purchaser to further resale, was tilted in favour ofthe latter, the words “regardless of whether such copy has beensold or given on hire on earlier occasion” being deleted by theamendment. Likewise, when it comes to section 14(a)(ii) of theCopyright Act, the distribution right subsists with the owner ofBcopyright to issue copies of the work to the public, to the extentsuch copies are not copies already in circulation, therebymanifesting a legislative intent to apply the doctrine of first sale/principle of exhaustion. Like section 14(d)(ii) of the CopyrightAct, section 14(b)(ii), has, after the 1999 Amendment, with effectCfrom 15.01.2000, also deleted the words “regardless of whethersuch copy has been sold or given on hire on earlier occasions’’,thereby making it clear that the same tilt that had been made insection 14(d)(ii) of the Copyright Act vide the amendment in 2012in favour of the purchaser, is also to be found post the 1999Amendment, in section 14(b)(ii) of the Copyright Act. [Paras 140,D141][470-E-H; 471-A-C]

15.3 The language of section 14(b)(ii) of the Copyright Actmakes it clear that it is the exclusive right of the owner to sell orto give on commercial rental or offer for sale or for commercialrental “any copy of the computer programme”. Thus, a distributorEwho purchases computer software in material form and resells itto an end-user cannot be said to be within the scope of theaforesaid provision. The sale or commercial rental spoken of insection 14(b)(ii) of the Copyright Act is of “any copy of a computerprogramme”, making it clear that the section would only apply toFthe making of copies of the computer programme and then sellingthem, i.e., reproduction of the same for sale or commercial rental.[Para 142][471-C-E, H]

15.4 The object of section 14(b)(ii) of the Copyright Act, inthe context of a computer program, is to interdict reproductionGof the said computer programme and consequent transfer of thereproduced computer programme to subsequent acquirers/end-users. By way of contrast, once a book is sold, on further resaleof the same book, the purchaser loses the material bookaltogether, as such purchaser has, for consideration, parted with H

the book once and for all. This may not be so in the case of acomputer programme. Once it is understood that the object ofsection 14(b)(ii) of the Copyright Act is not to interdict the saleof computer software that is “licensed” to be sold by a distributor,but that it is to prevent copies of computer software once soldbeing reproduced and then transferred by way of sale orotherwise, it becomes clear that any sale by the author of acomputer software to a distributor for onward sale to an end-user, cannot possibly be hit by the said provision. Further, thedistributor cannot use the computer software at all and has topass on the said software, as shrink-wrapped by the owner, tothe end-user for a consideration, the distributor’s profit marginbeing that of an intermediary who merely resells the same productto the end-user. Distribution of copyrighted computer software,on the facts of the present appeals would not constitute the grantof an interest in copyright under section 14(b)(ii) of the CopyrightAct necessitating the deduction of tax at source under section195 of the Income Tax Act. [Paras 143, 144][471-G-H; 472-A-D]

16.1 The DTAAs that have been entered into by India withother Contracting States have to be interpreted liberally with aview to implement the true intention of the parties. When thedefinition of “royalties” is seen in all the DTAAs in these appeal,it is found that “royalties” is defined in a manner either identicalwith or similar to the definition contained in Article 12 of theOECD Model Tax Convention. This being the case, the OECDCommentary on the provisions of the OECD Model TaxConvention then becomes relevant. [Paras 145, 150][472-E;476-C-D]

Union of India v. Azadi Bachao Andolan, (2004) 10SCC 1 : [2003] 4 Suppl. SCR 222; Formula One WorldChampionship Ltd. v. CIT, (2017) 15 SCC 602 : [2017]2 SCR 152; CIT v. E-Funds IT Solution Inc., (2018) 13SCC 294 : [2017] 10 SCR 157 – referred to Thiel v. Federal Commissioner of Taxation, High Courtof Australia, [1990] 94 ALR 647; Ram Jethmalani v.Union of India, (2011) 8 SCC 1 : [2011] 8 SCR 725;Director of Income Tax v. New Skies Satellite BV, (2016)

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338SUPREME COURT REPORTS

A382 ITR 114; Ostime (Inspector of Taxes) v. AustralianMutual Provident Society [1959] AC 259 – referred to 16.2 After India took such positions qua the OECDCommentary, no bilateral amendment was made by India and theother Contracting States to change the definition of royaltiesBcontained in any of the DTAAs in these appeals, in accordancewith its position. As a matter of fact, DTAAs that were amendedsubsequently, such as the Convention between the Republic ofIndia and the Kingdom of Morocco for the Avoidance of DoubleTaxation and the Prevention of Fiscal Evasion with respect toTaxes On Income, [“India-Morocco DTAA”], which was amendedCon 22.10.2019, incorporated a definition of royalties, not verydifferent from the definition contained in the OECD Model TaxConvention. [Para 156][485-G-H; 486-A-B]

16.3 Similarly, though the India-Singapore DTAA came intoforce on 08.08.1994, it has been amended several times, includingDon 01.09.2011, and 23.03.2017. However, the definition of“royalties” has been retained without any changes. Likewise,the Convention between the Government of the Republic of Indiaand the Government of Mauritius for the Avoidance of DoubleTaxation and the Prevention of Fiscal Evasion with respect toETaxes on Income and Capital Gains and for the Encouragementof Mutual Trade and Investment, [“India-Mauritius DTAA”] wasentered into on 06.12.1983, and was amended subsequently on10.08.2016, without making any change to the definition of“royalties”. It is thus clear that the OECD Commentary on Article12 of the OECD Model Tax Convention, incorporated in DTAAsFin these cases will continue to have persuasive value as to theinterpretation of the term “royalties” contained therein. [Paras157, 158][486-D-G]

Commissioner of Customs v. G.M. Exports, (2016) 1 SCC91 : [2015] 14 SCR 848 – referred to G

17. Given the definition of royalties contained in Article 12of the DTAAs there is no obligation on the persons mentioned insection 195 of the Income Tax Act to deduct tax at source, as thedistribution agreements/EULAs in the facts of these cases do H

ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v.THE COMMISSIONER OF INCOME TAX

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 applicationin the facts of these cases. the amounts paid by resident Indianend-users/distributors to non-resident computer softwaremanufacturers/suppliers, as consideration for the resale/use ofthe computer software through EULAs/distribution agreements,is not the payment of royalty for the use of copyright in thecomputer software, and that the same does not give rise to anyincome taxable in India, as a result of which the persons referredto in section 195 of the Income Tax Act were not liable to deductany TDS under section 195 of the Income Tax Act. [Paras 168and 169][491-G-H; 492-A-D]

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Transmission Corpn. of A.P. Ltd. v. CIT, (1999) 7 SCC266:[1999] 1 Suppl. SCR 504; Tata ConsultancyServices v. State of A.P., 2005 (1) SCC 308 : [2004] 5Suppl. SCR 1040 – referred to D

Case Law Reference

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BCIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 8733-8734 of 2018

From the Judgment and Order dated 15.10.2011 of the High Courtof Karnataka in Income Tax Appeal Nos. 1258 and 1270 of 2006.

WithC

Civil Appeal Nos. 8735-8736 of 2018, 8737-8941 of 2018, 8942-8947 of 2018, 8950-8953 of 2018, 8948-8949 of 2018, 4419 of 2012,4420 of 2012, 10114 of 2013, 10097 of 2013, 10112-10113 of 2013, 10106of 2013, 8954-8955 of 2018, 10115-10117 of 2013, 8956 of 2018, 8957 of2018, 8990 of 2018, 10103 of 2013, 10104 of 2013, 8960 of 2018, 8966 ofD2018, 8958 of 2018, 8959 of 2018, 8962 of 2018, 8961 of 2018, 8963 of2018, 8964 of 2018, 8965 of 2018, 8969 of 2018, 8967 of 2018, 8968 of2018, 8972 of 2018, 8971 of 2018, 8970 of 2018, 4629 of 2014, 8973 of2018, 4631 of 2014, 4630 of 2014, 8974-8975 of 2018, 6386-6387 of2016, 10105 of 2013, 7852 of 2012, 1416-1418 of 2013, 1403 of 2013,E1405 of 2013, 1410 of 2013, 1421 of 2013, 1409 of 2013, 1415 of 2013,1414 of 2013, 1412 of 2013, 1413 of 2013, 1419 of 2013, 1411 of 2013,1420 of 2013, 1404 of 2013, 1406 of 2013, 1408 of 2013, 1407 of 2013,2304 of 2013, 2305 of 2013, 2306 of 2013, 10098-10102 of 2013, 2307-2308 of 2013, 4666-4667 of 2013, 6764 of 2013, 4634 of 2014, 8976 of2018, 8977-8988 of 2018, 781 of 2021, 782 of 2021, 783 of 2021, 10673Fof 2016, 784 of 2021, 10674 of 2016, 785 of 2021, 3402 of 2017, 10758 of2017, 9486 of 2017, 8711 of 2018, 8722 of 2018, 8724 of 2018, 8725 of2018, 9551 of 2018, 786 of 2021, 2006 of 2019, and 790 of 2021.

Tushar Mehta, SG, Balbir Singh, ASG, Arvind Datar, S. Ganesh,Percy Pardiwala, K. Radhakrishnan, Ajay Vohra, Preetesh Kapur, A.GShankar, Sr. Advs., Mukesh Butani, Shreyash Shah, Shankey Agarwal,Tarun Jain, H. Raghavendra Rao, Rupesh Kumar, Rajat Nair, ZohebHussain, D.L. Chidananda, Mrs. Anil Katiyar, Ms. Anuradha Dutt, SachitJolly, Tushar Jarwal, Rohit Garg, Ms. Disha Jham, Vasudevan G., Ms.B. Vijayalakshmi Menon, Ms. Kavita Jha, Anant Mann, Udit Naresh, T.HSuryanarayan, Ms. Tanmayee Rajkumar, Ms. Yugandhara Pawar Jha, Ms. Manasa Ananthan, Kunal Verma, Senthil Jagadeesan, Ms. MrinalKanwar, Ms. Sonakshi Malhan, Ms. Suriti Chowdhary, S. Annamalai,Salil Kapoor, Ms. Ananya Kapoor, Sumit Lalchandani, Sanat Kapoor,Ms. Soumya Singh, Kamal Mohan Gupta, V. Balachandran, K.R.Vasudevan, Siddharth Naidu, Kishore Kunal, Manish Rastogi, Ms.Tanushree Jain, Parth Jaiprakash, Jagjit Singh Chhabra, Ms. VanitaBhargava, Ajay Bhargava, Ms. Trishala Trivedi, Ms. Maithili Moondrafor M/s. Khaitan & Co., G. Sridhar, Ms. Gayatri Gulati, Siddharth Vasudev,Rahul Unnikrishnan, Sandeep Bagmar, T. V. S. Raghavendra Sreyas,Ambhoj Kumar Sinha, Vishal Kalra, S.S. Tomar, Anil Kumar Gautam,Debmalya Banerjee, Kartik Bhatnagar, Ms. Astha Prasad, Rohan Sharma,Ujjwal Singh, Vardaan Wanchoo for M/s. Karanjawala & Co., RonyOommen John, Piyush Swami, Arshdeep Singh, G.C. Srivastava, SuvinayKumar Dash, Piyush Sachdev, Ms. Runamoni Bhuyan, Advs. for theappearing parties.

The Judgment of the Court was delivered by R.F. NARIMAN, J.

1. Leave granted.

2. The appeals in these cases are by both the assessees as wellas the Department of Revenue, Ministry of Finance [“Revenue”].Whereas the assessees have succeeded in the question that was posedbefore the High Court of Delhi,[1] the Revenue has succeeded insofar asthe same question was posed before the High Court of Karnataka,[2] andin the ruling by the Authority for Advance Rulings [“AAR”], impugnedin 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.ANo. 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.ANo.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.ANo. 8963/2018, C.A No. 8964/2018, C.A No. 8965/2018, C.A No. 8969/2018, C.ANo.8967/2018, C.A No. 8968/2018, C.A No. 8972/2018, C.A No. 8971/2018, C.A

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A3. One group of appeals arises from a common judgment of theHigh Court of Karnataka dated 15.10.2011 reported as CIT v. SamsungElectronics Co. Ltd., (2012) 345 ITR 494, by which the questionwhich was posed before the High Court, was answered stating that theamounts paid by the concerned persons resident in India to non- resident,foreign software suppliers, amounted to royalty and as this was so, theBsame constituted taxable income deemed to accrue in India under section9(1)(vi) of the Income Tax Act, 1961 [“Income Tax Act”], therebymaking it incumbent upon all such persons to deduct tax at source andpay such tax deductible at source [“TDS”] under section 195 of theIncome Tax Act. This judgment dated 15.10.2011 has been relied uponCby the subsequent impugned judgments passed by the High Court ofKarnataka to decide the same question in favour of the Revenue.

4. The appeals before us may be grouped into four categories:

4. The appeals before us may be grouped into four categories:

i)The first category deals with cases in which computersoftware is purchased directly by an end-user, resident inDIndia, from a foreign, non-resident supplier or manufacturer.[3]

ii)The second category of cases deals with resident Indiancompanies that act as distributors or resellers, by purchasingcomputer software from foreign, non-resident suppliers ormanufacturers and then reselling the same to resident IndianEend-users.[4]

No.8970/2018, C.A No. 4629/2014, C.A No. 8973/2018, C.A No. 4631/2014, C.ANo.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/F2013, 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.

3 This category includes C.A. Nos. 8733-8734/2018, C.A. No. 10114/2013, C.A. Nos.G10112-10113/2013, 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,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.AHNo. 4420/2012, C.A No. 8959/2018, C.A No. 8963/2018, C.A No. 8962/2018, C.A

iii)The third category concerns cases wherein the distributorhappens to be a foreign, non-resident vendor, who, afterpurchasing software from a foreign, non-resident seller, resellsthe same to resident Indian distributors or end-users.[5]

A

iv)The fourth category includes cases wherein computersoftware is affixed onto hardware and is sold as an integratedBunit/equipment by foreign, non-resident suppliers to residentIndian 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 oflaw that arise from the various appeals before us. In this case, the appellant,Engineering Analysis Centre of Excellence Pvt. Ltd. [“EAC”], is aresident Indian end-user of shrink-wrapped computer software, directlyimported from the United States of America [“USA”]. The assessmentyears that we are concerned with are 2001-2002 and 2002-2003.

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6. The Assessing Officer by an order dated 15.05.2002, afterapplying 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 thetransaction between the parties was copyright which attracted thepayment of royalty and thus, it was required that tax be deducted atsource by the Indian importer and end-user, EAC. Since this was notdone for both the assessment years, EAC was held liable to pay the DE

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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.ANo. 8969/2018, C.A No. 8971/2018, C.A No. 8970/2018, C.A No. 8964/2018, C.ANo.8967/2018, C.A No. 8968/2018, C.A No. 1403/2013, C.A No. 1414/2013, C.ANo.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.ANo. 1419/2013, C.A No. 1411/2013, C.A No. 1420/2013, C.A No. 1404/2013, C.ANo.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.

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.

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Aamount of Rs. 1,03,54,784 that it had not deducted as TDS, along withinterest 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 beforethe Income Tax Appellate Tribunal [“ITAT”] succeeded vide an orderdated 25.11.2005, in which the ITAT followed its previous order datedB18.02.2005, passed in Samsung Electronics Co. Ltd. v. Income TaxOfficer, ITA Nos. 264-266/Bang/2002.

7. An appeal was made from the order of the ITAT to the HighCourt of Karnataka by the Revenue. The Division Bench of the HighCourt of Karnataka heard a batch of appeals and framed nine questions,Cof which question nos. 8 and 9 are important and are set out as follows:

“8. Whether the Tribunal was correct in holding that since theassessee had purchased only a right to use the copyright i.e. thesoftware and not the entire copyright itself, the payment cannotbe treated as Royalty as per the Double Taxation AvoidanceDAgreement and Treaties, which [are] beneficial to the assesseeand consequently section 9 of the Act should not take intoconsideration.

9. Whether the Tribunal was correct in holding that the paymentpartakes the character of purchase and sale of goods and thereforeEcannot be treated as royalty payment liable to Income Tax.”

8. In answering these questions, through a judgment dated24.09.2009, the Division Bench of the High Court of Karnataka reliedheavily upon the judgment of this Court in Transmission Corpn. ofA.P. Ltd. v. CIT, (1999) 7 SCC 266 [“AP Transco”] and held thatFsince no application under section 195(2) of the Income Tax Act hadbeen made, the resident Indian importers became liable to deduct tax atsource, 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 GEIndia Technology Centre (P) Ltd. v. CIT, (2010) 10 SCC 29 [“GEGTechnology”], which ultimately found that the judgment of the HighCourt 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 ofHproportionality”. The said sub-section gets attracted only in cases where the payment made is a composite payment in which acertain proportion of payment has an element of “income”chargeable to tax in India. It is in this context that the SupremeCourt 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 sumis to be deducted and it is the statutory obligation of the personresponsible for paying such ‘sum’ to deduct tax thereon beforemaking payment. He has to discharge the obligation [to TDS].”

If one reads the observation of the Supreme Court, the words“such sum” clearly indicate that the observation refers to a caseof composite payment where the payer has a doubt regarding theinclusion of an amount in such payment which is exigible to tax inIndia. In our view, the above observations of this Court inTransmission Corpn. case [(1999) 7 SCC 266 : (1999) 239 ITR587] which is put in italics has been completely, with respect,misunderstood by the Karnataka High Court to mean that it is notopen for the payer to contend that if the amount paid by him to thenon-resident is not at all “chargeable to tax in India”, then no TASis required to be deducted from such payment. This interpretationof the High Court completely loses sight of the plain words ofSection 195(1) which in clear terms lays down that tax at sourceis deductible only from “sums chargeable” under the provisionsof the IT Act i.e. chargeable under Sections 4, 5 and 9 of the ITAct.

25. Before concluding we may clarify that in the present case onfacts ITO(TDS) had taken the view that since the sale of thesoftware concerned, included a licence to use the same, thepayment 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) ofthe Act. The said finding of ITO(TDS) was upheld by CIT(A).However, in the second appeal, ITAT held that such sum paid bythe appellant(s) to the foreign software suppliers was not a “royalty”and that the same did not give rise to any “income” taxable inIndia and, therefore, the appellant(s) was not liable to deduct TAS.However, the High Court did not go into the merits of the case A

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Aand it went straight to conclude that the moment there is remittancean obligation to deduct TAS arises, which view stands herebyoverruled.

26. Since the High Court did not go into the merits of the case onthe question of payment of royalty, we hereby set aside theBimpugned judgment of the High Court and remit these cases tothe High Court for de novo consideration of the cases on merits.The question which the High Court will answer is: whether onfacts and circumstances of the case ITAT was justified in holdingthat the amount(s) paid by the appellant(s) to the foreign softwaresuppliers was not “royalty” and that the same did not give rise toCany “income” taxable in India and, therefore, the appellant(s) wasnot liable to deduct any tax at source?”

10. The impugned judgment of the High Court of Karnataka, dated15.10.2011, reported as CIT v. Samsung Electronics Co. Ltd., (2012)345 ITR 494, dealt with a whole group of appeals, and was thus facedDwith 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)Epaid 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 todeduct any tax at source?””

(page 498)

F11. After setting out the facts in one of the appeals treated as thelead matter, namely ITA No. 2808/2005 concerning Samsung ElectronicsCo. Ltd., and the relevant provisions of the Income Tax Act, India’sDTAAs with USA, France and Sweden respectively, the High Court ofKarnataka, on an examination of the End-User Licence Agreement[“EULA”] involved in the transaction, found that what was sold by wayGof computer software included a right or interest in copyright, whichthus gave rise to the payment of royalty and would be an income deemedto accrue in India under section 9(1)(vi) of the Income Tax Act, requiringthe deduction of tax at source.

12. Leading the charge on behalf of the appellants in the appealsHagainst this impugned judgment of the High Court of Karnataka, Shri Arvind Datar, learned Senior Advocate, appearing on behalf of IBMIndia Ltd. [“IBM India”] in C.A. No. 4419/2012, which is a residentIndian distributor of computer software products purchased from IBMSingapore Pte Ltd. [“IBM Singapore”], submitted that his client is anon- exclusive distributor, which purchases off-the-shelf copies of shrink-wrapped computer software from a foreign company in Singapore foronward sale to Indian end-users under a Remarketer Agreement. Hestressed that IBM India, the distributor, is not party to the EULA betweenIBM Singapore and the ultimate end-users/customers in India. The Indianend-user pays IBM India, and in turn, IBM India pays this amount toIBM Singapore after deducting a portion of profit. Importantly, underthe Remarketer Agreement, IBM India does not own any right, title orinterest in copyright and other intellectual property owned by IBMSingapore, and merely markets IBM Singapore’s software products inIndia.

13. Shri Datar further argued that the computer software that isimported for onward sale from Singapore constitutes “goods” and thuswas directly covered by this Court’s judgment in Tata ConsultancyServices v. State of A.P., 2005 (1) SCC 308. He assailed the impugnedjudgment of the High Court of Karnataka by referring to Article 12 ofthe Agreement between the Government of the Republic of India andthe Government of the Republic of Singapore for the Avoidance of DoubleTaxation and the Prevention of Fiscal Evasion with respect to Taxes onIncome,[7] [“India-Singapore DTAA”], and the definition of “royalties”contained therein. He argued that the definition of “royalties” did notextend to derivative products of the copyright, for example, a book or a music CD or software products. He relied upon the judgment in Unionof India v. Azadi Bachao Andolan, (2004) 10 SCC 1 [“Azadi BachaoAndolan”] to argue that by virtue of section 90(2) of the Income TaxAct, the DTAA would prevail over domestic law to the extent it is morebeneficial to the deductor of tax under section 195 of the Income TaxAct. According to him, even assuming that under section 9(1)(vi) of theIncome Tax Act IBM India’s transaction would entail parting withcopyright and attract royalty, upon applying the more beneficial provisionsof the India-Singapore DTAA, it would be made clear that the amounts 7 Notification No. GSR 610(E), Dated 8-8-1994 As Amended by Notification No. SO1022(E), Dated 18-7-2005; No. S.O. 2031(E), Dated 1-9-2011 and No. S.O. 935(E),Dated 23-3-2017.

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Apayable were not in the nature of royalty, and no income in the hands ofthe foreign supplier would be deemed to accrue in India. Thus, no taxhad to be deducted by the Indian importer under section 195(1) of theIncome Tax Act. Equally, he submitted that the retrospective amendmentto section 9(1)(vi) of the Income Tax Act brought in by the Finance Act2012, which added explanation 4 to the provision and expanded itsBambit with effect from 01.06.1976, could also not be applied to the DTAAin question.

14. Pointing to the provisions of the Copyright Act, 1957[“Copyright Act”], Shri Datar argued that there was a differencebetween a copyright in an original work and a copyrighted article, andCthat this was recognised in section 14(b) of the Copyright Act, whichrefers to a “computer program” per se and a “copy of a computerprogram” as two distinct subject matters. He emphasized that under theRemarketer Agreement, no copyright was given by IBM Singapore andthat even the end-user in India only received a limited licence to use theDproduct by itself, with no right to sub-license, lease, make copies etc.The licence to use such shrink-wrapped computer software was thusincidental to and essential to effectuate the use of the product. He stronglyrelied upon the Commentaries on the Articles of the Model TaxConvention on Income and on Capital [“OECD Commentary”] by theOrganisation for Economic Co-operation and Development [“OECD”]Ewhich distinguishes between the sale of a copyrighted article and thesale of copyright itself. He further argued that the doctrine of first sale/principle of exhaustion was cemented in section 14(b)(ii) of the CopyrightAct post the amendment brought in vide Act 49 of 1999, with effectfrom 15.01.2000 [“1999 Amendment”], thereby making it clear thatFthe foreign supplier’s distribution right would not extend to the sale ofcopies of the work to other persons beyond the first sale. Importantly, headded that the importer, IBM India, being only a distributor, had no rightto use the computer software, and merely purchased a sealed, shrink-wrapped product and resold it in the same, sealed condition, and therebydid not pay any consideration for any transfer of or interest in copyright.GHe cited a number of judgments and other authorities to buttress hissubmissions.

15. Shri Percy Pardiwala, learned Senior Advocate appearing onbehalf of Rational Software Corporation India Ltd. in C.A. No. 8962/2018, supplemented Shri Datar’s submissions, and adverted to theHprovisions of the India-Singapore DTAA, Income Tax Act and the relevant EULA and Remarketer Agreement. Coming to the Finance Act 2012which added explanation 4 to section 9(1)(vi) of the Income Tax Act,he argued that the words “any right, property or information used orservices utilised” which occur in section 9(1)(vi)(b), make it clear thatexplanation 4, read both textually and contextually would only apply tosection 9(1)(vi)(b), and not expand the scope of the definition of royaltycontained in explanation 2 to section 9(1)(vi). Further, he referred toCircular No. 10/2002 dated 09.10.2002 by the Central Board of DirectTaxes [“CBDT”] in which “remittance for royalties” and “remittancefor supply of articles or…computer software” were addressed asseparate and distinct payments, the former attracting the “royalty”provision under Article 12 of the DTAA, and the latter being taxable asbusiness profits under Article 7 of the DTAA, provided that the foreign,non-resident supplier or manufacturer had a permanent establishment[“PE”] in India.

16. Shri S. Ganesh, learned Senior Advocate appearing on behalfof Sonata Information Technology Ltd. in C.A. Nos. 8737-8941/2018,submitted that to comprehend the nature of a licence, one would have torefer to section 52 of the Indian Easements Act 1882. He stressed thefact that the ruling by the AAR in the case of Dassault Systems, K.K.,In Re., (2010) 322 ITR 125 (AAR), as followed in GeoquestSystems B.V. Gevers Deynootweg, In Re., (2010) 327 ITR 1(AAR), was not appealed against by the Revenue, and the exhaustivestatement of law contained therein is something that he relied upon.According to him, if the position of the Revenue were correct, arbitraryresults would ensue, inasmuch as his client, receiving a 2% commission,would, however, after the disallowance of the deduction under section40(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 amanner so as to avoid such a result, this must be done. Further, he reliedheavily upon the OECD Commentary and went on to argue that merenomenclature, such as the use of the term “licence”, was not conclusiveas to the character of the transaction. He also relied upon section52(1)(aa) of the Copyright Act to argue that what is mentioned in theprovision is exactly what the transactions in these appeals are concernedwith, and therefore, the making of copies only in order to utilise theproduct to the extent permitted by the EULA, would not constitute aninfringement of copyright, as expressly stated in this provision. Going by AB

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Awhat the originator or creator holds by way of copyright, which he eitherpasses on or retains, and what is mentioned in section 52(1)(aa) of theCopyright Act, he submitted that what was resold by his client in thiscase was not copyright, but merely a copyrighted article, which constitutedgoods in the hands of the end- user, without any right to transfer thesame. He also cited several judgments to buttress his submissions.B

17. Shri Ajay Vohra, learned Senior Advocate appearing on behalfof Sasken Communications Tech Ltd. in C.A. Nos. 10114/2013 and 8957/2018, relied upon the Convention between the Government of the UnitedStates of America and the Government of the Republic of India for theAvoidance of Double Taxation and the Prevention of Fiscal EvasionCwith respect to Taxes on Income,[8] [“India-USA DTAA”] and echoedthe submissions of his predecessors. In addition, he argued that theretrospective amendment to section 9(1)(vi) of the Income Tax Act addingexplanation 4, could not be applied as the assessment years that weare concerned with in all these cases are prior to 2012, and that the lawDcannot compel one to do the impossible, namely, to deduct tax at sourceon an expanded definition of royalty which did not exist at the time of thepayment/deduction to be made under section 195 of the Income TaxAct. He cited various judgments and relied upon the proposition thatwhere no assessment to tax can be made on a foreign, non-residentsupplier, the appellants could not be held to be assessees in default forEnot deducting tax at source under section 195 of the Income Tax Act.

18. Shri Preetesh Kapur, learned Senior Advocate appearing onbehalf 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 fromF15.01.2000, and cited the doctrine of first sale/principle of exhaustion,arguing that the amendment, after deleting the words “regardless ofwhether such copy has been sold or given on hire on earlier occasions”,was a statutory application of the doctrine of first sale/principle ofexhaustion. This, he argued, made it clear that since no distribution rightGby the original owner extended beyond the first sale of the copyrightedgoods, it can be said that only the goods, and not the copyright in thegoods, had passed onto the importer.

19. Shri Sachit Jolly, learned advocate appearing on behalf ofEngineering Analysis Centre of Excellence Pvt. Ltd. in C.A. Nos. 8733- H8 Notification No. GSR 992(E), dated 20-12-1990.

8734/2018, and GE India Technology Centre Pvt. Ltd. in C.A. Nos.8735- 8736/2018, also echoed these submissions and in particular, reliedupon judgments which made it clear that a retrospective amendment toa statute cannot be applied to an assessment year in which, as a matterof fact, the expanded definition of royalty did not exist.

20. Shri Kunal Verma, learned advocate appearing on behalf ofInfineon Technologies India Pvt. Ltd. in C.A. No. 2006/2019, arguedthat in any case, in the facts of his case, the payments made by theassessee 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 SolicitorGeneral appearing on behalf of the Revenue, took us through theprovisions of the Income Tax Act, the Copyright Act, the India-USADTAA and some of the EULAs between the parties. He argued thatexplanation 2(v) to section 9(1)(vi) of the Income Tax Act applied topayments to a non-resident by way of royalty for the use of or the rightto use any copyright. For this, he relied upon the language of explanation2(v) and stressed that the words “in respect of” have to be given a widemeaning. He then relied upon CBDT Circular No. 152 dated 27.11.1974,[9]together with the statement of the Finance Minister made before theLok Sabha on 07.09.1990,[10] and CBDT Notification No. 21/2012 dated13.06.2012,[11] to submit that explanation 4 to section 9(1)(vi) of theIncome Tax Act is clarificatory of the position in law right from 01.06.1976when 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 existapart from provisions for assessment under the Income Tax Act. Thisbeing so, it is clear that the India-USA DTAA and other such DTAAswould not apply to the persons spoken of in section 195 of the IncomeTax Act who are not assessees, since the provisions of the DTAAs,when read with section 90 of the Income Tax Act, applied only to personswho could be described as assessees. He also relied upon Article 30 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), dated13.06.2012.

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Athe India-USA DTAA which, for the USA, fixes different dates for theentry into force of the provisions concerning withholding taxes and othertaxes, unlike the entry into force provision for India, which makes nosuch distinction. This, he argued, would make it clear that persons whohave to make deductions under section 195 of the Income Tax Act donot fall within the subject matter of the India-USA DTAA and otherBsuch DTAAs. He then relied heavily upon AP Transco (supra) andother judgments which make it clear that a “payer” under section 195and 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 PILCOMv. CIT, West Bengal- VII, 2020 SCC Online SC 426 [“PILCOM”],Cwhich dealt with section 194E of the Income Tax Act, for the propositionthat tax has to be deducted at source irrespective of whether tax isotherwise payable by the non-resident assessee. He then relied uponCBDT Circular No. 588 dated 02.01.1991,[12] which clarified that taxconcessions were not available in relation to payments in respect ofsoftware imported separately or independently of computer hardware.D22. Coming to the Copyright Act, the learned Additional SolicitorGeneral relied upon sections 2(a)(v), 19(3), 30A, 52(1)(ad), 58 and 65Aof the Copyright Act to buttress the submission that in some of the casesbefore us, since adaptation of software could be made, albeit forinstallation and use on a particular computer, copyright is parted with byEthe original owner. He added that section 51(b) of the Copyright Actmakes it clear that when any person makes for sale or hire, or sells orlets for hire, or distributes, either for the purpose of trade or to such anextent as to affect prejudicially the owner of the copyright, or importsinto India, any infringing copies of the work, such importation into IndiaFwithout a licence would amount to infringement of copyright. Further,section 58 of the Copyright Act regards infringing copies of any work asthe property of the owner of the copyright, who accordingly may takeproceedings for the recovery of possession thereof or in respect of theconversion thereof. From section 52(1)(ad) of the Copyright Act, thelearned Additional Solicitor General sought to argue that only the makingGof copies or the adaptation of a computer programme from a legallyobtained copy for non-commercial, personal use would not amount toinfringement, and therefore in the appeals before us, where such copieswere made for commercial use, the converse would be true. He reliedstrongly upon the AAR’s ruling in Citrix Systems Asia Pacific Ptyl.H12 187 ITR (St.) 0063.

Ltd., In Re., (2012) 343 ITR 1 (AAR), arguing that it approached thesubject correctly and that the findings made therein are different andpreferable to the findings made by the AAR in Dassault Systems,K.K., In Re., (2010) 322 ITR 125 (AAR) and Geoquest SystemsB.V. Gevers Deynootweg, In Re., (2010) 327 ITR 1 (AAR), andthe other judgments of the High Court of Delhi.

23. The learned Additional Solicitor General further pointed outthat the Indian Government had expressed its reservations on the OECDCommentary, especially on the parts of the OECD Commentary dealingwith the parting of copyright and royalty. He also relied upon on theReport of the High Powered Committee on ‘Electronic Commerce andTaxation’ constituted by the CBDT,[13] [“HPC Report 2003”] and theReport of the Committee on the Taxation of E-Commerce [“E-Commerce Report 2016”], which proposed an equalization levy onspecified transactions. He then went on to rely on certain judgments tostate that even if the OECD Commentary could be relied upon, it beinga rule of international law contrary to domestic law, to the extent it wascontrary to explanations 2 and 4 of section 9(1)(vi) of the Income TaxAct, it must give way to domestic law. Referring to the doctrine of firstsale/principle of exhaustion, he cited a number of judgments in order toshow that under section 14(b)(ii) of the Copyright Act, this doctrine cannotbe said to apply insofar as distributors are concerned. He finally concludedhis arguments by stating that the judgments which deal with computersoftware under sales tax law and excise law have no relevance to incometax law, as the laws relating to indirect taxes are fundamentally differentfrom the laws relating to direct taxes, since they must follow the drill ofthe chargeability under the Income Tax Act, which is different fromchargeability under sales tax law or excise law.

THE INCOME TAX ACT, 1961

24. Having heard the learned counsels appearing on behalf ofvarious parties, we first set out the relevant provisions of the IncomeTax 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 othersum of money is payable under this Act, and includes—

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(a) every person in respect of whom any proceeding underthis Act has been taken for the assessment of his income orassessment of fringe benefits or of the income of any otherperson in respect of which he is assessable, or of the losssustained by him or by such other person, or of the amount ofrefund due to him or to such other person; A

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(b) every person who is deemed to be an assessee under anyprovision of this Act;

(c) every person who is deemed to be an assessee in defaultunder any provision of this Act; Cxxx xxx xxx 14(37A) “rate or rates in force” or “rates in force”, in relation toan assessment year or financial year, means—

xxx xxx xxx

(iii) for the purposes of deduction of tax under section 194LBADor section 194LBB or section 194LBC or section 195, the rateor rates of income-tax specified in this behalf in the FinanceAct of the relevant year or the rate or rates of income-taxspecified in an agreement entered into by the CentralGovernment under section 90, or an agreement notified by theCentral Government under section 90A, whichever isEapplicable by virtue of the provisions of section 90, or section90A, as the case may be;”

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“4. Charge of income-tax.

(1) Where any Central Act enacts that income-tax shall be chargedfor any assessment year at any rate or rates, income-tax at thatFrate or those rates shall be charged for that year in accordancewith, and subject to the provisions (including provisions for thelevy of additional income-tax) of, this Act in respect of the totalincome 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 otherthan the previous year, income-tax shall be charged accordingly.

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(2) In respect of income chargeable under sub-section (1), income-tax shall be deducted at the source or paid in advance, where it isso 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).

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“5. Scope of total income.

(1) Subject to the provisions of this Act, the total income of anyprevious year of a person who is a resident includes all incomefrom whatever source derived which—

(a) is received or is deemed to be received in India in suchyear by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him inIndia 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 inIndia within the meaning of sub-section (6) of section 6, the incomewhich accrues or arises to him outside India shall not be so includedunless it is derived from a business controlled in or a professionset up in India.

(2) Subject to the provisions of this Act, the total income of anyprevious year of a person who is a non-resident includes all incomefrom whatever source derived which—

(a) is received or is deemed to be received in India in suchyear by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him inIndia during such year.

Explanation 1.—Income accruing or arising outside India shallnot be deemed to be received in India within the meaning of thissection by reason only of the fact that it is taken into account in abalance sheet prepared in India.

Explanation 2.—For the removal of doubts, it is hereby declaredthat income which has been included in the total income of aperson on the basis that it has accrued or arisen or is deemed tohave accrued or arisen to him shall not again be so included onthe basis that it is received or deemed to be received by him inIndia.”

“9. Income deemed to accrue or arise in India.

(1) The following incomes shall be deemed to accrue or arise inIndia:—

xxx xxx xxx

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A15(vi) income by way of royalty payable by— xxx xxx xxx (b) a person who is a resident, except where the royalty ispayable in respect of any right, property or information used orservices utilised for the purposes of a business or professioncarried on by such person outside India or for the purposes ofBmaking or earning any income from any source outside India; xxx xxx xxx Explanation 2.—For the purposes of this clause, “royalty” meansconsideration (including any lump sum consideration but excludingany consideration which would be the income of the recipientCchargeable under the head “Capital gains”) for—

(i) the transfer of all or any rights (including the granting of alicence) in respect of a patent, invention, model, design, secretformula or process or trade mark or similar property;

(ii) the imparting of any information concerning the workingDof, or the use of, a patent, invention, model, design, secret formulaor process or trade mark or similar property;

(iii) the use of any patent, invention, model, design, secretformula or process or trade mark or similar property;

(iv) the imparting of any information concerning technical,Eindustrial, commercial or scientific knowledge, experience orskill;

16(iva) the use or right to use any industrial, commercial orscientific equipment but not including the amounts referred toin section 44BB; F

(v) the transfer of all or any rights (including the granting of alicence) in respect of any copyright, literary, artistic or scientificwork including films or video tapes for use in connection withtelevision or tapes for use in connection with radio broadcasting;or G

(vi) the rendering of any services in connection with the activitiesreferred to in [17][sub-clauses (i) to (iv), (iva) and (v)].

15 Inserted by the Finance Act 1976 (66 of 1976), sec 4(b) (w.e.f. 1-6-1976).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) toH(v)” (w.e.f. 1-4-2002).

18Explanation 3.—For the purposes of this clause, “computersoftware” means any computer programme recorded on any disc,tape, perforated media or other information storage device andincludes any such programme or any customized electronic data.

19Explanation 4.—For the removal of doubts, it is hereby clarifiedthat the transfer of all or any rights in respect of any right, propertyor information includes and has always included transfer of all orany right for use or right to use a computer software (includinggranting of a licence) irrespective of the medium through whichsuch right is transferred.

20Explanation 5.—For the removal of doubts, it is hereby clarifiedthat the royalty includes and has always included consideration inrespect of any right, property or information, whether or not—

(a) the possession or control of such right, property orinformation is with the payer; (b) such right, property or information is used directly by thepayer;

(c) the location of such right, property or information is in India.”

“90. Agreement with foreign countries or specifiedterritories.

(1) The Central Government may enter into an agreement withthe Government of any country outside India or specified territoryoutside India,—

(a) for the granting of relief in respect of—

(i) income on which have been paid both income- tax underthis 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 thecorresponding law in force in that country or specified 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).

20 Inserted by the Finance Act 2012 (23 of 2012), sec 4(b) (w.r.e.f 1-6-1976).

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territory, as the case may be, to promote mutual economicrelations, trade and investment, or A

(b) for the avoidance of double taxation of income under thisAct and under the corresponding law in force in that countryor specified territory, as the case may be, without creatingopportunities for non-taxation or reduced taxation through taxevasion or avoidance (including through treaty-shoppingarrangements aimed at obtaining reliefs provided in the saidagreement for the indirect benefit to residents of any othercountry or territory), or B

(c) for exchange of information for the prevention of evasionor avoidance of income-tax chargeable under this Act or underthe corresponding law in force in that country or specifiedterritory, as the case may be, or investigation of cases of suchevasion or avoidance, or C

(d) for recovery of income-tax under this Act and under thecorresponding law in force in that country or specified territory,as the case may be, and may, by notification in the OfficialGazette, make such provisions as may be necessary forimplementing the agreement.

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(2) Where the Central Government has entered into an agreementEwith the Government of any country outside India or specifiedterritory outside India, as the case may be, under sub-section (1)for granting relief of tax, or as the case may be, avoidance ofdouble taxation, then, in relation to the assessee to whom suchagreement applies, the provisions of this Act shall apply to theFextent they are more beneficial to that assessee.

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21Explanation 4.—For the removal of doubts, it is hereby declaredthat where any term used in an agreement entered into undersub-section (1) is defined under the said agreement, the said termshall have the same meaning as assigned to it in the agreement;and where the term is not defined in the said agreement, but definedin the Act, it shall have the same meaning as assigned to it in theAct and explanation, if any, given to it by the Central Government.”

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“195. Other sums.

(1) Any person responsible for paying to a non-resident, not beinga company, or to a foreign company, any interest (not being interestreferred to in section 194LB or section 194LC) or section 194LDor any other sum chargeable under the provisions of this Act (notbeing income chargeable under the head “Salaries”) shall, at thetime of credit of such income to the account of the payee or at thetime of payment thereof in cash or by the issue of a cheque ordraft 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 Governmentor a public sector bank within the meaning of clause (23D) ofsection 10 or a public financial institution within the meaning ofthat clause, deduction of tax shall be made only at the time ofpayment thereof in cash or by the issue of a cheque or draft or byany other mode.

Explanation 1.—For the purposes of this section, where anyinterest 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 liableto pay such income, such crediting shall be deemed to be credit ofsuch income to the account of the payee and the provisions of thissection shall apply accordingly.

22Explanation 2.—For the removal of doubts, it is hereby clarifiedthat the obligation to comply with sub-section (1) and to makededuction thereunder applies and shall be deemed to have alwaysapplied and extends and shall be deemed to have always extendedto all persons, resident or non-resident, whether or not the non-resident person has—

(i) a residence or place of business or business connection inIndia; or

(ii) any other presence in any manner whatsoever in India.

(2) Where the person responsible for paying any such sumchargeable under this Act [23](other than salary) to a non- residentconsiders that the whole of such sum would not be income 22 Inserted by the Finance Act 2012 (23 of 2012), sec. 77(a)(ii) (w.r.e.f. 1-4-1962).

23 Substituted by the Finance Act 2003 (32 of 2003), sec. 80(b) (w.e.f. 1-6-2003).

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chargeable in the case of the recipient, he may make an applicationin such form and manner to the Assessing Officer, to determine insuch manner, as may be prescribed, the appropriate proportion ofsuch sum so chargeable, and upon such determination, tax shallbe deducted under sub- section (1) only on that proportion of thesum which is so chargeable.”

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“201. Consequences of failure to deduct or pay.

(1) Where any person, including the principal officer of acompany,—

(a) who is required to deduct any sum in accordance with theCprovisions of this Act; or (b) referred to in sub-section (1A) of section 192, being anemployer, 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,Dthen, such person, shall, without prejudice to any otherconsequences which he may incur, be deemed to be an assesseein default in respect of such tax:

Provided that any person, including the principal officer of acompany, who fails to deduct the whole or any part of the tax inEaccordance with the provisions of this Chapter on the sum paid toa payee or on the sum credited to the account of a payee shall notbe deemed to be an assessee in default in respect of such tax ifsuch payee—

(i) has furnished his return of income under section 139; F

(ii) has taken into account such sum for computing income insuch return of income; and

(iii) has paid the tax due on the income declared by him in suchreturn of income, G

and the person furnishes a certificate to this effect from anaccountant in such form as may be prescribed:

Provided further that no penalty shall be charged under section221 from such person, unless the Assessing Officer is satisfiedthat such person, without good and sufficient reasons, has failedHto deduct and pay such tax.”

25. The scheme of the Income Tax Act, insofar as the questionraised before us is concerned, is that for income to be taxed under theIncome Tax Act, residence in India, as defined by section 6, is necessaryin most cases. By section 4(1), income tax shall be charged for anyassessment year at any rate or rates, as defined by section 2(37A) ofthe Income Tax Act, in respect of the total income of the previous yearof every person. Under section 4(2), in respect of income chargeableunder sub-section (1) thereof, income tax shall be deducted at source orpaid in advance, depending upon the provisions of the Income Tax Act.Importantly, under section 5(2) of the Income Tax Act, the total incomeof a person who is a non-resident, includes all income from whateversource derived, which accrues or arises or is deemed to accrue or ariseto such person in India during such year. This, however, is subject to theprovisions of the Income Tax Act. Certain income is deemed to arise oraccrue in India, under section 9 of the Income Tax Act, notwithstandingthe fact that such income may accrue or arise to a non-resident outsideIndia. One such income is income by way of royalty, which, under section9(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 literarywork.

26. That such transaction may be governed by a DTAA is thenrecognized by section 5(2) read with section 90 of the Income Tax Act,making it clear that the Central Government may enter into any suchagreement with the government of another country so as to grant reliefin respect of income tax chargeable under the Income Tax Act or underany corresponding law in force in that foreign country, or for the avoidanceof double taxation of income under the Income Tax Act and under thecorresponding law in force in that country. What is of importance is thatonce a DTAA applies, the provisions of the Income Tax Act can onlyapply to the extent that they are more beneficial to the assessee and nototherwise. Further, by explanation 4 to section 90 of the Income TaxAct, it has been clarified by the Parliament that where any term is definedin a DTAA, the definition contained in the DTAA is to be looked at. It isonly where there is no such definition that the definition in the IncomeTax Act can then be applied. This position has been recognised by thisCourt in Azadi Bachao Andolan (supra), which held:

“21. The provisions of Sections 4 and 5 of the Act are expresslymade “subject to the provisions of this Act”, which would includeSection 90 of the Act. As to what would happen in the event of a AB

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Aconflict between the provision of the Income Tax Act and anotification issued under Section 90, is no longer res integra.”

“28. A survey of the aforesaid cases makes it clear that the judicialconsensus in India has been that Section 90 is specifically intendedto enable and empower the Central Government to issue aBnotification for implementation of the terms of a Double TaxationAvoidance Agreement. When that happens, the provisions of suchan agreement, with respect to cases to which they apply, wouldoperate even if inconsistent with the provisions of the IncomeTax Act. We approve of the reasoning in the decisions which wehave noticed. If it was not the intention of the legislature to makeCa departure from the general principle of chargeability to tax underSection 4 and the general principle of ascertainment of total incomeunder Section 5 of the Act, then there was no purpose in makingthose sections “subject to the provisions of the Act”. The veryobject of grafting the said two sections with the said clause is toDenable the Central Government to issue a notification under Section90 towards implementation of the terms of DTACs which wouldautomatically override the provisions of the Income Tax Act inthe matter of ascertainment of chargeability to income tax andascertainment of total income, to the extent of inconsistency with”the terms of DTAC.E

27. The machinery provision contained in section 195 of theIncome Tax Act is inextricably linked with the charging provisioncontained in section 9 read with section 4 of the Income Tax Act, as aFresult of which, a person resident in India, responsible for paying a sumof 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 thepayee 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 forceprescribed by the DTAA. Importantly, such deduction is only to be madeGif the non- resident is liable to pay tax under the charging provisioncontained in section 9 read with section 4 of the Income Tax Act, readwith the DTAA. Thus, it is only when the non-resident is liable to payincome tax in India on income deemed to arise in India and no deductionof TDS is made under section 195(1) of the Income Tax Act, or suchHperson has, after applying section 195(2) of the Income Tax Act, not

deducted such proportion of tax as is required, that the consequences ofa failure to deduct and pay, reflected in section 201 of the Income TaxAct, follow, by virtue of which the resident-payee is deemed an “assesseein default”, and thus, is made liable to pay tax, interest and penaltythereon. This position is also made amply clear by the referral order inthe concerned appeals from the High Court of Karnataka, namely, thejudgment of this Court in GE Technology (supra).

28. However, the learned Additional Solicitor General relied stronglyupon the recent judgment of this Court in PILCOM (supra). Thisjudgment dealt with payments made to non-resident sportspersons orsports associations, the relevant provision under section 194E of theIncome Tax Act reading as follows:

“194-E. Payments to non-resident sportsmen or sportsassociations. - 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 associationor institution, the person responsible for making the payment shall,at the time of credit of such income to the account of the payee orat the time of payment thereof in cash or by issue of a cheque ordraft or by any other mode, whichever is earlier, deduct incometax thereon at the rate of ten percent”

29. It is in this context that this Court referred to the judgment inGE Technology (supra) (see paragraph 16) and distinguished the same,stating:

“16.1 The submission that unless permission was obtained underSection 195(2) of the Act, the liability to deduct Tax at Sourcemust be with respect to the entire payment, was not accepted.Relying on the expression “chargeable under the provisions of theAct” occurring in Section 195(1) of the Act, it was held “theobligation to deduct TAS, is however, limited to the appropriateproportion of the income chargeable under the Act forming partof the gross sum of money payable to the non-resident”.

16.2 This decision, in our view, has no application insofar aspayments at serial nos. (vi) and (vii) are concerned. To the extentthe payments represented amounts which could not be subjectmatter of charge under the provisions of the Act, appropriatebenefit already stands extended to the Appellant.”

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30. It was in the context of section 194E of the Income Tax Act,that the Court went on to observe:

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“18. We now come to the issue of applicability of DTAA. Asobserved by the High Court, the matter was not argued before itin that behalf, yet the issue was dealt with by the High Court. InBour view, the reasoning that weighed with the High Court is quitecorrect. The obligation to deduct Tax at Source under Section194E of the Act is not affected by the DTAA and in case theexigibility to tax is disputed by the assessee on whose account thededuction is made, the benefit of DTAA can be pleaded and if thecase is made out, the amount in question will always be refundedCwith interest. But, that by itself, cannot absolve the liability underSection 194E of the Act.

19. In the premises, it must be held that the payments made to theNon Resident Sports Associations in the present case representedtheir income which accrued or arose or was deemed to haveDaccrued or arisen in India. Consequently, the Appellant was liableto 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 belongsto a set of various provisions which deal with TDS, without any referenceto chargeability of tax under the Income Tax Act by the concerned non-Eresident assessee. This section is similar to sections 193 and 194 of theIncome Tax Act by which deductions have to be made without anyreference to the chargeability of a sum received by a non-residentassessee under the Income Tax Act. On the other hand, as has beennoted in GE Technology (supra), at the heart of section 195 of theFIncome Tax Act is the fact that deductions can only be made if the non-resident assessee is liable to pay tax under the provisions of the IncomeTax Act in the first place.

32. Thus, the judgment of this Court in PILCOM (supra), dealingwith a completely different provision in a completely different setting,Ghas 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 otherwiserequires,—

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(a) “adaptation” means,-

xxx xxx xxx

(v) in relation to any work, any use of such work involvingits rearrangement or alteration; xxx xxx xxx (d) “author” means,—

24(vi) in relation to any literary, dramatic, musical or artisticwork which is computer-generated, the person who causesthe work to be created; xxx xxx xxx 25(fa) “commercial rental” does not include the rental, lease orlending of a lawfully acquired copy of a computer programme,sound recording, visual recording or cinematographic film fornon-profit purposes by a non-profit library or non-profiteducational institution; xxx xxx xxx (ffb) “computer” includes any electronic or similar device havinginformation processing capabilities (ffc) “computer programme” means a set of instructionsexpressed in words, codes, schemes or in any other form,including a machine readable medium, capable of causing acomputer to perform a particular task or achieve a particularresult; xxx xxx xxx (m) “infringing copy” means—

(i) in relation to a literary, dramatic, musical or artistic work,a reproduction thereof otherwise than in the form of acinematograph film;

(ii) in relation to a cinematographic film, a copy of the filmmade on any medium by any means;

(iii) in relation to a sound recording, any other recordingembodying the same sound recording, made by any means; 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).

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(iv) in relation to a programme or performance in whichsuch a broadcast reproduction right or a performer’s rightsubsists under the provisions of this Act, the sound recordingor a cinematographic film of such programme orperformance,; A

Bif such reproduction, copy or sound recording is made orimported in contravention of the provisions of this Act; xxx xxx xxx 26(o) “literary work” includes computer programmes, tablesand compilations including computer databases;”

C“14. Meaning of copyright.— For the purposes of this Act,copyright means the exclusive right subject to the provisions ofthis Act, to do or authorise the doing of any of the following actsin respect of a work or any substantial part thereof, namely—

(a) in the case of a literary, dramatic or musical work, notDbeing a computer programme,—

(i) to reproduce the work in any material form including thestoring of it in any medium by electronic means;

(ii) to issue copies of the work to the public not being copiesalready in circulation;

(iii) to perform the work in public, or communicate it to thepublic; E

(iv) to make any cinematograph film or sound recording inrespect of the work;

(v) to make any translation of the work; F

(vi) to make any adaptation of the work;

(vii) to do, in relation to a translation or an adaptation of thework, any of the acts specified in relation to the work insub-clauses (i) to (vi); (b) in the case of a computer programme—

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(i) to do any of the acts specified in clause (a); [27](ii) to sellor give on commercial rental or offer for sale or forcommercial rental any copy of the computer programme:

26 Substituted by Act 38 of 1994, sec. 2 (w.e.f. 10-5-1995).H27 Substituted by Act 49 of 1999, sec. 3 (w.e.f. 15-1-2000).

Provided that such commercial rental does not apply in respectof computer programmes where the programme itself is notthe essential object of the rental.”

“16. No copyright except as provided in this Act.— No personshall be entitled to copyright or any similar right in any work,whether published or unpublished, otherwise than under and inaccordance with the provisions of this Act or of any other law forthe time being in force, but nothing in this section shall be construedas abrogating any right or jurisdiction to restrain a breach of trustor confidence.”

“18. Assignment of copyright.— (1) The owner of the copyrightin an existing work or the prospective owner of the copyright in afuture work may assign to any person the copyright either whollyor partially and either generally or subject to limitations and eitherfor the whole term of the copyright or any part thereof:

Provided that in the case of the assignment of copyright in anyfuture work, the assignment shall take effect only when the workcomes into existence.

28Provided further that no such assignment shall be applied to anymedium or mode of exploitation of the work which did not exit orwas not in commercial use at the time when the assignment wasmade, unless the assignment specifically referred to such mediumor mode of exploitation of the work:

Provided also that the author of the literary or musical work includedin a cinematograph film shall not assign or waive the right to receiveroyalties to be shared on an equal basis with the assignee ofcopyright for the utilisation of such work in any form other thanfor the communication to the public of the work along with thecinematograph film in a cinema hall, except to the legal heirs ofthe authors or to a copyright society for collection and distributionand any agreement to contrary shall be void:

Provided also that the author of the literary or musical work includedin the sound recording but not forming part of any cinematographfilm shall not assign or waive the right to receive royalties to beshared on an equal basis with the assignee of copyright for any AB

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Autilisation of such work except to the legal heirs of the authors orto a collecting society for collection and distribution and anyassignment to the contrary shall be void.

(2) Where the assignee of a copyright becomes entitled to anyright comprised in the copyright, the assignee as respects the rightsBso assigned, and the assignor as respects the rights not assigned,shall be treated for the purposes of this Act as the owner ofcopyright and the provisions of this Act shall have effectaccordingly.

(3) In this section, the expression “assignee” as respects theassignment of the copyright in any future work includes the legalCrepresentatives of the assignee, if the assignee dies before thework comes into existence.”

“19. Mode of assignment.—

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(3) The assignment of copyright in any work shall also specify theamount of royalty and any other consideration payable, to theauthor or his legal heirs during the currency of the assignmentand the assignment shall be subject to revision, extension ortermination on terms mutually agreed upon by the parties.”

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“30. Licences by owners of copyright— The owner of theEcopyright in any existing work of the prospective owner of thecopyright in any future work may grant any interest in the right bylicence in writing by him or by his duly authorised agent:

Provided that in the case of a licence relating to copyright in anyfuture work, the licence shall take effect only when the workFcomes into existence.

Explanation.—Where a person to whom a licence relating tocopyright in any future work is granted under this section diesbefore the work comes into existence, his legal representativesshall, in the absence of any provision to the contrary in the licence,be entitled to the benefit of the licence.

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2930A. Application of section 19.— The provisions of section19 shall, with any necessary adaptations and modifications, applyin relation to a licence under section 30 as they apply in relation toassignment of copyright in a work.”

“51. When copyright infringed. Copyright in a work shall bedeemed to be infringed—

(a) when any person, without a licence granted by the owner ofthe copyright or the Registrar of Copyrights under this Act or incontravention of the conditions of a licence so granted or of anycondition imposed by a competent authority under this Act—

(i) does anything, the exclusive right to do which is by this Actconferred upon the owner of the copyright, or

(ii) permits for profit any place to be used for the communicationof the work to the public where such communication constitutesan infringement of the copyright in the work, unless he wasnot aware and had no reasonable ground for believing thatsuch communication to the public would be an infringement ofcopyright; or (b) when any person—

(i) makes for sale or hire, or sells or lets for hire, or by way oftrade displays or offers for sale or hire, or

(ii) distributes either for the purpose of trade or to such anextent as to affect prejudicially the owner of the copyright, or

(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 importof one copy of any work for the private and domestic use of theimporter.]

Explanation.— For the purposes of this section, the reproductionof a literary, dramatic, musical or artistic work in the form of acinematograph 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 ofcopyright, namely,—

xxx xxx xxx

30(aa) the making of copies or adaptation of a computerprogramme by the lawful possessor of a copy of such computerprogramme, from such copy—

30 Inserted by Act 38 of 1994, sec. 17 (w.e.f. 10-5-1995).

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(i) in order to utilise the computer programme for the purposefor which it was supplied; or A

(ii) to make back-up copies purely as a temporary protectionagainst loss, destruction or damage in order only to utilise thecomputer programme for the purpose for which it was supplied; B

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(ad) the making of copies or adaptation of the computer programmefrom a personally legally obtained copy for non-commercial personal use;”

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“58. Rights of owner against persons possessing or dealingwith infringing copies.— All infringing copies of any work inwhich copyright subsists, and all plates used or intended to beused for the production of such infringing copies, shall be deemedto be the property of the owner of the copyright, who accordinglymay take proceedings for the recovery of possession thereof orin respect of the conversion thereof:

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Provided that the owner of the copyright shall not be entitled toany 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 tobelieve that copyright subsisted in the work of which suchcopies are alleged to be infringing copies; or E

(b) that he had reasonable grounds for believing that such copiesor plates do not involve infringement of the copyright in anywork.”

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34. A reading of the aforesaid provisions leads to the followingconclusions. Under section 2(o) of the Copyright Act, a literary workincludes a computer programme and a computer programme has beendefined under section 2(ffc) of the Copyright Act to mean a set ofGinstructions expressed in words, codes, schemes or in any other formcapable of causing a computer to perform a particular task or achieve aparticular result.

35. Though the expression “copyright” has not been definedseparately in the “definitions” section of the Copyright Act, yet, sectionH14 makes it clear that “copyright” means the “exclusive right”, subject to the 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 authorhas the exclusive right, subject to the provisions of the Copyright Act, todo or authorise the doing of several acts in respect of such work or anysubstantial part thereof. In the case of a computer programme, section14(b) specifically speaks of two sets of acts – the seven acts enumeratedin sub-clause (a) and the eighth act of selling or giving on commercialrental or offering for sale or for commercial rental any copy of thecomputer programme. Insofar as the seven acts that are set out in sub-clause (a) are concerned, they all delineate how the exclusive right thatis with the owner of the copyright may be parted with, i.e., if there is anyparting with the right to reproduce the work in any material form; theright to issue copies of the work to the public, not being copies already incirculation; the right to perform the work in public or communicate it tothe public; the right to make any cinematograph film or sound recordingin respect of the work; the right to make any translation of the work; theright to make any adaptation of the work; or the right to do any of thespecified acts in relation to a translation or an adaptation.

36. In essence, such right is referred to as copyright, and includesthe right to reproduce the work in any material form, issue copies of thework to the public, perform the work in public, or make translations oradaptations of the work. This is made even clearer by the definition ofan “infringing copy” contained in section 2(m) of the Copyright Act,which in relation to a computer programme, i.e., a literary work, meansreproduction of the said work. Thus, the right to reproduce a computerprogramme and exploit the reproduction by way of sale, transfer, licenseetc. 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. Priorto the 1999 Amendment, section 14(b)(ii) of the Copyright Act read asfollows:

“(ii) to sell or give on hire, or offer for sale or hire any copy of thecomputer programme, regardless of whether such copy has beensold or given on hire on earlier occasions;”

What is conspicuous by its absence is the phrase “regardless ofwhether such copy has been sold or given on hire on earlier occasions”.

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A38. Importantly, no copyright exists in India outside the provisionsof 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 aliterary work assigns wholly or in part, all or any of the rights containedin section 14(a) and (b) of the Copyright Act, in the said work for aconsideration, the assignee of such right becomes entitled to all suchBrights comprised in the copyright that is assigned, and shall be treated asthe 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 ofthe Copyright Act, the owner of the copyright in any literary work maygrant any interest in any right mentioned in section 14(a) of the CopyrightCAct by licence in writing by him to the licensee, under which, for partingwith such interest, royalty may become payable (see section 30A of theCopyright Act). When such licence is granted, copyright is infringedwhen any use, relatable to the said interest/right that is licensed, is contraryto the conditions of the licence so granted. Infringement of copyrighttakes place when a person “makes for sale or hire or sells or lets forDhire” or “offers for sale or hire” or “distributes…so as to affectprejudicially the owner of the copyright”, vide section 51(b) of theCopyright Act. Importantly, the making of copies or adaptation of acomputer programme in order to utilise the said computer programmefor the purpose for which it was supplied, or to make up back-up copiesEas a temporary protection against loss, destruction or damage so as tobe able to utilise the computer programme for the purpose for which itwas supplied, does not constitute an act of infringement of copyrightunder section 52(1)(aa) of the Copyright Act. In short, what is referredto in section 52(1)(aa) of the Copyright Act would not amount toreproduction so as to amount to an infringement of copyright.F

39. Section 52(1)(ad) is independent of section 52(1)(aa) of theCopyright Act, and states that the making of copies of a computerprogramme from a personally legally obtained copy for non-commercialpersonal 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 theGlearned Additional Solicitor General, namely, that if personally legallyobtained copies of a computer programme are to be exploited forcommercial use, it would necessarily amount to an infringement ofcopyright. Section 52(1)(ad) of the Copyright Act cannot be read tonegate the effect of section 52(1)(aa), since it deals with a subject matterthat is separate and distinct from that contained in section 52(1)(aa) ofHthe 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 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 theOECD Model Tax Convention on Income and on Capital, and aretherefore substantially similar, if not identical, in respect of the provisionsconcerning “business profits” and “royalties”. The provisions of one ofthese DTAAs, namely the India-Singapore DTAA, are set out as follows:

“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”).

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2. The Agreement shall also apply to any identical or substantiallysimilar taxes which are imposed by either Contracting State afterthe date of signature of the present Agreement in addition to, or inplace of, the taxes referred to in paragraph 1. The competentauthorities of the Contracting States shall notify each other of anysubstantial changes which are made in their respective taxationlaws.”

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“ARTICLE 3 - GENERAL DEFINITIONS

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2. As regards the application of the Agreement by a ContractingState, any term not defined therein shall, unless the contextotherwise requires, have the meaning which it has under the lawof that State concerning the taxes to which the Agreementapplies.”

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“ARTICLE 7 - BUSINESS PROFITS

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1. The profits of an enterprise of a Contracting State shall betaxable only in that State unless the enterprise carries on businessin the other Contracting State through a permanent establishmentsituated therein. If the enterprise carries on business as aforesaid,the profits of the enterprise may be taxed in the other State butonly so much of them as is directly or indirectly attributable to thatpermanent establishment.”

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“ARTICLE 12 - ROYALTIES AND FEES FORTECHNICAL SERVICES

1. Royalties and fees for technical services arising in a ContractingState and paid to a resident of the other Contracting State may betaxed in that other State.

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2. However, such royalties and fees for technical services mayalso be taxed in the Contracting State in which they arise andaccording to the laws of that State, but if the recipient is theGbeneficial 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) andfees for technical services as defined in this Article (other thanservices described in subparagraph (b) of this paragraph), 15%

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of the gross amount of the royalties and fees; (b) in the case of royalties referred to in paragraph 3(b) andfees for technical services as defined in this Article that areancillary and subsidiary to the enjoyment of property for whichroyalties under paragraph 3(b) are received, 10% of the grossamount of the royalties and fees.

3. The term “royalties” as used in this Article means payments ofany kind received as a consideration for the use of, or the right touse:

(a) any copyright of a literary, artistic or scientific work,including cinematograph films or films or tapes used for radioor television broadcasting, any patent, trade mark, design ormodel, plan, secret formula or process, or for informationconcerning 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, otherthan payments derived by an enterprise from activities describedin 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 thecompletion of the procedures required by its law for the bringinginto force of this Agreement. This Agreement shall enter into forceon the date of the later of these notifications and shall thereuponhave effect:

(a) in India: in respect of income arising in any fiscal yearbeginning on or after the first day of April 1994; (b) in Singapore: in respect of income arising in any fiscal yearbeginning on or after the first day of January 1994.

2. The Agreement between the Government of the Republic ofIndia and the Government of the Republic of Singapore for theavoidance of double taxation and the prevention of fiscal evasionwith respect to taxes on income signed in Singapore on 20th April,1981 shall terminate and cease to be effective from the date onwhich this Agreement comes into effect.”

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A42. The subject matter of each of the DTAAs with which we areconcerned is income tax payable in India and a foreign country.Importantly, as is now reflected by explanation 4 to section 90 of theIncome Tax Act and under Article 3(2) of the DTAA, the definition ofthe term “royalties” shall have the meaning assigned to it by the DTAA,meaning thereby that the expression “royalty”, when occurring in sectionB9 of the Income Tax Act, has to be construed with reference to Article12 of the DTAA. This position is also clarified by CBDT Circular No.333 dated 02.04.1982,[31] which states as follows:

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“Circular : No. 333 dated 2-4-1982.

Specific provisions made in double taxation avoidanceCagreement - Whether it would prevail over generalprovisions contained in Income-tax Act

1. It has come to the notice of the Board that sometimes effect tothe provisions of double taxation avoidance agreement is not givenby the Assessing Officers when they find that the provisions ofDthe agreement are not in conformity with the provisions of theIncome-tax Act, 1961.

2. The correct legal position is that where a specific provision ismade in the double taxation avoidance agreement, that provisionswill prevail over the general provisions contained in the Income-Etax Act. In fact that the double taxation avoidance agreementswhich have been entered into by the Central Government undersection 90 of the Income-tax Act, also provide that the laws inforce in either country will continue to govern the assessment andtaxation of income in the respective countries except whereprovisions to the contrary have been made in the agreement.F

3. Thus, where a double taxation avoidance agreementprovides for a particular mode of computation of income, thesame should be followed, irrespective of the provisions in theIncome-tax Act. Where there is no specific provision in theagreement, it is basic law, i.e., the Income-tax Act, that willGgovern the taxation of income.”

43. Thus, by virtue of Article 12(3) of the DTAA, royalties arepayments of any kind received as consideration for “the use of, or theright to use, any copyright” of a literary work, which includes a computerprogramme or software.H31 F. No. 506/42/81-FTD.

END-USER LICENCE AGREEMENTS AND DISTRIBUTIONAGREEMENTS

44. Certain sample clauses of the EULAs that are illustrative ofthe transactions with which we are concerned in each category (outlinedin 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 legalagreement 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 itsaffiliated companies and its third party suppliers and licensors,that accompanies this EULA, which includes computer softwareand may include associated media, content and data, printedmaterials, or electronic documentation in connection with youruse of Samsung Mobile Device, which will be defined below(“Samsung Software”).

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1. GRANT OF LICENCE. Samsung grants you a limited non-exclusive licenceto install, use, access, display and run one copyof the Samsung Software on a single Samsung Mobile Device,local hard disk(s) or other permanent storage media of onecomputer and you may not make Samsung Software availableover a network where it could be used by multiple computers atthe same time. You may make one copy of the Samsung Softwarein machine readable form for backup purposes only; provided thatthe backup copy must include all copyright or other proprietarynotices contained on the original.

Certain items of the Samsung Software may be subject to opensource licences. The open source licence provisions may overridesome of the terms of this EULA. We make the applicable opensource licenses available to you on the Legal Notices section ofthe Settings menu of your device.

2. RESERVATION OF RIGHTS AND OWNERSHIP.

Samsung reserves all rights not expressly granted to you in thisEULA. The Software is protected by copyright and other A

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intellectual property laws and treaties. Samsung or its suppliersown the title, copyright and other intellectual property rights in theSamsung Software.The Samsung Software is licenced, not sold.

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 thesource code or algorithms of, the Software(except and only tothe extent that such activity is expressly permitted by applicablelaw notwithstanding this limitation), or modify, or disable anyfeatures of, the Software, or create derivative works based onthe Software. You may not rent, lease, lend, sublicense or providecommercial hosting services with the Software. You may nottransfer this EULA or the rights to the Samsung Software grantedhereinto any third party unless it is in connection with the sale ofthe mobile device which the Samsung Software accompanied. Insuch 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 ofthe Samsung Software. The transfer may not be an indirecttransfer, such as a consignment. Prior to the transfer, the enduser receiving the Samsung Software must agree to all the EULAterms. Where Samsung Mobile Device is being used by youremployee or other person using the Samsung Mobile Device aspart of your undertaking (“Your Staff”), that member of your Staffis licenced to use the Samsung Software as if it were you andmust comply with these terms on the same basis. Any failure tocomply with these terms by your Staff shall be deemed [to be a]failure to comply with these terms by you.

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7. EXPORT RESTRICTIONS. You acknowledge that theSamsung Software is subject to export restrictions of variouscountries. You agree to comply with all applicable internationaland national laws that apply to the Samsung Software, includingall the applicable export restriction laws and regulations.”

44. ii)Category 2:

44. ii) a. The Remarketer Agreement dated 01.10.2004, betweenIBM Singapore, a foreign, non-resident supplier of computer programmesand 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 marketto End User or Remarketers or both.

End User is anyone, who is not a Related Company, who acquiresPrograms for its own use and not for resale.

Programs shall mean instructions written, contained or recordedon materials, documents or machine readable media capable ofbeing executed on, or used in the operation of a machine andinformation technology or data related thereto. The term shallinclude, but is not limited to, instructions, documentation,information or data recorded on reels of magnetic tape, magneticdisks, microfiche cards, and other similar media, and logic manuals,flow charts, operational instruction guides, interface specifications,detailed listings, application manuals, modification guides, operatingInstructions, functional specifications and design specificationscontaining or related to such information, instruments or data. Inparticular, the term Programs includes, but is not limited tosupervisors, monitors, operating systems, language compiles, sortsconversion aid programs, general purpose utilities, industryapplication programs and other general purpose applicationprograms.

IMB Programs shall mean programs protected by IBM’s Patentsor IMB’s Copyrights, other than or in addition to Remarketer’sPatents and Remarkets, which are marketed by IMB or itsSubsidiaries.”

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A“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 ofthe other. Neither of us is legally a partner of the other (for example,neither of us is responsible for debts incurred by the other), andneither of us is an employee or franchise of the other nor doesthis Agreement create joint venture between us B

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5. We may withdraw a Program from marketing at any time”“Other Responsibilities You agree:

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2. that your rights under this Agreement are not property rightsand therefore, you can not transfer them to anyone else orencumber them in any way. For example, you can not sell yourapproval to market our Programs or your rights to use Trademarks;

3. Not to assign or otherwise transfer this Agreement, your rightsunder it, or any of its approvals or delegate any duties, other thanto a Related Company, unless expressly permitted to do so underthis Agreement.”

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“7. Patents, Copyrights and Intellectual Property Rights.You agree that you do not and shall not own any right, title orinterest in and to any and all patents, copyrights and intellectualproperty rights.

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You shall not alter, deface, remove, cover, mutilate, or add to, inany manner whatsoever, any patent notice, copyright notice,trademark, service mark, trade name, serial number, model number,Gbrand name or legend that we may attach or affix to the Programs.

If a third party claims that Program we provide under thisAgreement infringes that part’s patents or copyrights, we willdefend you against that claim at our expense and pay all costs,damages, and attorney’s fees that a court finally awards, providedHthat you:

1. promptly notify us in writing of the claim; and

2. allow us to control, and cooperate with us in the defense andany related settlement negotiations;”

“You may market to your Customers the Programs we sell toyou. We will notify you from time to time of the types of Programsthat are available for purchase by you under this Agreement. Theseterms apply to all methods of distribution including to End Usersand through distributors, resellers, solution providers, and systemsintegrators.”

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 softwareremarketed or distributed in India through IBM India, contains thefollowing terms:

“1. Definitions and Interpretation

1.1 In this Agreement, unless the context requires otherwise, thefollowing words and expressions shall have the following meanings:

“Authorized Use” – the specified level at which Licensee isauthorized to execute or run the Program. That level may bemeasured by number of users, millions of service units (“MSUs”),Processor Value Units (“PVUs” ), or other level of use specifiedby IBM.

“IBM” – International Business Machines Corporation or one ofits subsidiaries.

“License Information” (“LI”) – a document that providesinformation and any additional terms specific to a Program.

“Program” – the following, including the original and all whole orpartial copies:

1) machine-readable instructions and data,

2) components, files and modules

3) audio-visual content (such as images, text, recordings, orpictures),

4) related licensed materials (such as keys and documentation).”

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A“2. License Grant

The Program is owned by IBM or an IBM supplier, and iscopyrighted and licensed, not sold. Licensee receives a license tothe Programs from Assimil8 Limited through a sublicensingagreement between IBM and Assimil8 Limited. Assimil8 Limitedgrants Licensee a nonexclusive license to B

1) use the Program up to the Authorized Use specified in thePoE

2) make and install copies to support such Authorized Use, and

3) make a backup copy, all provided that C

a. Licensee has lawfully obtained the Program and complieswith the terms of the Agreement;

b. The backup copy does not execute unless the backed-upProgram cannot execute D

c. Licensee reproduces all copyright notices and otherlegends of ownership on each copy, or partial copy of theProgram d …

e. Licensee does not:

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1) use, copy, modify, or distribute the Program exceptas expressly permitted in this agreement;

2) reverse assemble, reverse compile,otherwisetranslate, or reverse engineer theprogram, except asexpressly permitted by law without the possibility ofcontractual waiver; F

3) use any of the Program’s components, files, modules,audio-visual content, or related licensed materialsseparately from that program; or G

4) sublicense, rent, or lease the Program;”

44. iii)Category 3:

The standard-form EULA accompanying Microsoft softwareHproducts sold to resident Indian end-users by Microsoft Corporation, a non- resident, foreign vendor includes the followingterms:

“1. GRANT OF LICENSE: This EULA grants you the followingrights:

a. Systems Software -

You may install and use one copy of the SOFTWARE PRODUCTon a single computer, including a workstation, terminal, or otherdigital electronic device (“COMPUTER”). You may permit amaximum of five (5) COMPUTERS to connect to the singleCOMPUTER running the SOFTWARE PRODUCT solely toaccess the Internet using the Internet Connection Sharing featureof the SOFTWARE PRODUCT. You may not allow theseconnected COMPUTERS to use any other components of theSOFTWARE PRODUCT, nor to invoke application sharing asdescribed below. The five

(5) connection maximum includes any indirect connections madethrough software or hardware that pools or aggregatesconnections.

-b. Storage/Network Use

You may also store or install a copy of the SOFTWAREPRODUCT on a storage device, such as a network server,usedon to install or run the SOFTWARE PRODUCT on yourotherCOMPUTERS over an internal network: however, you mustacquire and run a licence for each separate COMPUTER on orfrom which the SOFTWARE PRODUCT is installed, used,accessed, displayed, or forgoing any number of COMPUTERSmay access or otherwise utilize the file and print services andpeer web services of the SOFTWARE PRODUCT. In addition,you may use the “Multiple Display” feature of the SOFTWAREPRODUCT to expand your desktop as described in the onlineHelp file without obtaining a license for each display.”

“2. DESCRIPTION OF OTHER RIGHTS ANDLIMITATIONS

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Limitations on Reverse Engineering, Decompilation, andDisassembly - You may not reverse engineer, decompile, ordisassemble the SOFTWARE PRODUCT, except and only to A

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the extent that such activity is expressly permittedby applicablelaw nothwithstanding this limitation.”

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“4. COPYRIGHT- All title and intellectual property rights in andto the SOFTWARE PRODUCT (including but not limited to anyimages, photographs, animations, video, audio, music, text, andB“applets” incorporated into the SOFTWARE PRODUCT), theaccompanying printed materials, and any copies of theSOFTWARE PRODUCT are owned by Microsoft or its suppliers.All title and intellectual property rights in and to the content that isnot contained in the Software Product, but may be accessed throughuse of the Software Product, is the property of the respectiveCcontent owners and may be protected by applicable copyright orother intellectual property laws and treaties. This EULAgrantsyou no rights to use such content. All rights not expressly granted”are reserved by Microsoft.

“6. BACKUP COPY- After installation of one copy of theDSOFTWARE PRODUCT pursuant to this EULA, you may keepthe original media on which the SOFTWARE PRODUCT wasprovided by Microsoft solely for backup or archival purposes. Ifthe original media is required to use the SOFTWARE PRODUCTon the COMPUTER, you may make one copy of the SOFTWAREEPRODUCT solely for backup or archival purposes. Except asexpressly provided in this EULA, you may not otherwise makecopies of the SOFTWARE PRODUCT or the printed materialsaccompanying the SOFTWARE PRODUCT”

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F44. 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:

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“20. LICENSE

20.1 Subject to the terms of conditions set forth in thisArticle 20, Licence, JT MOBILES is hereby granted a non-exclusive restricted licence to use the Software andDocumentation, 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 thecontrary, it is understood that JT MOBILES receives no titleor ownership rights to the Software or Documentation, and allsuch rights shall remain with Contractor or its suppliers.

20.3 JT MOBILES agrees that the Software orDocumentation provided to it by Contractor under this Contractor any renewals, extension, or expansions thereof, shall, asbetween the parties hereto, be treated as proprietary and atrade secret of Contractor or its suppliers, and be subject tothe provisions of Article 30, Confidentiality.

20.4 In pursuance of the foregoing JT MOBILES shall:

a) not provide or make the Software or Documentationor any portions or aspects thereof (including any methodsor concepts utilized or expressed therein) available toany person except to its employees on a “need to know”basis;

b) not make any copies of Software or Documentationor parts thereof, except for archival backup purposes;

c) when making permitted copies as aforesaid transferto the copy/copies any copyright or other marking onthe Software or Documentation.

d) not use the Software or Documentation for any otherpurpose than permitted in this Article 20, License or sellor in any manner alienate or part with its possession.

e) not use or transfer the Software and/or theDocumentation outside India without the written consentof the Contractor and after having received necessaryexport or re-export permits from relevant authorities.

20.5 JT MOBILES and any successor to JT MOBILEStitle to the Hardware or part of Hardware shall have the rightwithout further consent of Contractor to transfer this licenseto a third party which acquires the System, provided any suchthird party agrees in writing to abide by all the terms andconditions of this license.

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20.6. The obligations of JT MOBILES under this Article20, Licence, shall survive the termination or expiration of thisContract for any reason.

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20.7 The Software licensed under this Contract isdelivered in an inseparable package also containing othersoftware functionality than the Software. In order to avoiddoubt JT MOBILES may not in any use that other part of thesoftware functionality. However, upon JT MOBILES’ requestContractor shall offer a licence to use such other softwarefunctionality to JT MOBILES on the same terms and conditionsas stipulated in this Contract but not price.”

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45. A reading of the aforesaid distribution agreement would showthat what is granted to the distributor is only a non-exclusive, non-transferable licence to resell computer software, it being expresslyDstipulated that no copyright in the computer programme is transferredeither to the distributor or to the ultimate end-user. This is further amplifiedby stating that apart from a right to use the computer programme by theend-user himself, there is no further right to sub-license or transfer, noris there any right to reverse-engineer, modify, reproduce in any mannerotherwise than permitted by the licence to the end-user. What is paid byEway of consideration, therefore, by the distributor in India to the foreign,non-resident manufacturer or supplier, is the price of the computerprogramme as goods, either in a medium which stores the software or ina medium by which software is embedded in hardware, which may bethen further resold by the distributor to the end-user in India, the distributorFmaking a profit on such resale. Importantly, the distributor does not getthe right to use the product at all.

46. When it comes to an end-user who is directly sold the computerprogramme, such end-user can only use it by installing it in the computerhardware owned by the end-user and cannot in any manner reproduceGthe 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 transfersan interest in all or any of the rights contained in sections 14(a) and14(b) of the Copyright Act, but is a “licence” which imposes restrictionsor conditions for the use of computer software. Thus, it cannot be saidH

that any of the EULAs that we are concerned with are referable tosection 30 of the Copyright Act, inasmuch as section 30 of the CopyrightAct speaks of granting an interest in any of the rights mentioned insections 14(a) and 14(b) of the Copyright Act. The EULAs in all theappeals before us do not grant any such right or interest, least of all, aright or interest to reproduce the computer software. In point of fact,such reproduction is expressly interdicted, and it is also expressly statedthat no vestige of copyright is at all transferred, either to the distributoror to the end-user. A simple illustration to explain the aforesaid positionwill suffice. If an English publisher sells 2000 copies of a particular bookto an Indian distributor, who then resells the same at a profit, no copyrightin the aforesaid book is transferred to the Indian distributor, either byway of licence or otherwise, inasmuch as the Indian distributor onlymakes a profit on the sale of each book. Importantly, there is no right inthe Indian distributor to reproduce the aforesaid book and then sell copiesof the same. On the other hand, if an English publisher were to sell thesame book to an Indian publisher, this time with the right to reproduceand 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 oflicence or otherwise, and what the Indian publisher will pay for, is theright to reproduce the book, which can then be characterised as royaltyfor the exclusive right to reproduce the book in the territory mentionedby the licence.

48. An instructive judgment of this Court in this respect is to befound in State Bank of India v. Collector of Customs, (2000) 1SCC 727. In this case, the State Bank of India imported a consignmentof computer software and manuals from Kindle Software Ltd., Dublin,Ireland, and cleared the goods for home consumption, and filed anapplication before the Additional Collector of Customs, claiming a refundof customs duty. After setting out section 14 of the Customs Act 1962and rule 9(1)(c) of the Customs Valuation (Determination of Price ofImported Goods) Rules, 1988, the Court stated:

“9. Now, if we refer to the interpretative note relating to Rule9(1)(c) it says that royalties and licence fees may include, amongother things, payments in respect to patents, trademarks andcopyrights. There is, however, an exception which says that thecharges for the right to reproduce the imported goods in the countryof importation shall not be added to the price actually paid orpayable for the imported goods in determining the customs value.

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Further payments made by the buyer for the right to distribute orresell the imported goods shall not be added to the price actuallypaid or payable for the imported goods if such payments are not acondition of the sale for the exports to the country of importationof the imported goods.

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11. What we have now to see is if under the agreement SBI hasthe right to reproduce the imported software and for that purposeSBI has paid “royalties and licence fee” which have been addedto the price actually paid for the imported software for use at theCprincipal place called the Support Centre. If that is so under thepress note no customs duty is leviable on the royalty so paid. Thistakes us to the relevant terms of the agreement which wouldindicate as to whether or not the royalty/licence fees needed tobe included in the value of the imported goods.”

49. The contention of the State Bank of India that the countrywidelicence fee paid by it by way of royalty was for the reproduction of thesaid software and was thus exempt from customs duty, was turned downby this Court as follows:

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“17. The question that arises for consideration is if licence feeEcharged towards countrywide use of software in the secondinvoice could be the charges for the right to reproduction andwere these added to the price actually paid or payable for theimported goods. If we refer to the agreement, software is notsold to SBI as such but it was to remain the property of Kindle.There is no other value of the software indicated in the agreementFexcept the licence fee. Price is payable only for allowing SBI touse the software in a limited way at its own centres for a limitedperiod and that is why the amount charged is called the licencefee. After five years SBI is required to pay only recurring licencefee. Countrywide use of the software and reproduction of softwareGare two different things and licence fee for countrywide use cannotbe considered as the charges for the right to reproduce the importedgoods. Under the agreement copying, storage, removal, etc. areunder the strict control of Kindle and all copies are the propertyof Kindle. SBI can use the software for its internal requirementsonly. Licence has been given to SBI to use the property of KindleHat its branches and not for reproduction of the software as claimed H

by SBI. The words in the agreement are specific that “SBI shallpay the licensor the initial licence fee and the recurring licencefees for use under the provisions of this agreement”.”

50. The Court then made an important observation, stating:

“21. Reproduction and use are two different things. Now underthe agreement user is specifically limited to licence sites. Thetransaction as a whole is to be seen. The press note is of no helpto SBI. Rule 9(1)(c) and the interpretative note thereto did notapply as nothing was added to the price actually paid for theimported goods by way of royalties etc. Refund would be allowableonly if there was something added on to the royalty payment whichwas not in the present case. The invoice originally presented wascomplete in itself. The second invoice was not filed along with thebill of entry. In the second invoice also it is the licence fee for theright to use countrywide and it is not the right to reproduce asclaimed by SBI. Schedule I to the agreement is module and copiesare modalities for the use of software by SBI with variousrestrictions. If we again refer to clause 6.4 of the agreement thereis a complete restraint on SBI which says SBI shall not use, print,copy, reproduce or disclose the software or documentation in wholeor in part except as is expressly permitted by the agreement norshall SBI permit any of the foregoing. SBI is also barred fromallowing access to its software or documentation except what ispermitted under the agreement. Again SBI is barred from selling,charging or otherwise making the software or documentationavailable to any person except what is expressly permitted underthe agreement. Clause 6.5 of the agreement says that SBI shallnot copy or permit copying of the software supplied to it by Kindlesave as may be strictly required for delivery to licence sites. Theterms of the agreement also apply to the copies.”

Though this judgment has been delivered under the Customs Act1962, yet the important differentiation made between the right toreproduce and the right to use computer software has been recognizedby this judgment. Whereas the former would amount to a parting ofcopyright by the owner thereof, the latter would not.

51. An argument was advanced by the learned Additional SolicitorGeneral that in some of the aforestated EULAs, it was clearly stated A

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Athat what was licensed to the distributor/end-user by the non-resident,foreign supplier would not amount to a sale, thereby making it clear thatwhat was transferred was not goods. This argument has no legs to standon. It is settled law that in all such cases, the real nature of the transactionmust be looked at upon reading the agreement as a whole. Thus, inSundaram Finance Ltd. v. State of Kerala, (1966) 2 SCR 828, oneBof the questions that was raised before this Court was as to the executionof 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 advanceloans on favourable terms on the security of vehicles. This isCeffected by obtaining a promissory-note for repayment of theamount advanced, and a hire-purchase agreement which providesa mechanism for recovery of the amount. It is true that a “saleletter” is obtained from the customer, but the consideration forthe sale letter is only the balance remaining payable to the dealer,Dafter giving credit against the price of the vehicle the amount paidby the customer. The application for a loan, and the letter addressedto the appellants undertaking to insure the vehicle expresslymention that a loan is asked for and granted on the security of themotor-vehicle under the hire- purchase agreement. It is thecustomer who insures the vehicle, and in the books of the MotorEVehicle Authorities he remains, with the consent of the appellants,owner of the vehicle. Undue importance to the acknowledgmentof sale in the “sale letter” and the recital of sale in the bill and inthe receipt cannot therefore be attached. These documents —“sale letter”, bill and receipt — must be read with the applicationFfor granting a loan on the security of the vehicles, the letter inwhich the customer requests the appellants to pay the balance ofthe price remaining to be paid by him to the dealer, the promissory-note executed by him for that amount, the undertaking to insurethe vehicle, and intimation to the Motor Vehicles Authorities tomake note of the hire- purchase agreement.”G

(page 839)

“The true effect of a transaction may be determined from theterms of the agreement considered in the light of the surroundingcircumstances. In each case, the Court has, unless prohibited bystatute, power to go behind thedocuments and to determine theH

nature of the transaction, whatever may be the form of thedocuments. An owner of goods who purports absolutely to conveyor acknowledges to have conveyed goods and subsequentlypurports to hire them under a hire-purchase agreement is notestopped from proving that the real bargain was a loan on thesecurity of the goods. If there is a bona fide and completed saleof goods, evidenced by documents, anterior to and independent ofa subsequent and distinct hiring to the vendor, the transaction maynot be regarded as a loan transaction, even though the reason forwhich it was entered into was to raise money. If the real transactionis a loan of money secured by a right of seizure of the goods, theproperty ostensibly passes under the documents embodying thetransaction, but subject to the terms of the hiring agreement, whichbecome part of the buyer’s title, and confer a licence to seize.When a person desiring to purchase goods and not having sufficientmoney on hand borrows the amount needed from a third personand pays it over to the vendor, the transaction between the customerand the lender will unquestionably be a loan transaction. The realcharacter of the transaction would not be altered if the lenderhimself is the owner of the goods and the owner accepts thepromise of the purchaser to pay the price or the balance remainingdue against delivery of goods. But a hire- purchase agreement isa more complex transaction. The owner under the hire-purchaseagreement enters into a transaction of hiring out goods on theterms and conditions set out in the agreement, and the option topurchase exercisable by the customer on payment of all theinstalments of hire arises when the instalments are paid and notbefore. In such a hire-purchase agreement there is no agreementto buy goods; the hirer being under no legal obligation to buy, hasan option either to return the goods or to become its owner bypayment in full of the stipulated hire and the price for exercisingthe option. This class of hire- purchase agreements must bedistinguished from transactions in which the customer is the ownerof the goods and with a view to finance his purchase he entersinto an arrangement which is in the form of a hire-purchaseagreement with the financier, but in substance evidences a loantransaction, subject to a hiring agreement under which the lenderis given the license to seize the goods.”

(pages 841-842)(emphasis supplied)

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(pages 841-842)(emphasis supplied)

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A“In the light of these principles the true nature of the transactionsof the appellants may now be stated. The appellants are carryingon the business of financiers: they are not dealing in motor-vehicles.The motor-vehicle purchased by the customer is registered in thename of the customer and remains at all material times soregistered in his name. In the letter taken from the customer underBwhich the latter agrees to keep the vehicle insured, it is expresslyrecited that the vehicle has been given as security for the loanadvanced by the appellants. As a security for repayment of theloan, the customer executes a promissory- note for the amountpaid by the appellants to the dealer of the vehicle. The so-calledC“sale letter” is a formal document which is not made effective byregistering the vehicle in the name of the appellants and even theinsurance of the vehicle has to be effected as if the customer isthe owner. Their right to seize the vehicle is merely a licence toensure compliance with the terms of the hire-purchase agreement.The customer remains qua the world at large the owner andDremains in possession, and on condition of performing thecovenants, has a right to continue to remain in possession. Theright of the appellants may be extinguished by payment of theamount due to them under the terms of the hire- purchaseagreement even before the dates fixed for payment. TheEagreement undoubtedly contains several onerous covenants, butthey are all intended to secure to the appellants recovery of theamount advanced. We are accordingly of the view that the intentionof the appellants in obtaining the hire-purchase and the alliedagreements was to secure the return of loans advanced to theircustomers, and no real sale of the vehicle was intended by theFcustomer to the appellants. The transactions were merely financingtransactions.”

(page 844)

52. There can be no doubt as to the real nature of the transactionsGin the appeals before us. What is “licensed” by the foreign, non-residentsupplier to the distributor and resold to the resident end-user, or directlysupplied to the resident end-user, is in fact the sale of a physical objectwhich contains an embedded computer programme, and is therefore, asale of goods, which, as has been correctly pointed out by the learnedcounsel for the assessees, is the law declared by this Court in the contextH

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 TAXATIONAVOIDANCE AGREEMENT’S PROVISIONS

53. The learned Additional Solicitor General sought to reopen acontention made by the Revenue in the earlier round of litigation in GETechnology (supra) which led to this Court framing the question of lawand sending it back to the High Court to decide “on merits”. He soughtto argue, based in particular on Article 30 of the India-USA DTAA, thatthe DTAA’s provisions in these cases would not apply at all, inasmuchas provisions relatable to deduction of TDS under section 195 of theIncome Tax Act do not refer to tax at all, but are deductions that are tobe made before assessments to tax are made. He argued that thesedeductions do not partake the character of tax at all, section 195 of theIncome Tax Act speaking of “any person responsible to pay”, as opposedto an “assessee”. He therefore differentiated between the language usedin section 9 and section 195 of the Income Tax Act and argued that thedeductions made under section 195, not being in the nature of tax at alland at a stage prior to the person responsible for paying defaulting, andbeing declared an assessee in default (under section 201 of the IncomeTax Act), the DTAA provisions would not apply at all.

54. There is no doubt that section 9 of the Income Tax Act refersto persons who are non-residents and taxes their income as incomewhich is deemed to accrue or arise in India, thus, making such personsassessees under the Income Tax Act, who are liable to pay tax. There isalso no doubt that the “person responsible for paying” spoken of in section195 of the Income Tax Act is not a non-resident assessee, but a personresident in India, who is liable to make deductions under section 195 ofthe Income Tax Act when payments are made by it to the non-residentassessee. The submission of the learned Additional Solicitor General isanswered by the judgment of this Court in GE 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 ofthe words chargeable under the provisions of the Act. A personpaying interest or any other sum to a non- resident is not liable todeduct 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 payerand no right to receive the sum by the recipient and that the A

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payment does not arise out of any contract or obligation betweenthe payer and the recipient but is made voluntarily, such paymentscannot be regarded as income under the IT Act.

9. It may be noted that Section 195 contemplates not merelyamounts, the whole of which are pure income payments, it alsocovers composite payments which have an element of incomeembedded or incorporated in them. Thus, where an amount ispayable to a non-resident, the payer is under an obligation to deductTAS in respect of such composite payments. The obligation todeduct TAS is, however, limited to the appropriate proportion ofincome chargeable under the Act forming part of the gross sumof money payable to the non-resident. This obligation being limited to the appropriate proportion of income flows from the wordsused in Section 195(1), namely, “chargeable under the provisionsof the Act”. It is for this reason that vide Circular No. 728 dated30-10-1995 CBDT has clarified that the tax deductor can takeinto consideration the effect of DTAA in respect of payment ofroyalties and technical fees while deducting TAS. It may also benoted that Section 195(1) is in identical terms with Section 18(3-B) of the 1922 Act.

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11. While deciding the scope of Section 195(2) it is important tonote that the tax which is required to be deducted at source isdeductible only out of the chargeable sum. This is the underlyingprinciple of Section 195. Hence, apart from Section 9(1), Sections4, 5, 9, 90, 91 as well as the provisions of DTAA are also relevant,while applying tax deduction at source provisions.

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13. If the contention of the Department that the moment there isremittance the obligation to deduct TAS arises is to be acceptedthen we are obliterating the words “chargeable under the provisionsof 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, thewhole or part of which is liable to tax in India. The payer is boundto deduct TAS only if the tax is assessable in India. If tax is not soassessable, there is no question of TAS being deducted. (See VijayShip Breaking Corpn. v. CIT [(2010) 10 SCC 39 : (2009) 314ITR 309] .)

14. One more aspect needs to be highlighted. Section 195 falls inChapter XVII which deals with collection and recovery. ChapterXVII-B deals with deduction at source by the payer. On analysisof various provisions of Chapter XVII one finds the use of differentexpressions, however, the expression “sum chargeable under theprovisions 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 and194-F inter alia provide for deduction of tax in respect of “anyamount” referred to in the specified provisions. In none of theprovisions we find the expression “sum chargeable under theprovisions of the Act”, which as stated above, is an expressionused only in Section 195(1). Therefore, this Court is required togive meaning and effect to the said expression. It follows,therefore, that the obligation to deduct TAS arises only when thereis a sum chargeable under the Act.

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18. If the contention of the Department that any person makingpayment to a non-resident is necessarily required to deduct TASthen the consequence would be that the Department would beentitled to appropriate the monies deposited by the payer even ifthe sum paid is not chargeable to tax because there is no provisionin the IT Act by which a payer can obtain refund. Section 237read with Section 199 implies that only the recipient of the sumi.e. the payee could seek a refund. It must therefore follow, if theDepartment is right, that the law requires tax to be deducted onall payments. The payer, therefore, has to deduct and pay tax,even if the so-called deduction comes out of his own pocket andhe has no remedy whatsoever, even where the sum paid by him isnot a sum chargeable under the Act. The interpretation of theDepartment, therefore, not only requires the words “chargeableunder the provisions of the Act” to be omitted, it also leads to anabsurd consequence. The interpretation placed by the Departmentwould result in a situation where even when the income has noterritorial nexus with India or is not chargeable in India, theGovernment would nonetheless collect tax. In our view, Section195(2) provides a remedy by which a person may seek adetermination of the “appropriate proportion of such sum so ABC

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chargeable” where a proportion of the sum so chargeable is liableto tax.

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20. We find no merit in these contentions. As stated hereinabove,Section 195(1) uses the expression “sum chargeable under theprovisions 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 anassessee-in-default only when he fails to fulfil the statutoryobligation under Section 195(1). If the payment does not containthe element of income the payer cannot be made liable. He cannotbe declared to be an assessee-in-default.

21. The abovementioned contention of the Department is basedon an apprehension which is ill-founded. The payer is also anassessee under the ordinary provisions of the IT Act. When thepayer remits an amount to a non-resident out of India he claimsdeduction or allowances under the Income Tax Act for the saidsum as an “expenditure”. Under Section 40(a)(i), inserted videthe Finance Act, 1988 w.e.f. 1-4-1989, payment in respect ofroyalty, fees for technical services or other sums chargeable underthe Income Tax Act would not get the benefit of deduction if theassessee fails to deduct TAS in respect of payments outside Indiawhich are chargeable under the IT Act. This provision ensureseffective compliance with Section 195 of the IT Act relating totax deduction at source in respect of payments outside India inrespect of royalties, fees or other sums chargeable under the ITAct. In a given case where the payer is an assessee he willdefinitely claim deduction under the IT Act for such remittanceand on inquiry if the AO finds that the sums remitted outside Indiacome within the definition of royalty or fees for technical serviceor other sums chargeable under the IT Act then it would be opento the AO to disallow such claim for deduction. Similarly, vide theFinance Act, 2008 w.e.f. 1-4-2008 sub-section (6) has been insertedin Section 195 which requires the payer to furnish informationrelating to payment of any sum in such form and manner as maybe prescribed by the Board. This provision is brought into forceonly from 1-4-2008. It will not apply for the period with which weare concerned in these cases before us. Therefore, in our view, there are adequate safeguards in the Act which would preventrevenue leakage.

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24. In our view, Section 195(2) is based on the “principle ofproportionality”. The said sub-section gets attracted only in caseswhere the payment made is a composite payment in which acertain proportion of payment has an element of “income”chargeable to tax in India. It is in this context that the SupremeCourt 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 sumis to be deducted and it is the statutory obligation of the personresponsible for paying such ‘sum’ to deduct tax thereon beforemaking payment. He has to discharge the obligation [to TDS].”

If one reads the observation of the Supreme Court, the words“such sum” clearly indicate that the observation refers to a caseof composite payment where the payer has a doubt regarding theinclusion of an amount in such payment which is exigible to tax inIndia. In our view, the above observations of this Court inTransmission Corpn. case [(1999) 7 SCC 266 : (1999) 239 ITR587] which is put in italics has been completely, with respect,misunderstood by the Karnataka High Court to mean that it is notopen for the payer to contend that if the amount paid by him to thenon-resident is not at all “chargeable to tax in India”, then no TASis required to be deducted from such payment. This interpretationof the High Court completely loses sight of the plain words ofSection 195(1) which in clear terms lays down that tax at sourceis deductible only from “sums chargeable” under the provisionsof the IT Act i.e. chargeable under Sections 4, 5 and 9 of the ITAct.

25. Before concluding we may clarify that in the present case onfacts ITO(TDS) had taken the view that since the sale of thesoftware concerned, included a licence to use the same, thepayment 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 A

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Athe Act. The said finding of ITO(TDS) was upheld by CIT(A).However, in the second appeal, ITAT held that such sum paid bythe appellant(s) to the foreign software suppliers was not a “royalty”and that the same did not give rise to any “income” taxable inIndia and, therefore, the appellant(s) was not liable to deduct TAS.However, the High Court did not go into the merits of the caseBand it went straight to conclude that the moment there is remittancean obligation to deduct TAS arises, which view stands herebyoverruled.”

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 IncomeCTax Act is liable to make the necessary deductions only if the non-residentis liable to pay tax as an assessee under the Income Tax Act, and nototherwise. This judgment also clarifies, after referring to CBDT CircularNo.728 dated 30.10.1995, that the tax deductor must take intoconsideration the effect of the DTAA provisions. The crucial link, Dtherefore, is that a deduction is to be made only if tax is payable by thenon-resident assessee, which is underscored by this judgment, statingthat the charging and machinery provisions contained in sections 9 and195 of the Income Tax Act are interlinked.

56. This conclusion is also echoed in Vodafone InternationalEHoldings BV v. Union of India, (2012) 6 SCC 613, wherein thefollowing observations were made on the scope and applicability ofsection 195 of the Income Tax Act:

“171. Section 195 casts an obligation on the payer to deduct taxat source (“TAS”, for short) from payments made to non- residentsFwhich payments are chargeable to tax. Such payment(s) musthave an element of income embedded in it which is chargeable totax in India. If the sum paid or credited by the payer is notchargeable to tax then no obligation to deduct the tax would arise.Shareholding in companies incorporated outside India (CGP) isproperty located outside India. Where such shares become subject-Gmatter of offshore transfer between two non-residents, there isno liability for capital gains tax. In such a case, question of deductionof TAS would not arise.

172. If in law the responsibility for payment is on a non- resident,the fact that the payment was made, under the instructions of theHnon-resident, to its agent/nominee in India or its PE/Branch Office will not absolve the payer of his liability under Section 195 todeduct TAS. Section 195(1) casts a duty upon the payer of anyincome specified therein to a non-resident to deduct therefromTAS unless such payer is himself liable to pay income tax thereonas an agent of the payee. Section 201 says that if such personfails to so deduct TAS he shall be deemed to be an assessee-in-default in respect of the deductible amount of tax (Section 201).

173. Liability to deduct tax is different from “assessment” underthe Act. Thus, the person on whom the obligation to deduct TASis cast is not the person who has earned the income. Assessmenthas to be done after liability to deduct TAS has arisen. The objectof Section 195 is to ensure that tax due from non-resident personsis secured at the earliest point of time so that there is no difficultyin collection of tax subsequently at the time of regular assessment.”

57. The absurd consequence that the resident in India, after makingthe deduction/payment, would not then get any excess payment madeby way of refund when regular assessment takes place, as the non-resident assessee alone would be entitled to such refund, is also pointedout in paragraph 18 of the judgment in GE Technology (supra). It wasafter keeping all this in view that this Court then set aside the judgmentof the High Court of Karnataka dated 24.09.2009 and remanded thecase to the High Court for a decision of the question “on merits”, i.e., onthe sole question as to whether the ITAT was justified in holding that theamounts paid by the appellants to the foreign software suppliers did notamount 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-SingaporeDTAA would demonstrate the fallacy of the aforesaid submission of thelearned Additional Solicitor General. Under Article 12(2) of the India-Singapore DTAA, royalties may be taxed in the Contracting State inwhich they arise (India) and according to the laws of that ContractingState (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 thelearned Additional Solicitor General is correct in his submission, as theDTAA would then not apply, royalty would be liable to be taxed in Indiaat the rate mentioned in the Income Tax Act which can be much higherthan the DTAA rate, as a result of which, the deduction made undersection 195 of the Income Tax Act by the “person responsible” would AB

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Ahave to be a proportion of a much higher sum than the tax that is ultimatelypayable by the non-resident assessee. This equally absurd result cannotbe countenanced given the fact that the person liable to deduct tax isonly liable to deduct tax first and foremost if the non- resident person isliable to pay tax, and second, that if so liable, is then liable to deduct taxdepending on the rate mentioned in the DTAA.B

59. Further, tearing an article of a specific DTAA, namely Article30 of the India-USA DTAA, out of context in order to buttress hissubmission, in a manner far removed from the actual rationale behindthat provision, does not commend itself to us.

C59. i) Article 30 of the India-USA DTAA, relied upon by thelearned Additional Solicitor General, reads:

“1. Each Contracting State shall notify the other Contracting Statein writing, through diplomatic channels, upon the completion oftheir respective legal procedures to bring this Convention into force.

D2. The Convention shall enter into force on the date of the latterof such notifications and its provisions shall have effect:

(a) in the United States

(i) in respect of taxes withheld at source, for amounts paidor credited on or after the first day of January next followingEthe date on which the Convention enters into force;

(ii) in respect of other taxes, for taxable periods beginningon or after the first day of January next following the dateon which the Convention enters into force; and (b) in India, in respect of income arising in any taxable yearFbeginning on or after the first day of April next following thecalendar year in which the Convention enters into force.”

59. ii) By way of contrast, under the Convention between theRepublic of India and the Kingdom of Netherlands for the Avoidance ofDouble Taxation and the Prevention of Fiscal Evasion with respect toGTaxes on Income and on Capital,[32] [“India-Netherlands DTAA”],Article 29 reads:

“1. Each of the States shall notify to the other the completion ofthe procedures required by its law for the bringing into force of 32 Notification No. GSR 382(E), dated 27-3-1989, as amended by Notification No.HS.O. 693(E), dated 30-8-1999.

this Convention. This Convention shall enter into force on thethirtieth day after the latter of the dates on which the respectiveGovernments have notified each other in writing that the formalitiesconstitutionally required in their respective States have beencomplied with, and its provisions shall have effect:

(a) in the Netherlands for taxable years and periods beginningon or after the first day of January next following the calendaryear in which the latter of the notifications is given; (b) in India in respect of income arising in any fiscal yearbeginning on or after the first day of April next following thecalendar year in which the latter of the notifications is given.

2. Notwithstanding the provisions of paragraph 1, the provisionsof Article 8 shall have effect:

(a) in the Netherlands for taxable years and periods beginningon or after the first day of January, 1987; (b) in India in respect of income arising in any fiscal yearbeginning on or after the first day of April, 1987.”

59. iii) Under the Convention between the Government of Japanand the Government of the Republic of India for the Avoidance of DoubleTaxation and the Prevention of Fiscal Evasion with respect to Taxes onIncome,[33] [“India-Japan DTAA”] Article 28 is set out in the followingterms:

“1. This Convention shall be ratified and the instruments ofratification shall be exchanged at Tokyo as soon as possible.

2. This Convention shall enter into force on the thirtieth day afterthe date of the exchange of instruments of ratification and shallhave effect :

(a) In Japan : as regards income for any taxable year beginningon or after the first day of January of the calendar year nextfollowing 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 yearnext following that in which this Convention enters into force.

33 Notification : No. GSR 101(E), dated 1-3-1990, as amended by Notification Nos. SO753(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.

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A3. The Agreement between Japan and India for the Avoidance ofDouble Taxation in respect of Taxes on Income signed at NewDelhi on January 5, 1960 shall terminate and cease to have effectin respect of income to which this Convention applies under theprovisions of paragraph 2.”

B59. iv) Under the Convention between the Government of theRepublic of India and the Government of the United Kingdom of GreatBritain and Northern Ireland for the Avoidance of Double Taxation andthe Prevention of Fiscal Evasion with respect to Taxes on Income andCapital Gains,[34] [“India-UK DTAA”] Article 30 reads as follows:

C(1) Each of the Contracting States shall notify to the other thecompletion of the procedures required by its law for the bringinginto force of this Convention. This Convention shall enter intoforce on the date of the later of these notifications and shallthereupon have effect:

D(a) in the United Kingdom:

(i) in respect of income tax and capital gains tax, for anyyear of assessment beginning on or after 6th April in thecalendar year next following that in which the later of thenotifications is given; E

(ii) in respect of corporation tax, for any financial yearbeginning on or after 1st April in the calendar year nextfollowing that in which the later of the notifications is given;

(iii) in respect of petroleum revenue tax, for any chargeableperiod beginning on or after 1st January in the calendarFyear next following that in which the later of the notificationsis given; (b) in India, in respect of income arising in any fiscal yearbeginning on or after the first day of April next following thecalendar year in which the later of the notifications is given.

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(2) Subject to the provisions of paragraph (3) of this Article, theConvention between the Government of the United Kingdom ofGreat Britain and Northern Ireland and the Government of Indiafor the Avoidance of Double Taxation and the Prevention of Fiscal 34 GSR 91(E), dated 11-2-1994, as amended by Notification No. 10/2014 [F.No. 505/H1986 FTD-I], dated 10-2-2014.

Evasion with Respect to Taxes on Income and Capital Gains signedin New Delhi on 16th April 1981 (hereinafter referred to as “the1981 Convention”) shall terminate and cease to be effective fromthe date upon which this Convention has effect in respect of thetaxes to which this Convention applies in accordance with theprovisions of paragraph (1) of this Article.

(3) Where any provisions of the 1981 Convention would haveafforded any greater relief from tax than is due under thisConvention, any such provision as aforesaid shall continue to haveeffect: (a) in the United Kingdom, for any year of assessment orfinancial year; and (b) in India, for any fiscal year; beginning, ineither case, before the entry into force of this Convention.”

59. v) Article 28 of the Agreement between the Government ofthe Republic of India and the Government of the People’s Republic ofChina for the Elimination of Double Taxation with respect to Taxes onIncome 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 afterthe date on which diplomatic notes indicating the completion ofinternal legal procedures necessary in each country for the entryinto force of this Agreement have been exchanged. This Agreementshall have effect :

(a) in China, in respect of income arising in any taxable yearbeginning on or after the first day of January next followingthe calendar year in which this Agreement enters into force; (b) in India, in respect of income arising in any previous yearbeginning on or after the first day of April next following thecalendar year in which this Agreement enters into force.”

60. Obviously, the logic behind Article 30 of the India-USA DTAAis for reasons connected with USA’s municipal taxation laws, and hasnothing to do with Indian municipal law governing the liability of personsto deduct tax at source under section 195 of the Income Tax Act. This isreinforced by the fact that the OECD Commentary on Articles 30 and31 acknowledges the fact that the “entry into force” provisions, unlikethe rest of the provisions in the OECD Model Tax Convention on Income 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.

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Aand on Capital, depend on the domestic laws of Contracting States, asfollows:

“COMMENTARY ON ARTICLES 30 AND 31CONCERNING THE ENTRY INTO FORCE AND THETERMINATION OF THE CONVENTION

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3. It is open to Contracting States to agree that the Conventionshall enter into force when a specified period has elapsed afterthe exchange of the instruments of ratification or after theconfirmation that each State has completed the proceduresCrequired for such entry into force.

4. No provisions have been drafted as to the date on which theConvention shall have effect or cease to have effect,since suchprovisions would largely depend on the domestic laws of theContracting States concerned.Some of the States assess tax onDthe income received during the current year, others on the incomereceived during the previous year, others again have a fiscal yearwhich differs from the calendar year. Furthermore, someconventions provide, as regards taxes levied by deduction at thesource, a date for the application or termination which differsfrom the date applying to taxes levied by assessment.”

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61. For all these reasons, we do not permit the learned AdditionalSolicitor General to have a second bite at the same cherry, albeit throughthe ingenious argument made by him based on Article 30 of the India-USA DTAA.FDEFINITION OF ROYALTY IN THE DTAAs VIS-À-VISTHE INCOME TAX ACT

62. In order to ascertain whether the question which was posedby this Court in GE Technology (supra) was correctly answered bythe High Court of Karnataka vide the impugned judgment datedG15.10.2011,[36] the first expression that has to be considered by us is theexpression “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 kindthat are received as a consideration for the use of or the right to use anycopyright in a literary work. As opposed to this, the definition containedin explanation 2 to section 9(1)(vi) of the Income Tax Act, is wider inat least three respects:

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i.It speaks of “consideration”, but also includes a lump-sumconsideration which would not amount to income of therecipient chargeable under the head “capital gains”;

ii.When it speaks of the transfer of “all or any rights”, itexpressly includes the granting of a licence in respect thereof;Cand

iii.It states that such transfer must be “in respect of” anycopyright 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 sineDqua non under explanation 2 to section 9(1)(vi) of the Income TaxAct. In short, there must be transfer by way of licence or otherwise, ofall or any of the rights mentioned in section 14(b) read with section 14(a)of the Copyright Act.

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65. In State of Madras v. Swastik Tobacco Factory, (1966) 3SCR 79, this Court construed the words “in respect of” used in rule5(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 ofestate duty, construed the words “in respect of” in Section 5(2) ofthe Finance Act, 1894 (57 & 58 Vict, c. 30) and observed that thephrase denoted some imprecise kind of nexus between the propertyand the estate duty. The House of Lords in Asher v. SeafordCourt Estates Ltd. [LR 1950 AC 608] in construing the provisionsof Section 2, sub- section (3) of Increase of Rent and MortgageInterest (Restrictions) Act, 1920 (10 & 11 Geo. 5, c. 17), held thattheexpression “in respect of” must be read as equivalent to“attributable”. The Privy Council in Bicher Ltd. v. CIT [(1962) 3All ER 294] observed that the said words could mean more than“consisting of” or “namely”.

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AIt is not necessary to refer to other decisions. It may be acceptedthat the said expression received a wide interpretation, havingregard to the object of the provisions and the setting in which thesaid words appeared. On the other hand, Indian tax laws use theexpression “in respect of” as synonymous with the expression“on”:see Article 288 of the Constitution of India; Section 3 of theBIndian Income Tax Act, 1922; Sections 3(2) and 3(5), SecondProviso, of the Madras General Sales Tax Act, 1939; Section 3(1-A) of the Central Excise and Salt Act, 1944; and Section 9 of theKerala Sales Tax Act. We should not be understood to haveconstrued the said provisions, but only have referred to them toCstate the legislative practice. Consistent with the said practice,Rule 5(1)(i) of the Rules uses the same expression. When thesaid Rule says “excise duty paid in respect of the goods”, theexcise 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, exciseDduty is levied on the goods described in the Schedule. Therefore,when Rule 5(1)(i) of the Rules refers to the duty paid in respectof the goods to the Central Government, it necessarily refers tothe duty paid on the goods mentioned in the Schedule.As the dutyexempted from the gross turnover is the duty so paid under theECentral Act, read with the Schedule, the expression “in respectof” in the context can only mean excise duty paid on goods. Inour 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 resultwill not be different, for the duty paid shall be attributable to theFgoods. If it was paid on the raw material it can be attributableonly to raw material and not to the goods. We, therefore, hold thatonly excise duty paid on the goods sold by the assessee is deductiblefrom the gross turnover under Rule 5(1)(i) of the Rules.”

(pages 82-83)

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66. The aforesaid meaning accords with the meaning to be givento the expression “in respect of” contained in explanation 2(v) to section9(1)(vi) of the Income Tax Act.

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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 FinanceAct 1976,[37] was to introduce source-based taxation for income in thehands of a non-resident by way of interest, royalty and fees for technicalservices. In Carborandum & Co. v. CIT, (1977) 2 SCC 862, thisCourt, applying residence-based rules of taxation, held that the technicalservice fees received by the non-resident assessee (relatable to theassessment year 1957-1958) could only be deemed to accrue in India ifsuch income could be attributed to a business connection in India. In thefacts of that case, since no part of the foreign assessee’s operationswere carried on in India, the technical services being rendered wholly inforeign territory, it was held that no part of the technical service feesreceived 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 thehands of a non-resident, noted in the Memorandum explaining theprovisions of the Finance Bill 1976, as follows:

38. “Source rule” regarding place of accrual of income byway of interest, royalty and fees for technical services. - Anon-resident taxpayer is chargeable to tax in India in respect ofincome from whatever source derived which is received or isdeemed to be received in India or which accrues or arises or isdeemed to accrue or arise to him in India. The existing provisionsin the Income-tax Act which provide that certain incomes will bedeemed to accrue or arise in India are couched in general language.The absence of a clear- cut source rule sometimes createsuncertainty about the chargeability of certain types of incomes inthe case of non- residents. In order to avoid any doubt or disputein regard to the accrual of income by way of interest, royalty andfees for technical services in the case of non-residents, it isproposed to make certain provisions in the Income-tax Act clearlyspecifying the circumstances in which such income shall bedeemed to accrue or arise in India.

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40. Income by way of royalty payable by the Government will bedeemed to accrue or arise in India. Royalty payable by a person B

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Awho is resident in India will also be deemed to accrue or arise inIndia, except in cases where the royalty is payable for the transferof any right or the use of any property or information or for utilisingthe services of the recipient for the purposes of a business orprofession carried on outside India or for the purposes of makingor earning any income from a source outside India. Royalty payableBby a non-resident will be deemed to accrue or arise in India onlyin cases where the royalty is payable in respect of any right,property or information used or services utilised for the purposesof a business or profession carried on by the non- resident in Indiaor for the purposes of making or earning any income from anyCsource in India.”

69. Consequently, section 9(1)(vi) of the Income Tax Act wasbrought into force. The definition of royalty contained in explanation2(v) of section 9(1)(vi) of the Income Tax Act includes the transfer ofall or any rights (including the granting of a licence) “in respect of anyDcopyright, literary, artistic or scientific work”.

70. The comma after the word “copyright” does not fit as copyrightis 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 TaxesCode 2010,[38] under Chapter XIX in Part H thereof, which set out theEdefinition of “royalty” as follows:

“PART H - CHAPTER XIX INTERPRETATIONS ANDCONSTRUCTIONS

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(314) (220) “royalty” means consideration (including any lump-Fsum consideration but excluding any consideration which wouldbe the income of the recipient chargeable under the head “Capitalgains”) for—

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(g) the transfer of all or any rights (including the granting of aGlicence) in respect of — (i) any copyright of literary, artistic orscientific work; (ii) cinematographic films or work on films,tapes or any other means of reproduction; or (iii) live coverageof any event”

H38 This Code has, however, remained in draft form and was never enacted.

71. The transfer of “all or any rights (including the granting of alicence) 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 hasbeen held hereinabove, the expression “in respect of” is equivalent to“in” or “attributable to”. Thus, explanation 2(v) to section 9(1)(vi) ofthe Income Tax Act, when it speaks of “all of any rights…in respect ofcopyright” is certainly more expansive than the DTAA provision, whichspeaks of the “use of, or the right to use” any copyright. This has beenrecognised by the High Court of Delhi in CIT v. DCM Limited, ITANos. 87-89/1992 in its judgment dated 10.03.2011, as follows:

“9. A bare perusal of Article XIII(3) would show that theexpression “payments of any kind” is circumscribed by the latterpart 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 observedthat the CIT(A) had erred in coming to the conclusion that theexpression “payments of any kind” was broad enough to includeeven an outright sale. To drive home this point the Tribunal, onceagain, has correctly drawn a distinction between the definition ofroyalty as appearing in the DTAA and that which finds mention inexplanation 2 to section 9(1)(vi) of the I.T. Act. A perusal of theprovisions of the said explanation would show that it brings withinthe ambit of royalty a wider range of transactions which wouldinclude payments made for “transfer of all” or “any right” in patents,inventions, model, design, etc. apart from payments based for useof such right, patent, innovation, model, design, secret formula orprocess or trade mark or similar property. As a matter of fact, aperusal of clause (i) of explanation 2 of section 9(1)(vi) of theI.T. Act would show that “transfer of all” or “any right” couldtake place by execution of licences as well, which was themethodology adopted by Tate and the assessee in the presentcase…”

72. However, when it comes to the expression “use of, or theright to use”, the same position would obtain under explanation 2(v) ofsection 9(1)(vi) of the Income Tax Act, inasmuch as, there must, underthe licence granted or sale made, be a transfer of any of the rightscontained in sections 14(a) or 14(b) of the Copyright Act, for explanation2(v) to apply. To this extent, there will be no difference in the position AB

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Abetween the definition of “royalties” in the DTAAs and the definition of“royalty” in explanation 2(v) of section 9(1)(vi) of the Income TaxAct.

73. Even if we were to consider the ambit of “royalty” only underthe Income Tax Act on the footing that none of the DTAAs apply to theBfacts of these cases, the definition of royalty that is contained inexplanation 2 to section 9(1)(vi) of the Income Tax Act would make itclear that there has to be a transfer of “all or any rights’’ which includesthe grant of a licence in respect of any copyright in a literary work. Theexpression “including the granting of a licence” in clause (v) ofexplanation 2 to section 9(1)(vi) of the Income Tax Act, wouldCnecessarily mean a licence in which transfer is made of an interest inrights “in respect of” copyright, namely, that there is a parting with aninterest in any of the rights mentioned in section 14(b) read with section14(a) of the Copyright Act. To this extent, there will be no differencebetween the position under the DTAA and explanation 2 to sectionD9(1)(vi) of the Income Tax Act.

74. However, the learned Additional Solicitor General presses theapplication of the amendment made vide the Finance Act 2012 withretrospective effect from 01.06.1976, which added explanation 4 tosection 9(1)(vi) of the Income Tax Act.

E75. The Memorandum explaining the provisions in the FinanceBill 2012 states:

“Section 9(1)(vi) provides that any income payable by way ofroyalty in respect of any right, property or information is deemedto be accruing or arising in India. The term “royalty” has beenFdefined in Explanation 2 which means consideration received orreceivable for transfer of all or any right in respect of certainrights, property or information. Some judicial decisions haveinterpreted this definition in a manner which has raised doubts asto whether consideration for use of computer software is royaltyGor not; whether the right, property or information has to be useddirectly by the payer or is to be located in India or control orpossession of it has to be with the payer. Similarly, doubts havebeen raised regarding the meaning of the term processed.

Considering the conflicting decisions of various courts in respectof income in nature of royalty and to restate the legislative intent,H

it is further proposed to amend the Income Tax Act in followingmanner:-

(i) To amend Section 9(1)(vi) to clarify that the considerationfor use or right to use of computer software is royalty byclarifying that transfer of all or any rights in respect of anyright, property or information as mentioned in Explanation 2,includes and has always included transfer of all or any rightfor use or right to use a computer software (including grantingof a licence) irrespective of the medium through which suchright is transferred.

(ii) To amend section 9(1)(vi) to clarify that royalty includesand has always included consideration in respect of any right,property or information, whether or not (a) The possession or control of such right, property orinformation is with the payer; (b) Such right, property or information is used directly bythe payer;

(c) The location of such right, property or information is inIndia

(iii) To amend section 9(1)(vi) to clarify that the term “process”includes and shall be deemed to have always includedtransmission by satellite (including up-linking, amplification,conversion for down-linking of any signal), cable, optic fibre orby any other similar technology, whether or not such processis 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 insertedwith retrospective effect, uses the language that is contained in section9(1)(vi)(b) of the Income Tax Act, namely, that the expression “anyright, property or information” occurring in section 9(1)(vi)(b) alone isthe subject matter of explanation 4, explanation 4 not expanding thescope of the definition of royalty contained in explanation 2, whichdoes not contain the aforesaid expression. A reference to theMemorandum explaining the provisions in the Finance Bill 2012 set out AB

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Ahereinabove, would make it clear that the expression “as mentioned inExplanation 2” in sub-para (i) of the aforesaid Memorandum showsthat explanation 4 was inserted retrospectively to expand the scope ofexplanation 2(v). In any case, explanation 2(v) contains the expression,“the transfer of all or any rights” which is an expression that wouldsubsume “any right, property or information” and is wider than theBexpression “any right, property or information”. It is therefore difficultto accept Shri Pardiwala’s argument that explanation 4 does not expandthe scope of the expression “royalty” as contained in explanation 2 tosection 9(1)(vi) of the Income Tax Act.

77. It is equally difficult to accept the learned Additional SolicitorCGeneral’s submission that explanation 4 to section 9(1)(vi)of the IncomeTax Act is clarificatory of the position as it always stood, since 01.06.1976,for which he strongly relied upon CBDT Circular No. 152 dated27.11.1974. Quite obviously, such a circular cannot apply as it wouldthen be explanatory of a position that existed even before section 9(1)(vi)

Dwas 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 tocomputer 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 useEcomputer software even before the term “computer software” wasinserted in the statute. Likewise, even qua section 2(o) of the CopyrightAct, the term “computer software” was introduced for the first time inthe definition of a literary work, and defined under section 2(ffc) only in1994 (vide Act 38 of 1994).F78. Furthermore, it is equally ludicrous for the aforesaid amendmentwhich also inserted explanation 6 to section 9(1)(vi) of the Income TaxAct, to apply with effect from 01.06.1976, when technology relating totransmission by a satellite, optic fibre or other similar technology, wasonly regulated by the Parliament for the first time through the CableTelevision Networks (Regulation) Act, 1995, much after 1976. For allGthese reasons, it is clear that explanation 4 to section 9(1)(vi) of theIncome Tax Act is not clarificatory of the position as of 01.06.1976, butin fact, expands that position to include what is stated therein, vide theFinance Act 2012.

79. The learned Additional Solicitor General then relied upon theHFinance Minister’s statement made before the Lok Sabha on 07.09.1990, which allowed lump sum payments to be made without the deduction oftax at source under section 195(1) of the Income Tax Act and did awaywith the dual levy, both by way of customs duty and income tax, onroyalty payments for the licensing of software. This statement, again, inno manner furthers the case of the Revenue that explanation 4 is merelyclarificatory of the legal position as it always stood. Likewise, NotificationNo. 21/2012 dated 13.06.2012, which deals with section 194J of theIncome Tax Act, does no more than providing that a transferee is exemptfrom deducting TDS under section 194J when TDS has already beendeducted under section 195 on the payment made in the previous transferof the same software which the transferee acquires without anymodification. In any case, this notification being issued on 13.06.2012,i.e., after explanation 4 was inserted vide the Finance Act 2012, itwould not assist the Revenue in asserting that explanation 4 clarifiesthe legal position as it always stood.

80. The learned Additional Solicitor General then argued that beingcovered 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 TaxAct ought to have deducted tax at source on the footing that explanation4 existed on the statute book with effect from 1976. We have, therefore,to examine as to whether persons liable to deduct TDS under section195 of the Income Tax Act can be held liable to deduct such sums at atime when explanation 4 was factually not on the statute book, alldeductions liable to be made and the assessment years in question beingprior to the year 2012.

81. This question is answered by two latin maxims, lex non cogitad impossibilia, i.e., the law does not demand the impossible andimpotentia excusat legem, i.e., when there is a disability that makes itimpossible to obey the law, the alleged disobedience of the law is excused.Recently, in the judgment in Arjun Panditrao Khotkar v. KailashKushanrao Gorantyal, (2020) 7 SCC 1 delivered by this Court, thisCourt applied the said maxims in the context of the requirement of acertificate to produce evidence by way of electronic record under section65B of the Evidence Act, 1872 and held that having taken all possiblesteps to obtain the certificate and yet being unable to obtain it for reasonsbeyond his control, the respondent in the facts of the case, was relievedof the mandatory obligation to furnish a certificate. In so holding, thisCourt referred to previous judgments dealing with the doctrine ofimpossibility and concluded as follows:

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“47. However, a caveat must be entered here. The facts of thepresent case show that despite all efforts made by therespondents, both through the High Court and otherwise, to getthe requisite certificate under Section 65-B(4) of the EvidenceAct from the authorities concerned, yet the authorities concernedwilfully refused, on some pretext or the other, to give suchcertificate. In a fact-circumstance where the requisite certificatehas 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 suchcertificate can apply to the court for its production under theprovisions aforementioned of the Evidence Act, CPC or CrPC.Once such application is made to the court, and the court thenorders or directs that the requisite certificate be produced by aperson to whom it sends a summons to produce such certificate,the party asking for the certificate has done all that he can possiblydo to obtain the requisite certificate. Two Latin maxims becomeimportant at this stage. The first is lex non cogit ad impossibiliai.e. the law does not demand the impossible, and impotentiaexcusat legem i.e. when there is a disability that makes itimpossible to obey the law, the alleged disobedience of the law isexcused. This was well put by this Court in Presidential Poll, Inre [Presidential Poll, In re, (1974) 2 SCC 33] as follows : (SCCpp. 49-50, paras 14-15)

“14. If the completion of election before the expiration of theterm is not possible because of the death of the prospectivecandidate it is apparent that the election has commenced before the expiration of the term but completion before the expirationof the term is rendered impossible by an act beyond the controlof human agency. The necessity for completing the electionbefore the expiration of the term is enjoined by the Constitutionin public and State interest to see that the governance of thecountry is not paralysed by non-compliance with the provisionthat there shall be a President of India.

15. The impossibility of the completion of the election to fillthe vacancy in the office of the President before the expirationof the term of office in the case of death of a candidate asmay appear from Section 7 of the 1952 Act does not rob Article

62(1) of its mandatory character. The maxim of law impotentiaexcusat legem is intimately connected with another maxim oflaw lex non cogit ad impossibilia. Impotentia excusat legemis that when there is a necessary or invincible disability toperform the mandatory part of the law that impotentia excuses.The law does not compel one to do that which one cannotpossibly perform. ‘Where the law creates a duty or charge,and the party is disabled to perform it, without any default inhim, and has no remedy over it, there the law will in generalexcuse him.’ Therefore, when it appears that the performanceof the formalities prescribed by a statute has been renderedimpossible by circumstances over which the persons interestedhad no control, like the act of God, the circumstances will betaken as a valid excuse. Where the act of God prevents thecompliance with the words of a statute, the statutory provisionis not denuded of its mandatory character because ofsupervening impossibility caused by the act of God. (SeeBroom’s Legal Maxims, 10th Edn. at pp. 162-63 and Craieson Statute Law, 6th Edn. at p. 268.)”

It is important to note that the provision in question in PresidentialPoll, In re [Presidential Poll, In re, (1974) 2 SCC 33] was alsomandatory, which could not be satisfied owing to an act of God, inthe facts of that case. These maxims have been applied by thisCourt in different situations in other election cases — See ChandraKishore Jha v. Mahavir Prasad [Chandra Kishore Jha v.Mahavir Prasad, (1999) 8 SCC 266] (at paras 17 and 21); SpecialReference No. 1 of 2002, In re (Gujarat Assembly Electionmatter) [Special Reference No. 1 of 2002, In re (GujaratAssembly Election matter), (2002) 8 SCC 237] (at paras 130 and151) and Raj Kumar Yadav v. Samir Kumar Mahaseth [RajKumar Yadav v. Samir Kumar Mahaseth, (2005) 3 SCC 601](at paras 13 and 14).

48. These Latin maxims have also been applied in several othercontexts 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 anundertaking by the State Electricity Board under Section 6(4) ofthe Electricity Act, 1910. The provision required a notice of at AB

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least 18 months before the expiry of the relevant period to begiven by such State Electricity Board to the State Government.Since this mandatory provision was impossible of compliance, itwas held that the State Electricity Board was excused from givingsuch 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 StateElectricity Board the option of purchase on the expiry of therelevant period specified in the licence. But the StateGovernment claims that under sub-section (2) of Section 6 it isnow vested with the option. Now, under sub-section (2) ofSection 6, the State Government would be vested with theoption only ‘where a State Electricity Board has not beenconstituted, or if constituted, does not elect to purchase theundertaking’. It is common case that the State Electricity Boardwas duly constituted. But the State Government claims thatthe State Electricity Board did not elect to purchase theundertaking. For this purpose, the State Government relies uponthe deeming provisions of sub-section (4) of Section 6, andcontends that as the Board did not send to the State Governmentany intimation in writing of its intention to exercise the optionas required by the sub-section, the Board must be deemed tohave elected not to purchase the undertaking. Now, the effectof sub- section (4) read with sub-section (2) of Section 6 isthat on failure of the Board to give the notice prescribed bysub-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 thecoming into force of Section 6 a notice in writing of its intentionto exercise the option at least 18 months before the expiry ofthe relevant period. Section 6 came into force on 5-9-1959,and the relevant period expired on 3-12-1960. In thecircumstances, the giving of the requisite notice of 18 monthsin respect of the option of purchase on the expiry of 2-12-1960, was impossible from the very commencement of Section6. The performance of this impossible duty must be excused inaccordance 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 wasnot required to give the notice under sub-section (4) of Section6 in respect of its option of purchase on the expiry of 25 years.It must follow that the Board cannot be deemed to have electednot to purchase the undertaking under sub-section (4) of Section6. By the notice served upon the appellant, the Board dulyelected to purchase the undertaking on the expiry of 25 years.Consequently, the State Government never became vested withthe option of purchasing the undertaking under sub-section (2)of Section 6. The State Government must, therefore, berestrained 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 adimpossibilia was applied in the context of the applicability of amandatory 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 arewell settled, namely, actus curiae neminem gravabit — Anact of the court shall prejudice no man. In Broom’s LegalMaxims, 10th Edn., 1939 at p. 73 this maxim is explained thatthis maxim was founded upon justice and good sense; andafforded a safe and certain guide for the administration of thelaw. The above maxim should, however, be applied with caution.The other maxim is lex non cogit ad impossibilia (Broom’sLegal Maxims, p. 162) — The law does not compel a man todo that which he cannot possibly perform. The law itself andthe administration of it, said Sir W. Scott, with reference to analleged infraction of the revenue laws, must yield to that towhich everything must bend, to necessity; the law, in its mostpositive and peremptory injunctions, is understood to disclaim,as it does in its general aphorisms, all intention of compellingimpossibilities, and the administration of laws must adopt thatgeneral exception in the consideration of all particular cases.

7. In this case indisputably during the period from 26-7-1978to December 1982 there was subsisting injunction preventingthe arbitrators from taking any steps. Furthermore, as noted AB

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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 presentedthe award for its registration during that time. The award aswe have noted before was made on 28-11-1977 and beforethe expiry of the four months from 28-11-1977, the award wasfiled in the court pursuant to the order of the court. It wasargued that the order made by the court directing the arbitratorsto keep the award in the custody of the court was wrong andwithout jurisdiction, but no arbitrator could be compelled todisobey the order of the court and if in compliance or obediencewith court of doubtful jurisdiction, he could not take back theaward from the custody of the court to take any further stepsfor its registration then it cannot be said that he has failed toget the award registered as the law required. The aforesaidtwo legal maxims — the law does not compel a man to dothat which he cannot possibly perform and an act of thecourt shall prejudice no man would, apply with full vigour inthe facts of this case and if that is the position then the awardas we have noted before was presented before the Sub-Registrar, Arambagh on 25-11-1983 the very next one day ofgetting 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 theperiod during which the judicial proceedings were pending thatis to say, from 28-1-1978 to 24-11-1983 should be excluded inview of the principle laid down in Section 15 of the LimitationAct, 1963. The High Court [Tarapada Dey v. DistrictRegistrar, Hooghly, 1986 SCC OnLine Cal 101 : AIR 1987Cal 107], therefore, in our opinion, was wrong in holding thatthe only period which should be excluded was from 26-7-1978till 20-12-1982. We are unable to accept this position. 26-7-1978 was the date of the order of the learned Munsif directingmaintenance of status quo and 20-12-1982 was the date whenthe interim injunction was vacated, but still the award was inthe custody of the court and there is ample evidence as it wouldappear from the narration of events hereinbefore made thatthe arbitrators had tried to obtain the custody of the awardwhich 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) 2SCC 407] (at para 12), and have also been applied to relieveauthorities of fulfilling their obligation to allot plots when such plotshave been found to be unallottable, owing to the contravention ofthe Central statutes — see Hira Tikkoo v. State (UT ofChandigarh) [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 thefacts of this case, the respondents, having done everything possibleto obtain the necessary certificate, which was to be given by athird party over whom the respondents had no control, must berelieved of the mandatory obligation contained in the said sub-section.”

82. As a matter of fact, even under the Income Tax Act, the HighCourt of Bombay has taken a view, applying the aforestated maxims inthe context of the provisions of the relevant DTAAs, to hold that personsare not obligated to do the impossible, i.e., to apply a provision of astatute 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 Section9(1)(vi), in the context of section 194J of the Income Tax Act, whichexplanation was inserted with retrospective effect. The High Court ofBombay, applying the aforesaid maxim, held:

“(d) We find that [the] view taken by the impugned order dated9[th] July, 2014 of the Tribunal that a party cannot be called upon toperform an impossible act i.e. to comply with a provision not inforce at the relevant time but introduced later by retrospectiveamendment. This is in accord with the view taken by this Court inCIT v/s. Cello Plast (2012) 209 Taxmann 617 – wherein thisCourt has applied the legal maxim lex non cogit ad impossibilia(law does not compel a man to do what he cannot possiblyperform).

(e) In the present facts, the amendment by introduction ofExplanation-6 to Section 9(1)(vi) of the Act took place in the year A

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420SUPREME COURT REPORTS

A2012 with retrospective effect from 1976. This could not havebeen contemplated by the Respondent when he made the paymentwhich was subject to tax deduction at source under Section 194Cof the Act during the subject Assessment Year, would requirededuction under Section 194J of the Act due to some futureamendment with retrospective effect.”B

84. In CIT v. Western Coalfields Ltd., ITA No. 93/2008, theHigh Court of Bombay dealt with the insertion of an explanation tosection 17(2)(ii) of the Income Tax Act with retrospective effect andheld:

C“11) We see no merit in the above contentions. The Apex Courtin Arun Kumar’s case (supra) while upholding the validity of Rule3 has held that in the absence of any “deeming fiction” in the Act,it is open to the assessee to contend that there is no concession inthe matter of accommodation provided by the employer to theemployees and the case is not covered by Section 17(2)(ii) of theDAct. In other words, even after the substitution of Rule 3 witheffect from 1/4/2001, in the absence of any specific provisionunder the Act, it was open to the assessee not to deduct tax atsource relating to the accommodation given to the employees onthe ground that no concession in rent has been given to theEemployees. This contention of the assessee has been in fact upheldby the Apex Court in the case of Arun Kumar (supra). Toovercome the above decision, the law has been amended byFinance Act, 2007 with retrospective effect from 1/4/2002. Theretrospective amendment merely takes away the above argument,which was available to the assessee. Once the salary is paid byFthe employer after deducting tax at source as per the law prevailingon the date of paying the salary, then any subsequent amendmentin law brought about retrospectively cannot require the employerto deduct tax at source for the past period, because the salary forthat period has already been paid. Consequently, the employerGcannot be made liable for the consequences set out in Section 201of the Act on account of the retrospective amendment to Section17(2) of the Act.”

85. It is thus clear that the “person” mentioned in section 195 ofthe Income Tax Act cannot be expected to do the impossible, namely, toHapply the expanded definition of “royalty” inserted by explanation 4 to section 9(1)(vi) of the Income Tax Act, for the assessment years inquestion, at a time when such explanation was not actually and factuallyin the statute.

RULINGS OF THE AAR AND JUDGMENTS OF HIGHCOURTS

86. The question of law posed before us in these appeals hasbeen answered in several rulings – some by the AAR, some by the HighCourt of Karnataka, and some by the High Court of Delhi. Theseauthorities will now be dealt with sequentially.

87. The first and most comprehensive authority dealing with thequestion raised in these appeals is by the AAR in its ruling in DassaultSystems, K.K., In Re., (2010) 322 ITR 125 (AAR) [“Dassault(AAR)”]. In that case, the applicant was a company incorporated underthe 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 sellingsoftware to end-users. The question posed by the AAR to itself was asfollows:

“Whether on the facts and circumstances of the case and in lawthe payment received by Dassault Systems K.K. (hereinafterreferred to as the “the applicant”) from sale of software productsto independent third party resellers will be taxable as businessprofits under Article 7 of the India-Japan Double TaxationAvoidance Agreement (“India-Japan DTAA” or “Treaty”) andwill not constitute ‘royalties and fee for technical services’ asdefined in Article 12 of India-Japan DTAA?”

(pages 129-130)

88. After setting out Article 12 of the India-Japan DTAA, whichis in the same terms as Article 12 of the India-Singapore DTAA and theother DTAAs that we are concerned with, and after adverting to thedefinition 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 classicuson copyright law, the following passage:

“Before entering into a discussion on the applicability of the royaltydefinition, it is appropriate to recapitulate certain basic principlesconcerning the copyright as a legal concept. We may, in this A

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connection, refer to some passages from the classic treatise ofCopinger and Skone James on Copyright (1999 Edn):

“Copyright gives the owner of the copyright in a work of anydescription the exclusive right to authorize or prohibit theCopyright, Designs and Patents Act, 1988 of UK exploitationof the copyright work by third parties. This includes the rightto copy the work itself and also to use the work in other waysprotected under the law”.(p. 26)

Copyright is often described as a negative right. This idea isconveyed by Copinger in the following words:

“Copyright, however, does not essentially mean a right to dosomething, but rather a right to restrict others from doing certainacts, and, when copyright is referred to as “an exclusive right,”the emphasis is on the word ‘exclusive’. Thus, the 1988 Act,whilst not defining “copyright” otherwise than as a propertyright, which is transmissible as personal or moveable property,provides that the owner of the copyright in a work has theexclusive right to do the acts restricted by the copyright in awork 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 awork is different from the ownership of the physical materialin which the copyright work may happen to be embodied. Justas the owner of the physical material on which a copyrightwork is first recorded is not necessarily the first owner of thecopyright, so the transfer of title to the original physical materialdoes not by itself operate to transfer the title to the copyright…Thus, to take an obvious example, the purchaser of a book orvideo recording becomes the owner of the physical article buthe does not thereby become the owner of any part of thecopyright in the works reproduced in it. The copyright in theliterary work remains with the copyright owner, who enjoysand is entitled to enforce all the exclusive rights of copying,publication, adaptation, sale, rental and so on conferred on himby copyright law. The purchaser does not acquire by hispurchase any right, either by way of assignment or licence, toexercise 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:

“A mere licence from the copyright owner confers noproprietary interest on the licensee enabling him, for example,to bring proceedings in his own name, unless coupled with thegrant of some other interest, for example, the right to takeproperty away. Statute apart, even an exclusive licence, whichis merely the leave to do a thing coupled with a promise not todo, or give anyone else permission to do that thing, gives thelicensee no right to sue in his own name for infringement norany other proprietary interest. In copyright law this generalrule is altered by statute in the case of exclusive licences whichcomply with prescribed formalities. The 1988 Act confers onsuch a licensee a procedural status which enables him to bringproceedings but otherwise the rule is unchanged: an exclusivelicensee has no proprietary interest in the copyright.””

89. After setting out various provisions of the Copyright Act, theterms 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 doany 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 saidacts. In fact, the restrictions placed on the end- user and the VARwhich have been referred to earlier coupled with a declarationthat the intellectual property rights in the licensed programmeswill remain exclusively with the applicant (or its licensors) and thenon-exclusive and non- transferable character of licence are allmeant to ensure that none of the rights vesting in the applicant ascopyright- holder can be claimed or enjoyed by the licensee andthat they will remain intact and are preserved. The entire tenor ofthe Agreement and the various stipulations contained therein makeit clear that no rights in derogation of the applicant’s exclusiverights in relation to the copyright have been conferred on thelicensee i.e., the end-user or VAR. The core of the transaction isto authorize the end-user to have access to and make use of thelicensed software products over which the applicant has exclusive AB

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copyright, without giving any scope for dealing with them anyfurther.

Passing on a right to use and facilitating the use of a product forwhich the owner has a copyright is not the same thing astransferring or assigning rights in relation to the copyright. Theenjoyment of some or all the rights which the copyright ownerhas, is necessary to trigger the royalty definition. Viewed fromthis angle, a non-exclusive and non- transferable licence enablingthe use of a copyrighted product cannot be construed as anauthority to enjoy any or all of the enumerated rights ingrained ina copyright. Where the purpose of the licence or the transactionis only to establish access to the copyrighted product for internalbusiness purpose, it would not be legally correct to state that thecopyright itself has been transferred to any extent. It does notmake any difference even if the computer programme passed onto the user is a highly specialized one. The parting of intellectualproperty rights inherent in and attached to the software product infavour of the licencee/customer is what is contemplated by thedefinition clause in the Act as well as the Treaty. As observedearlier, those rights are incorporated in Section 14. Merelyauthorizing or enabling a customer to have the benefit of data orinstructions contained therein without any further right to dealwith them independently does not, in our view, amount to transferof rights in relation to copyright or conferment of the right ofusing the copyright. However, where, for example, the owner ofcopyright over a literary work grants an exclusive license to makeout copies and distribute them within a specified territory, thegrantee will practically step into the shoes of the owner/grantorand he enjoys the copyright to the extent of its grant to the exclusionof others. As the right attached to copyright is conveyed to suchlicencee, he has the authority to commercially deal with it. Incase of infringement of copyright, he can maintain a suit to preventit. Different considerations will arise if the grant is non-exclusive,that too confined to the user purely for in- house or internal purpose.The transfer of rights in or over copyright or the conferment ofthe right of use of copyright implies that the transferee/licenceeshould acquire rights - either in entirety or partially co-extensivewith the owner/transferor who divests himself of the rights hepossesses pro tanto. That is what, in our view, follows from the language employed in the definition of ‘royalty’ read with theprovisions of Copyright Act, viz., Section 14 and othercomplementary provisions.

We may refer to one more aspect here. In the definition of royaltyunder the Act, the phrase “including the granting of a licence” isfound. That does not mean that even a non- exclusive licencepermitting user for in-house purpose would be covered by thatexpression. Any and every licence is not what is contemplated. Itshould take colour from the preceding expression “transfer ofrights in respect of copyright”. Apparently, grant of ‘licence’ hasbeen referred to in the definition to dispel the possible controversy[that a] licence — whatever be its nature, can be characterizedas transfer.”

(pages 144-145)

90. The AAR then concluded:

“As stated in Copinger’s treatise on Copyright, “the exclusiveright to prevent copying or reproduction of a work is the mostfundamental and historically oldest right of a copyrightowner”. We do not think that such a right has been passed on tothe end-user by permitting him to download the computerprogramme and storing it in the computer for his own use. Thecopying/reproduction or storage is only incidental to the facilityextended to the customer to make use of the copyrighted productfor his internal business purpose. As admitted by the Revenue’srepresentative, that process is necessary to make the programmefunctional and to have access to it and is qualitatively differentfrom the right contemplated by the said provision because it isonly integral to the use of copyrighted product. Apart from suchincidental facility, the customer has no right to deal with the productjust as the owner would be in a position to do. In so far as thelicensed material reproduced or stored is confined to the fourcorners of its business establishment, that too on a non- exclusivebasis, the right referred to in sub-clause (i) of Section 14(a) wouldbe wholly out of place. Otherwise, in respect of even off the shelfsoftware available in the market, it can be very well said that theright of reproduction which is a facet of copyright vested with theowner is passed on to the customer. Such an inference leads tounintended and irrational results. We may in this context refer to AB

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Section 52(aa) of C.R. Act (extracted supra) which makes it clearthat “the making of copies or adaptation” of a computer programby the lawful possessor of a copy of such program, from suchcopy (i) in order to utilize the computer program, for the purposefor which it was supplied or (ii) to make back up copies purely asa temporary protection against loss, destruction, or damage in orderto utilize the computer program for the purpose of which it wassupplied” will not constitute infringement of copyright.Consequently, customization or adaptation, irrespective of thedegree, will not constitute ‘infringement’ as long as it is to ensurethe utilization of the computer program for the purpose for whichit was supplied. Once there is no infringement, it is not possible tohold that there is transfer or licensing of ‘copyright’ as defined inCR Act and as understood in common law. This is because, aspointed out earlier, copyright is a negative right in the sense that itis a right prohibiting someone else to do an act, withoutauthorization of the same, by the owner.

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It seems to us that reproduction and adaptation envisaged bySection 14(a)(i) and (vi) can contextually mean only reproductionand adaptation for the purpose of commercial exploitation.Copyright being a negative right (in the sense explained in para 9supra), it would only be appropriate and proper to test it in termsEof infringement. What has been excluded under S. 52(aa) is notcommercial exploitation, but only utilizing the copyrighted productfor one’s own use. The exclusion should be given due meaningand effect; otherwise, Section 52(aa) will be practically redundant.In fact, as the law now stands, the owner need not necessarilyFgrant licence for mere reproduction or adaptation of work forone’s own use. Even without such licence, the buyer of productcannot be said to have infringed the owner’s copyright. When theinfringement is ruled out, it would be difficult to reach the conclusionthat the buyer/licensee of product has acquired a copyright therein.

E

The following observations of the Constitution Bench of theGSupreme Court in Tata Consultancy Services v. The State ofAndhra Pradesh case are quite apposite, though made in adifferent context:

“a software programme may consist of various commandswhich enable the computer to perform a designated task. TheHcopyright 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 thecontention of the Revenue referred to in para 18 supra.”

(pages 147-148)

91. Referring to section 14(b)(ii) of the Copyright Act, the AARthen held:

“Next, it has been argued on behalf of the Revenue that the rightto sell or offer for sale the applicant’s software product has beenconferred on the VAR and therefore such authority given to VARamounts to conferment of rights in or over the copyright in viewof cl. (b)(ii) of Section 14. We are unable to sustain this contention.First of all, this contention of Revenue goes contrary to its standthat the product was licensed but not sold. Be that as it may, evenfor other reasons, the contention has to be rejected. VAR has notbeen given an independent right to sell or offer for sale the softwareproducts of the applicant to the end-users. What the VAR does inthe course of carrying out its marketing function is to canvass fororders, collect the purchase order from the interested customerand forward that offer to the applicant. It is the applicant thataccepts or rejects that offer. For this purpose, a non-exclusiveand non-transferable license to distribute the product has beengiven to VAR. The transaction emanating from the order of theend-user followed up by back to back order of VAR is finalizedby the applicant and unless the purchase order is accepted by theapplicant, the transaction does not materialize. The VAR’s role isonly to forward the order to the applicant with the necessarydocuments. It is upto the applicant to accept it or not to accept it.Once the product is delivered to the end- user, the sale if any byVAR takes place simultaneously and that transaction is a differentone. In the absence of an independent right to conclude the saleor offer for sale, sub- clause (ii) of clause (b) of Section 14 cannotbe invoked to bring the case within the fold of Art. 12.3 of theTreaty or Section 9(1)(vi) of the Act. It is also noteworthy thatVAR is not an exclusive distributor for a territory and he does notpay any consideration to the applicant distinctly for acquiring thedistribution rights. He gets the discount for each individualtransaction at the agreed rate.”

(pages 148-149)

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A92. Consequently, the question posed to itself was answered bythe AAR as follows:

“The answer to the question framed by the applicant is broadly inthe negative. It is ruled that the payment received by the applicantfrom VARs. (“third party re-sellers”) on account of supplies ofBsoftware products to the end- customers (from whom the licencefee is collected and appropriated by VAR) does not result in incomein the nature of royalty to the applicant and moreover paymentsreceived by the applicant cannot be taxed as business profits inIndia in the absence of permanent establishment as envisaged byArticle 7 of the India-Japan Tax Treaty.”C

(pages 157-158)

93. Close on the heels of this determination, the AAR followedthis determination in Geoquest Systems B.V. Gevers Deynootweg,In Re., (2010) 327 ITR 1 (AAR) [“Geoquest (AAR)”] qua anapplicant which was a company incorporated in the Netherlands andDsold certain software packages to the Oil and Natural Gas Corporationin India. After referring to and relying upon the determination in Dassault(AAR) (supra), the AAR concluded that the amount payable to theapplicant did not amount to “royalties” within the meaning of Article 12of the India- Netherlands DTAA.

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94. However, a discordant note was soon struck by the AAR inCitrix 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 arosebefore the AAR in the earlier two cases, namely Dassault (AAR) (supra)Fand Geoquest (AAR) (supra), arose. The case concerned an applicantincorporated in Australia that had entered into a distribution agreementwith an independent Indian company engaged in the business ofdistribution of computer software and hardware. “Ingram” was appointedas the non-exclusive distributor of the products of the applicant in India.This time, the AAR, after referring to the provisions of the Income TaxGAct and the Convention between the Government of the Republic ofIndia and the Government of Australia for the Avoidance of DoubleTaxation and the Prevention of Fiscal Evasion with respect to Taxes onIncome,[39] [“India-Australia DTAA”], together with the provisions of 39 Notification No. GSR 60(E), dated 22-1-1992 as amended by Notification No.74/H2013 [F.No.503/1/2009-FTD-II]/SO 2820(E), dated 20-9-2013.

the Copyright Act, arrived at a conclusion diametrically opposite to thatcontained 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 acopyright either by an owner or a licensee, would not be aninfringement of a copyright. The transfer of ownership can be byan assignment to another of the copyright either wholly or partially,either generally or with special limitations and either for the wholeterm of the copyright or any part thereof. Similarly, a license canbe granted by the owner of the copyright of any interest in theright. An exclusive right also can be granted excluding even oneselffrom the right to use the copyright owned. So, a transgression ofthe limitations of an assignment or of a license would prime faciebe an infringement of the copyright and invite the consequencesprovided for under the Act. Similarly, the act of taking copies oract of adaptation will not be an infringement only if it is done by alawful possessor of a copy of the computer programme. A lawfulpossessor can only be an assignee, an exclusive licensee or alicensee of the programme. When he acquires a computerprogramme, he also gets the right to use that programme to alimited extent. This in our view, is on the basis that in so acquiringthe computer programme, he has also got a right, absolute or limitedto use the copyright.

When a software is created by a person who acquires a copyrightfor it, he becomes the owner of that copyright. He can transfer orlicense that right either by himself or through an agent. When hesells or licenses the software for use, he is also selling or licensingthe right to use the copyright embedded therein. If a software isused without being lawfully acquired either by purchase or bylicense, that would amount to an infringement of the copyrightobviously because of the copyright embedded in the software.The software is a literary work and clearly the copyright of thecreator over the software is an important and commerciallyvaluable right. So, whenever a software is assigned or licensedfor use, there is involved an assignment of the right to use theembedded copyright in the software or a license to use theembedded copyright, the Intellectual Property Right in the software.Therefore, it appears to us that it is not possible to divorce the A

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Asoftware from the Intellectual Property Right of the creator ofthe software embedded therein. The amendment to Section14(1)(b) of the Copyright Act, by Act 49 of 1999, clarifying that inthe case of a computer programme, copyright means the right tosell or give on commercial rental or offer for sale or commercialrental any copy of the computer programme, seems to beBsignificant. This addition would suggest that even the right to sellor give on rental, would amount to a copyright and would be aright to be dealt with as a copyright.”

A

(pages 13-14)

95. The AAR disagreed with the determination in Dassault (AAR)C(supra), stating:

“In Dassault (AAR 821 of 2009), it was noticed that the core ofthe transaction in that case was to authorise the end-user to haveaccess to and make use of the licensed software products overwhich the applicant had exclusive copyright without giving anyscope for dealing with them any further.

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The reasoning or the line of reasoning in Factset on applicabilityof the Copyright Act, in this context, was followed. It was alsonoticed that in Tata Consultancy Services (271 ITR 401), theSupreme Court had held that “a software programme may consistof various commands which enable the computer to perform aEdesignated task. The copyright in that programme may remainwith the originator of the programme. But, the moment copies aremade and marketed it becomes goods which are susceptible tosales-tax.” The Supreme Court was speaking in the context ofthe Sales-tax Act. The Court had no occasion to consider whatwas involved in the sale of a software programme. The CourtFhad no occasion to consider what all are the rights that pass on tothe grantee when a software programme is transferred or licensedto him. It was concluded in Dassault, that in the absence of anindependent right to conclude a sale or offer for sale, section 14could not be invoked to bring the case within Section 9(1)(vi) ofGthe Act by invoking sub-clause (ii) of Clause (b) of that section. Itwas concluded that no right to use the copyright as such has beenconferred on the licensee. In our view whenever software istransferred or licensed for use, it takes within it the copyrightembedded in the software and the one cannot be divorced fromthe other.”

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(page 17)

96. The AAR then reasoned that the fact that a licence had beengranted would be sufficient to conclude that there was a transfer ofcopyright, and that there was no justification for the use of the doctrineof noscitur a sociis to confine the transfer by way of a licence to onlyinclude a licence which transferred rights in respect of copyright, byreferring to explanation 2 to section 9(1)(vi) of the Income Tax Act. Itthen held:

“Considerable arguments are raised on the so-called distinctionbetween a copyright and copyrighted articles. What is acopyrighted article? It is nothing but an article which incorporatesthe copyright of the owner, the assignee, the exclusive licensee orthe licencee. So, when a copyrighted article is permitted or licensedto be used for a fee, the permission involves not only the physicalor electronic manifestation of a programme, but also the use of orthe right to use the copyright embedded therein. That apart, theCopyright Act or the Income-tax Act or the DTAC does not usethe expression ‘copyrighted article’, which could have been usedif the intention was as claimed by the applicant. In thecircumstances, the distinction sought to be made appears to beillusory.”

(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 usecomputer software in the form of a CD, the end-user only receives aright to use the software and nothing more. The end-user does not getany 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, theconclusion that when computer software is licensed for use under anEULA, what is also licensed is the right to use the copyright embeddedtherein, is wholly incorrect. The licence for the use of a product underan EULA cannot be construed as the licence spoken of in section 30 ofthe Copyright Act, as such EULA only imposes restrictive conditionsupon the end-user and does not part with any interest relatable to anyrights mentioned in sections 14(a) and 14(b) of the Copyright Act.

98. As a matter of fact, even otherwise, on first principles, theextract from Copinger and Skone James on Copyright (14[th] Edition)(1999) referred to in Dassault (AAR) (supra) makes it clear that theownership of copyright in a work is different from the ownership of the AB

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Aphysical material in which the copyrighted work may happen to beembedded. This important passage correctly relied upon by the AAR inthe Dassault (AAR) (supra) ruling has been completely missed.

99. Further, it is difficult to understand the reasoning contained inthis determination. It is self-contradictory when it says that the DTAABwhich defines “royalties” must somehow be given a go-bye, as this termmust be understood as it is commonly understood. It is also difficult tounderstand the holding that the AAR need not be constrained by thedefinition of “copyright” contained in section 14 of the Copyright Act,when construing a DTAA, when we have already seen how section 16of the Copyright Act makes it clear that no person shall be entitled toCcopyright otherwise than under the provisions of the Copyright Act orany other law in force.

100. Also, any ruling on the more expansive language containedin the explanations to section 9(1)(vi) of the Income Tax Act wouldhave to be ignored if it is wider and less beneficial to the assessee thanDthe definition contained in the DTAA, as per section 90(2) of the IncomeTax Act read with explanation 4 thereof, and Article 3(2) of the DTAA.Further, the expression “copyright” has to be understood in the contextof the statute which deals with it, it being accepted that municipal lawswhich apply in the Contracting States must be applied unless there isEany repugnancy to the terms of the DTAA. For all these reasons, thedetermination of the AAR in Citrix Systems (AAR) (supra) does notstate the law correctly and is thus set aside.

101. The High Court of Karnataka, in a judgment impugned invarious appeals before us, namely, CIT v. Samsung Electronics Co.FLtd., (2012) 345 ITR 494, also held that what was sold/licensed byway of computer software, included the grant of a right or interest incopyright, and thus gave rise to the payment of royalty, which thenrequired the deduction of TDS. The reasoning of this judgment underappeal is set out as follows:

G“…Accordingly, we hold that right to make a copy of the softwareand use it for internal business by making copy of the same andstoring the same in the hard disk of the designated computer andtaking back up copy would itself amount to copyright work undersection 14(1) of the Act and licence is granted to use the softwareby making copies, which [would], but for the licence granted, haveHconstituted 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 appearingfor the respondents that there is no transfer of any part of copyrightor copyright and transaction only involves sale of copy of thecopyright software cannot be accepted.

It is also to be noted that what is supplied is the copy of thesoftware of which the respondent-supplier continues to be theowner of the copyright and what is granted under the licence isonly right to copy the software as per the terms of the agreement,which, but for the licence would amount to infringement ofcopyright and in view of the licence granted, the same would notamount to infringement under section 52 of the Copyright Act asreferred to above.

Therefore, the amount paid to the non-resident supplier towardssupply of shrink-wrapped software, or off-the-shelf software isnot the price of the C.D. alone nor software alone nor the price oflicence granted. This is a combination of all and in substance,unless licence is granted permitting the end user to copy, anddownload the software, the dumb C.D. containing the softwarewould not in any way be helpful to the end user as software wouldbecome operative, only if it is downloaded to the hardware of thedesignated computer as per the terms and conditions of theagreement and that makes, the difference between the computersoftware and copyright, in respect of books or prerecorded music[C.D.], as book and prerecorded music C.D. can be used oncethey are purchased, but so far as software stored in dumb C.D. isconcerned, the transfer of dumb C.D. by itself would not conferany, right, upon the end user and the purpose of the

C.D. is only to enable the end user to take a copy of the softwareand to store it in the hard disk of the designated computer if licenceis granted in that behalf and in the absence of licence, the samewould amount to infringement of copyright, which is exclusivelyowned by non-resident suppliers, who would continue to be theproprietor of copyright. Therefore, there is no similarity betweenthe 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 likebooks and other articles separately from “computer” software A

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within the meaning of the “copyright” as referred to above undersection 14 of the Copyright Act.

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It is also clear from the abovesaid analysis of the DTAA, theIncome-tax Act, the Copyright Act that the payment wouldconstitute “royalty” within the meaning of article 12(3) of theBDTAA and even as per the provisions of section 9(1)(vi) of theAct as the definition of “royalty” under clause 9(1)(vi) of the Actis broader than the definition of “royalty” under the DTAA as theright that is transferred in the present case is the transfer ofcopyright including the right to make copy of software for internalbusiness, and payment made in that regard would constituteC“royalty” for imparting of any information concerning technical,industrial, commercial or scientific knowledge, experience or skillas 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 90of the Act, agreements with foreign countries DTAA wouldDoverride the provisions of the Act. Once it is held that paymentmade by the respondents to the non-resident companies wouldamount to “royalty” within the meaning of article 12 of the DTAAwith the respective country, it is clear that the payment made bythe respondents to the non-resident supplier would amount toroyalty. In view of the said finding, it is clear that there is obligationEon the part of the respondents to deduct tax at source under section195 of the Act and consequences would follow as held by thehon’ble Supreme Court while remanding these appeals to thiscourt. Accordingly, we answer the substantial question of law infavour of the Revenue and against the assessee by holding thatFon the facts and in the circumstances of the case, the Income-taxAppellate Tribunal was not justified in holding that the amount(s)paid by the respondents) to the foreign software suppliers wasnot “royalty” and that the same did not give rise to any “income”taxable in India and wherefore, the respondent(s) were not liableto deduct any tax at source and pass the following order:

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All the appeals are allowed. The order passed by the Income-taxAppellate Tribunal, Bangalore Bench “A” impugned in theseappeals is set aside and the order passed by the Commissioner ofIncome-tax (Appeals) confirming the order passed by theAssessing Officer (TDS)-I is restored.”

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(pages 527-528)

102. The reasoning of this judgment also does not commend itselfto 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 madebetween computer software that was sold/licensed on a CD/otherphysical medium and the parting of copyright in respect of any of therights or interest in any of the rights mentioned in sections 14(a) and14(b) of the Copyright Act. This being the case, the reasoning of thisjudgment suffers from the same fundamental defect that the ruling inCitrix Systems (AAR) (supra) suffers from. By no stretch ofimagination, can the payment for such computer software amount toroyalty 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, dated03.08.2020, in CIT v. Synopsis International Old Ltd., ITA Nos.11-15/2008 [“Synopsis Intl.”],[40] the High Court relied upon theexpression “in respect of” in section 9(1)(vi) of the Income Tax Act,holding:

“27. The words “in respect of” [denote] the intention of theParliament to give a broader meaning. The words “in respect of”admit of a wide connotation, than the word “in” or “on”. Theexpression “in respect of” means “attributable to”. If it is given awider meaning “relating to or with reference to”, it has been usedin the sense of being “connected with”. Whether it is a fiscallegislation or any legislation for that matter, the golden rule ofinterpretation equally applies to all of them, i.e., the words in astatute should be given its literal meaning. In respect of fiscallegislation those words should be strictly construed. If those wordsare capable of two meanings that meaning which is beneficial toan assessee should be given. However, when the meaning of thewords used are clear, unambiguous, merely because it is a fiscallegislation, the meaning cannot be narrowed down and it cannotbe interpreted so as to give benefit to the assessee only. Then itwould be re-writing the section, under the guise of interpreting afiscal legislation, which is totally impermissible in law. When thelegislature has advisedly used the words “in respect of”, theintention is clear and manifest. The said phrase being capable of 40 This judgment has been relied upon by several judgments of the High Court ofKarnataka impugned in the appeals before us.

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Aa broader meaning, the same is used in the section to bring withinthe tax net all the incomes from the transfer of all or any of therights in respect of a copyright. In a taxing statute provisionsenacted to prevent tax evasion are to be given a liberal constructionto effectuate the purpose of suppressing tax evasion, althoughprovisions imposing a charge are construed strictly there being noBa priori liability to pay a tax and the purpose of charging sectionbeing only to levy a charge on persons and activities brought withinits clear terms. Therefore, the specific words used in a taxingstatute, charging tax cannot be ignored. It is not the considerationfor transfer of all or any of the rights in the copyright. WithoutCtransferring a right in the copyright it is possible to receiveconsideration for the use of the intellectual property for which theowner possesses a copyright. Ultimately, the consideration paid isfor the usefulness of the material object in respect of which thereexists a copyright. Therefore, the intention was not to exclude theconsideration paid for the use of such material object which isDpopularly called as copyrighted article. Even in respect of acopyrighted article the same is transferred, no doubt the right inthe copyright is not transferred, but a right in respect of a copyrightcontained in the copyrighted article is transferred. Therefore, theParliament thought it fit to use the phrase “in respect of” as contraEdistinct from the word “in” copyright. The meaning is clear,intention is clear, there is no ambiguity. Therefore, there is noscope for interpretation of this expressed term inasmuch as in thecontext in which it is used in the provision. Any other interpretationwould lead to the aforesaid provision becoming otiose.”

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F104. After so holding, the High Court of Karnataka went on tostate:

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F104. After so holding, the High Court of Karnataka went on tostate:

“32. … Therefore, the expression ‘copyright’ used in the Actcannot be the same as used in the Income-tax Act, when thelegislature advisedly used the word ‘in respect of a copyright’ itcannot be construed as a right in the copyright and assign themeaning assigned in the Copyright Act to the second explanation.The language in Explanation (2) explicitly makes it clear for thepurpose of clause (vi) of sub-section (1) of section 9 royalty meansconsideration for transfer of all or any rights including the grantingof a licence in respect of any copyright, literary, artistic or scientific G

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work. Therefore, the word exclusive right used in section 14 ofthe Act do not fit into the meaning of the word ‘royalty’ inExplanation 2 because royalty means the consideration for thetransfer of all or any rights including the granting of a licencewhich is certainly not an exclusive right or transfer of all rights inthe copyright or literary work. Payments made for the acquisitionof partial rights in the copyright without the transfer fully alienatingthe copyright rights will represent a royalty where the considerationis for granting of lights to use the program[m]e in a manner thatwould, without such license, constitute an infringement of copyright.In these circumstances, the payments are for the right to use thecopyright in the program i.e., to exploit the rights that wouldotherwise be the sole prerogative of the copyright holder.Therefore, to constitute royalty under the Income-tax Act it is notnecessary that there should be transfer of exclusive right incopyright, it is sufficient if there is transfer of any interest in theright and also a licence and consideration paid for grant of a licenceconstitutes royalty for the purpose of the said clause in the Income-tax Act. It is in this background, the discussion whether the paymentis for a copyright or for a copyright article would be totallyirrelevant. The crux of the issue is whether any consideration ispaid for any right, or for granting of licence in respect of acopyright. The word ‘in respect of’ gives a broader meaning. Ithas been used in the sense of being connected with. When thelegislature has advisedly used the words ‘in respect of’, theintention is clear and manifest. The said phrase being capable ofa broader meaning, the same is used in the section to bring withinthe tax net all the incomes from the transfer of all or any of therights in respect of the copyright.

xxx xxx xxx

35. The copyright subsists in a computer program. It is not onlyunauthorised reproduction but also the storage of a program in acomputer constitutes copyright infringement. Copying a literarywork (such as a computer program) includes storing the work inany medium by electronic means. Copying includes the making ofcopies which are transient or some other use of the work.

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39. It is no doubt true the provisions of the DTAA overrides theprovisions of the Income-tax Act. In the DTAA the term ‘royalty’means payments of any kind received as a consideration for theuse or the right to use any copyright of literary, artistic or scientificwork whereas in the Income-tax Act, royalty means considerationfor the transfer of all or any rights including the granting of alicence. Therefore, under the DTAA to constitute royalty thereneed 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 touse any copyright. Therefore, if the definition of royalty in theDTAA is taken into consideration it is not necessary there shouldbe a transfer of any exclusive right. A mere right to use or the useof a copyright falls within the mischief of Explanation

(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 otherwisebe unlawful. The question arises, therefore, as to what legalpermission is granted by a software licence. The answer is, briefly,that in some cases the licence will be a permission to useconfidential information, and in virtually [...] all cases it will be apermission to copy a copyright work. If the software has beenkept secret by the producer, or only supplied on conditions ofconfidentiality and has not been published too widely, then thesoftware licence will be akin to a licence of confidential informationor know-how. The owner or licensor of a copyright, has a right togrant permission to use the software or a computer programme,in respect of which they have a copyright, without transferringthe right in copyright. It is one of the right[s] of a copyright owneror licensor. Without such right being transferred, the end-user hasno right to use the software or computer programme. If he usesit, it amounts to infringement of copyright. For transfer of suchright if consideration is paid, it is not a consideration for transferof a copyright but for use of intellectual property embedded in thecopyright, and therefore it is for transfer of one of those rights ofthe owner of the copyright. It is not a right in copyright but it is inrespect 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. Thereforethe mode adopted or the terminology given is not decisive to decidethe nature of transfer. Ultimately, it is the substance which has tobe looked into.”

105. The reasoning of the High Court of Karnataka in SynopsisIntl. (supra) does not commend itself to us. First and foremost, as heldin State of Madras v. Swastik Tobacco Factory, (1966) 3 SCR 79,the expression “in respect of”, when used in a taxation statute, is onlysynonymous with the words “on” or “attributable to”. Such meaningaccords 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 TaxAct, and would not in any manner make the expression otiose, as haswrongly 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 inaccordance with the provisions of this Act or of any other law for thetime being in force” has been completely missed, thus making it clearthat the expression “copyright” has to be understood only as is stated insection 14 of the Copyright Act and not otherwise.

107. Thirdly, when it comes to computer programmes, the HighCourt in Synopsis Intl. (supra) was wholly incorrect in stating that thestorage of a computer programme per se would constitute infringementof copyright. This, again, would directly be contrary to the terms ofsection 52(1)(aa) of the Copyright Act.

108. Fourthly, the High Court is not correct in referring to section9(1)(vi) of the Income Tax Act after considering it in the manner that ithas and then applying it to interpret the provisions under the Conventionbetween the Government of the Republic of India and the Governmentof Ireland for the Avoidance of Double Taxation and for the Preventionof 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 theDTAA, as it is more beneficial to the assessee as compared to section9(1)(vi) of the Income Tax Act, as construed by the High Court. Hereagain, section 90(2) of the Income Tax Act, read with explanation 4thereof, has not been properly appreciated.

41 Notification : No. GSR 105(E) [45/2002 (F. No. 503/6/99-FTD)], dated 20-2-2002.

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A109. Fifthly, the finding that when a copyrighted article is sold,the end-user gets the right to use the intellectual property rights embodiedin the copyright which would therefore amount to transfer of an exclusiveright of the copyright owner in the work, is also wholly incorrect.

For all these reasons, therefore, the judgment of the High CourtBof Karnataka in Synopsis Intl. (supra) also does not state the lawcorrectly.

110. A series of judgments by the High Court of Delhi have dealtwith the same question that now lies before us. In Director of IncomeTax v. Ericsson A.B., (2012) 343 ITR 470 [“Ericsson A.B.”], whichChappens to be impugned in C.A. Nos. 6386-6387/2016 before us, theassessee was a company incorporated in Sweden which entered into anagreement with Indian cellular operators, pursuant to which the assesseesupplied various equipment (hardware) embedded with software to thesaid cellular operators. The High Court in this case, found:

D“Once we proceed on the basis of aforesaid factual findings, it isdifficult to hold that payment made to the assessee was in thenature of royalty either under the Income-Tax Act or under theDTAA. We have to keep in mind what was sold by the assesseeto the Indian customers was a GSM which consisted both of thehardware as well as the software, therefore, the Tribunal is rightEin holding that it was not permissible for the Revenue to assessthe same under two different articles. The software that wasloaded on the hardware did not have any independent existence.The software supply is an integral part of the GSM mobiletelephone system and is used by the cellular operator for providingFthe cellular services to its customers. There could not be anyindependent use of such software. The software is embodied inthe system and the revenue accepts that it could not be usedindependently. This software merely facilitates the functioning ofthe equipment and is an integral part thereof. On these facts, itwould be useful to refer to the judgment of the Supreme Court inGTATA Consultancy Services v. State of Andhra Pradesh, 271ITR 401, wherein the Apex Court held that software which isincorporated on a media would be goods and, therefore, liable tosales tax. Following discussion in this behalf is required to be noted:- H

“In our view, the term “goods” as used in Article 366(12) ofthe Constitution of India and as defined under the said Act arevery wide and include all types of movable properties, whetherthose properties be tangible or intangible. We are in completeagreement with the observations made by this Court inAssociated Cement Companies Ltd. (supra). A softwareprogramme may consist of various commands which enablethe computer to perform a designated task. The copyright inthat programme may remain with the originator of theprogramme. But the moment copies are made and marketed,it becomes goods, which are susceptible to sales tax. Evenintellectual property, once it is put on to a media, whether it bein the form of books or canvas (In case of painting) or computerdiscs or cassettes, and marketed would become “goods”. Wesee no difference between a sale of a software programme ona CD/floppy disc from a sale of music on a cassette/CD or asale of a film on a video cassette/CD. In all such cases, theintellectual property has been incorporated on a media forpurposes of transfer. Sale is not just of the media which byitself has very little value. The software and the media cannotbe split up. What the buyer purchases and pays for is not thedisc or the CD. As in the case of paintings or books or musicor films the buyer is purchasing the intellectual property andnot the media i.e. the paper or cassette or disc or CD. Thus atransaction sale of computer software is clearly a sale of“goods” within the meaning of the term as defined in the saidAct. The term “all materials, articles and commodities” includesboth tangible and intangible/incorporeal property which iscapable of abstraction, consumption and use and which can betransmitted, transferred, delivered, stored, possessed etc. Thesoftware 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 withinterpretation of uniform civil code which “applied to transactionsin goods”. The goods therein were defined as “all things (includingspecially manufactured goods) which are moveable at the time ofthe 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 ABC

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computer owners. An analogy can be drawn to a compactdisc recording of an orchestral rendition. The music is producedby the artistry of musicians and in itself is not a “good”, butwhen transferred to a laser- readable disc becomes a readilymerchantable commodity. Similarly, when a professor deliversa lecture, it is not a good, but, when transcribed as a book, itbecomes a good.

That a computer program may be copyrightable as intellectualproperty does not alter the fact that once in the form of afloppy disc or other medium, the program is tangible, moveableand available in the marketplace. The fact that some programsmay be tailored for specific purposes need not alter their statusas “goods” because the Code definition includes “speciallymanufactured goods.”

A fortiorari when the assessee supplies the software which isincorporated on a CD, it has supplied tangible property and thepayment made by the cellular operator for acquiring such propertycannot be regarded as a payment by way of royalty.

(pages 499-500)

“Be that as it may, in order to qualify as royalty payment, withinthe meaning of Section 9(1)(vi) and particularly clause (v) ofExplanation-II thereto, it is necessary to establish that there istransfer 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 computerprogramme is to be regarded as a ‘literary work’. Thus, in orderto treat the consideration paid by the cellular operator as royalty,it is to be established that the cellular operator, by making suchpayment, obtains all or any of the copyright rights of such literarywork. In the presence case, this has not been established. It is noteven the case of the Revenue that any right contemplated underSection 14 of the Copyright Act, 1957 stood vested in this cellularoperator as a consequence of Article 20 of the Supply Contract.Distinction has to be made between the acquisition of a “copyrightright” and a “copyrighted article”.

Mr. Dastur is right in this submission which is based on thecommentary on the OECD Model Convention. Such a distinction has been accepted in a recent ruling of the Authority for AdvanceRuling (AAR) in Dassault Systems KK 229 CTR 125. We alsofind force in the submission of Mr. Dastur that even assuming thepayment made by the cellular operator is regarded as a paymentby way of royalty as defined in Explanation 2 below Section9(1)(vi), nevertheless, it can never be regarded as royalty withinthe meaning of the said term in article 13, para 3 of the DTAA.This is so because the definition in the DTAA is narrower thanthe definition in the Act. Article 13(3) brings within the ambit ofthe definition of royalty a payment made for the use of or the rightto use a copyright of a literary work. Therefore, what iscontemplated is a payment that is dependent upon user of thecopyright and not a lump sum payment as is the position in thepresent case.

We thus hold that payment received by the assessee was towardsthe title and GSM system of which software was an inseparableparts incapable of independent use and it was a contract for supplyof goods. Therefore, no part of the payment therefore can beclassified 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 NetworksOY”],[42] with the High Court of Delhi, adverting, this time, to the furtherexpanded definition of “royalty” that is contained in the retrospectiveamendment that inserted explanation 4 to section 9(1)(vi) of the IncomeTax Act. In this case, the High Court was concerned with the Agreementbetween the Republic of India and the Republic of Finland for theAvoidance of Double Taxation and the Prevention of Fiscal Evasionwith respect to Taxes on Income,[43] [“India-Finland DTAA”]. Aftersetting out the rationale for the clarificatory amendment made vide theFinance Act 2012, the High Court held :

“He, thus submitted that the question of “copyrighted article” oractual copyright does not arise in the context of software both inthe DTAA and in the Income Tax Act since the right to usesimpliciter of a software program itself is a part of the copyright 42 This judgment has been relied upon by various judgments of the High Court of Delhiimpugned in the appeals before us.

43 Notification No. 36/2010 [F. No. 501/13/1980-FTD-I], dated 20-5-2010.

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Ain the software irrespective of whether or not a further right tomake copies is granted. The decision of the Delhi Bench of theITAT has dealt with this aspect in its judgment in Gracemac Co.v. ADIT 134 TTJ (Delhi) 257 pointing out that even softwarebought off the shelf, does not constitute a “copyrighted article” assought to be made out by the Special Bench of the ITAT in theBpresent case. However, the above argument misses the vital pointnamely the assessee has opted to be governed by the treaty andthe language of the said treaty differs from the amended Section9 of the Act. It is categorically held in CIT v. SiemensAktiongesellschaft, 310 ITR 320 (Bom) that the amendmentsCcannot be read into the treaty. On the wording of the treaty, wehave already held in Ericsson (supra) that a copyrighted articledoes not fall within the purview of Royalty. Therefore, we decidequestion of law no. 1 & 2 in favour of the assessee and againstthe Revenue.”

(page 281)

DThe 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) 264CTR 329 [“Infrasoft”],[44] a Division Bench of the High Court of Delhi,Eby an exhaustive analysis of the provisions contained the India-USADTAA, the Income Tax Act and the Copyright Act, dealt with a situationin which the assessee who was primarily into the business of developingand manufacturing civil engineering software, licensed the said softwareto persons engaged in civil engineering work in India. The High Courtreferred to a decision of the Special Bench of the ITAT (New Delhi) inFMotorola Inc. v. Deputy CIT, dated 22.06.2005 [“Motorola (ITAT)”]as follows:

“65. The issue whether consideration for software was royaltycame up for consideration before the Special Bench of the Tribunalin Delhi in the case of Motorola Inc v. Deputy Cit And DeputyGCit V. Nokia (2005) 147 TAXMAN 39 (DELHI). The Tribunalhas held as under:

155. It appears to us from a close examination of the mannerin which the case has proceeded before the Income-tax 44 This judgment has been relied upon by various judgments of the High Court of DelhiHimpugned in the appeals before us.

authorities and the arguments addressed before us that thecrux of the issue is whether the payment is for a copyright orfor a copyrighted article. If it is for copyright, it should beclassified as royalty both under the Income-tax Act and underthe DTAA and it would be taxable in the hands of the Assesseeon 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 theAct or under the DTAA. This issue really is the key to theentire controversy and we may now proceed to address thisissue.

156. We must look into the meaning of the word “copyright”as given in the Copyright Act, 1957. Section 14 of this Actdefines “Copyright” as “the exclusive right subject to theprovisions of this Act, to do or authorize the doing of any of thefollowing acts in respect of a work or any substantial partthereof [ … ]

It is clear from the above definition that a computer programmementioned in Clause (b) of the section has all the rightsmentioned in Clause (a) and in addition also the right to sell orgive on commercial rental or offer for sale or for commercialrental any copy of the computer programme. This additionalright was substituted w.e.f. 15.1.2000. The difference betweenthe 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 ofthe computer programme. It follows that if any of the cellularoperators does not have any of the rights mentioned in Clauses(a) and (b) of Section 14, it would mean that it does not haveany right in a copyright. In that case, the payment made by thecellular operator cannot be characterized as royalty either underthe Income-tax Act or under the DTAA. The question,therefore, to be answered is whether any of the operators canexercise any of the rights mentioned in the above provisionswith reference to the software supplied by the Assessee.

157. We may first look at the supply contract itself to find outwhat JTM, one of the cellular operators, can rightfully do withreference to the software. We may remind ourselves that JTM

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is taken as a representative of all the cellular operators andthat it was common ground before us that all the contractswith the cellular operators are substantially the same. Clause20.1 of the Agreement, under the title “License”, says thatJTM is granted a non-exclusive restricted license to use thesoftware and documentation but only for its own operationand maintenance of the system and not otherwise. This clauseappears to militate against the position, if it were a copyright,that the holder of the copyright can do anything with respect tothe same in the public domain. What JTM is permitted to do isonly to use the software for the purpose of its own operationand maintenance of the system. There is a clear bar on thesoftware being used by JTM in the public domain or for thepurpose of commercial exploitation.

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158. Secondly, under the definition of “copyright” in Section14 of the Copyright Act, the emphasis is that it is an exclusiveright granted to the holder thereof. This condition is not satisfiedin the case of JTM because the license granted to it by theAssessee is expressly stated in Clause 20.1 as a “non exclusiverestricted license”. This means that the supplier of the software,namely, the Assessee, can supply similar software to anynumber of cellular operators to which JTM can have noobjection and further all the cellular operators can use thesoftware only for the purpose of their own operation andmaintenance of the system and not for any other purpose. Theuser of the software by the cellular operators in the publicdomain is totally prohibited, which is evident from the use ofthe words in Article 20.1 of the agreement, “restricted” and“not otherwise”. Thus JTM has a very limited right so far asthe use of software is concerned. It needs no repetition toclarify that JTM has not been given any of the seven rightsmentioned in Clause (a) of Section 14 or the additional rightmentioned in Sub-clause (ii) of Clause (b) of the section whichrelates to a computer programme and, therefore, what JTM orany other cellular operator has acquired under the agreementis not a copyright but is only a copyrighted article.””

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(pages 362-364)

113. Further, the Court noted that the same argument that foundHfavour with the AAR in Citrix Systems (AAR) (supra) was pressed

into service by the learned senior counsel who appeared for the Revenuein the case of Motorola (ITAT) (supra), and this was correctly turneddown as follows:

“163. We may now briefly deal with the objections of Mr. G.C.Sharma, the learned senior counsel for the Department. Hecontended that if a person owns a copyrighted article then heautomatically has a right over the copyright also. With respect,this objection does not appear to us to be correct. Mr. Dastur filedan extract from Iyengar’s Copyright Act (3rd Edition) edited byR.G. Chaturvedi. The following observations of the author are onthe 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 amanuscript. The copyright owner may dispose of it on suchterms as he may see fit. He has an individual right of exclusiveenjoyment. The transfer of the manuscript does not, of itself,serve to transfer the copyright therein. The transfer of theownership of a physical thing in which copyright exists givesto the purchaser the right to do with it (the physical thing)whatever he pleases, except the right to make copies and issuethem to the public” (underline is ours).”

The above observations of the author show that one cannot havethe copyright right without the copyrighted article but at the sametime just because one has the copyrighted article, it does not followthat one has also the copyright in it. Mr. Sharma’s objection cannotbe accepted.”

(pages 365-366)

114. Referring to the High Court’s earlier judgments in EricssonA.B. (supra) and Nokia Networks OY (supra) and the determinationsof the AAR in Dassault (AAR) (supra) and Geoquest (AAR) (supra),the High Court concluded:

“87. In order to qualify as royalty payment, it is necessary toestablish that there is transfer of all or any rights (including thegranting of any licence) in respect of copyright of a literary, artisticor scientific work. In order to treat the consideration paid by theLicensee as royalty, it is to be established that the licensee, by A

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making such payment, obtains all or any of the copyright rights ofsuch literary work. Distinction has to be made between theacquisition 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 aprivilege, quite independent of any material substance, such as amanuscript. Just because one has the copyrighted article, it doesnot follow that one has also the copyright in it. It does not amountto transfer of all or any right including licence in respect ofcopyright. Copyright or even right to use copyright is distinguishablefrom sale consideration paid for “copyrighted” article. This saleconsideration is for purchase of goods and is not royalty.

88. The license granted by the Assessee is limited to thosenecessary to enable the licensee to operate the program. Therights transferred are specific to the nature of computer programs.Copying the program onto the computer’s hard drive or randomaccess memory or making an archival copy is an essential step inutilizing the program. Therefore, rights in relation to these acts ofcopying, where they do no more than enable the effective operationof the program by the user, should be disregarded in analyzing thecharacter of the transaction for tax purposes. Payments in thesetypes of transactions would be dealt with as business income inaccordance with Article 7.

89. There is a clear distinction between royalty paid on transferof copyright rights and consideration for transfer of copyrightedarticles. Right to use a copyrighted article or product with theowner retaining his copyright, is not the same thing as transferringor assigning rights in relation to the copyright. The enjoyment ofsome or all the rights which the copyright owner has, is necessaryto invoke the royalty definition. Viewed from this angle, a non-exclusive and non- transferable licence enabling the use of acopyrighted product cannot be construed as an authority to enjoyany or all of the enumerated rights ingrained in Article 12 of DTAA.Where the purpose of the licence or the transaction is only torestrict use of the copyrighted product for internal business purpose,it would not be legally correct to state that the copyright itself orright to use copyright has been transferred to any extent. Theparting of intellectual property rights inherent in and attached tothe software product in favour of the licensee/customer is what is contemplated by the Treaty. Merely authorizing or enabling acustomer to have the benefit of data or instructions containedtherein without any further right to deal with them independentlydoes not, amount to transfer of rights in relation to copyright orconferment of the right of using the copyright. The transfer ofrights in or over copyright or the conferment of the right of use ofcopyright implies that the transferee/licensee should acquire rightseither in entirety or partially co-extensive with the owner/transferorwho divests himself of the rights he possesses pro tanto.”

(pages 385-386)

115. The High Court of Delhi also expressed its disagreementwith the impugned judgment of the High Court of Karnataka dated15.10.2011, in CIT v. Samsung Electronics Co. Ltd., (2012) 345ITR 494, as follows:

“96. The amount received by the Assessee under the licenceagreement for allowing the use of the software is not royalty underthe DTAA.

97. What is transferred is neither the copyright in the softwarenor the use of the copyright in the software, but what is transferredis the right to use the copyrighted material or article which isclearly distinct from the rights in a copyright. The right that istransferred is not a right to use the copyright but is only limited tothe right to use the copyrighted material and the same does notgive 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 storingthe same in the hard disk of the designated computer and takingbackup copy would amount to copyright work under section 14(1)of the Copyright Act and the payment made for the grant of thelicence for the said purpose would constitute royalty. The licensegranted to the licensee permitting him to download the computerprogramme and storing it in the computer for his own use wasonly incidental to the facility extended to the licensee to make useof the copyrighted product for his internal business purpose. Thesaid process was necessary to make the programme functionaland to have access to it and is qualitatively different from the A

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Aright contemplated by the said provision because it is only integralto the use of copyrighted product. The right to make a backupcopy purely as a temporary protection against loss, destruction ordamage has been held by the Delhi High Court in DIT v. NokiaNetworks OY (Supra) as not amounting to acquiring a copyrightin the software.”B

(page 388)

116. Likewise, in CIT v. ZTE Corporation, (2017) 392 ITR80 [“ZTE”],[45] a Division Bench of the High Court of Delhi dealt withthe India-China DTAA and after referring to its earlier judgments, heldCas follows:

“The misconception that the revenue harbors stems from its flawedappreciation of a copyright license. True, “copyright” is notdefined; yet what works are capable of copyright protectionis spelt out in the Copyright Act. Sections 13 and 14 of theDCopyright Act flesh out the essential ingredients that makecopyright a property right.”

(page 93)

“Thus, Section 14 categorically provides that copyright “meansthe exclusive right to do or authorizing the doing of any ofEthe acts mentioned in Section 14 (a) to (e) or any “substantialpart thereof”. The content of copyright in respect of computerprogrammes is spelt out in Section 14 (b). A joint reading of thecontrolling provisions of the earlier part of Section 14 with clause(b) implies that in the case of computer programs, copyright wouldmean the doing or authorizing the doing-in respect of work (i.e.Fthe 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)

(ii) to sell or give on commercial rental or offer for sale or forGcommercial rental any copy of the computer programme:

Provided that such commercial rental does not apply in respectof computer programmes where the programme itself is notthe essential object of the rental.

45 This judgment has been relied upon by various judgments of the High Court of DelhiHimpugned in the appeals before us.

The reference to clause (a) and (b) means that all the rights whichare in literary works i.e.”(i) to reproduce the work in any materialform including the storing of it in any medium by electronic means;(ii) to issue copies of the work to the public not being copies alreadyin circulation; (iii) to perform the work in public, or communicateit to the public; (iv) to make any cinematograph film or soundrecording in respect of the work; (v) to make any translation ofthe work; (vi) to make any adaptation of the work; (vii) to do, inrelation to a translation or an adaptation of the work, any of theacts 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 outcomprehensively by this provision. In the context of the facts ofthis case, the assessee is the copyright proprietor; it made available,through one time license fee, the software to its customers; thissoftware without the hardware which was sold, is useless.Conversely the hardware sold by the assessee to its customers isalso valueless and cannot be used without such software. Thisanalysis is to show that what was conveyed to its customers bythe assessee bears a close resemblance to goods-significantlyenough, Section 14(1) talks of sale or rental of a “copy”. Thequestion of conveying or parting with copyright in the softwareitself would mean that the copyright proprietor has to assign it,divesting itself of the title implying that it has divested itself of allthe rights under Section 14. This would mean an outright sale ofthe copyright or assignment, under Section 18 of the Act. Section16 of the Copyright Act enacts that there cannot be any otherkind of right termed as “copyright”.

In the present case, the facts are closely similar to Ericsson. Thesupplies made (of the software) enabled the use of the hardwaresold. It was not disputed that without the software, hardware usewas not possible. The mere fact that separate invoicing was donefor purchase and other transactions did not imply that it was royaltypayment. In such cases, the nomenclature (of license or someother fee) is indeterminate of the true nature. Nor is thecircumstance that updates of the software are routinely given tothe assessee’s customers. These facts do not detract from thenature of the transaction, which was supply of software, in thenature of articles or goods. This court is also not persuaded with AB

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Athe submission that the payments, if not royalty, amounted topayments for the use of machinery or equipment. Such asubmission was never advanced before any of the lower taxauthorities; moreover, even in Ericsson (supra), a similar provisionexisted in the DTAA between India and Sweden.”

(pages 95-96)

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117. The conclusions that can be derived on a reading of theaforesaid 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.

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ii)Copyright is an intangible, incorporeal right, in the nature ofa privilege, which is quite independent of any materialsubstance. Ownership of copyright in a work is differentfrom the ownership of the physical material in which thecopyrighted work may happen to be embodied. An obviousDexample is the purchaser of a book or a CD/DVD, whobecomes the owner of the physical article, but does notbecome 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 anyEof 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 theownership of the physical substance, in which copyrightsubsists, gives the purchaser the right to do with it whateverFhe pleases, except the right to reproduce the same and issueit to the public, unless such copies are already in circulation,and the other acts mentioned in section 14 of the CopyrightAct.

iv)A licence from a copyright owner, conferring no proprietaryinterest on the licensee, does not entail parting with anyGcopyright, and is different from a licence issued under section30 of the Copyright Act, which is a licence which grants thelicensee an interest in the rights mentioned in section 14(a)and 14(b) of the Copyright Act. Where the core of atransaction is to authorize the end-user to have access toHand make use of the “licensed” computer software product over which the licensee has no exclusive rights, no copyrightis 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 touse computer software that is customised to its specificationsor otherwise.

v)A non-exclusive, non-transferable licence, merely enablingthe use of a copyrighted product, is in the nature of restrictiveconditions which are ancillary to such use, and cannot beconstrued as a licence to enjoy all or any of the enumeratedrights mentioned in section 14 of the Copyright Act, or createany interest in any such rights so as to attract section 30 ofthe Copyright Act.

vi)The right to reproduce and the right to use computer softwareare distinct and separate rights, as has been recognized inSBI v. Collector of Customs, 2000 (1) SCC 727 (seeparagraph 21), the former amounting to parting with copyrightand the latter, in the context of non-exclusive EULAs, notbeing so.

118. Consequently, the view contained in the determinations ofthe 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), statethe law correctly and have our express approval. We may add that theview expressed in the aforesaid judgments and determinations alsoaccords with the OECD Commentary on which most of India’s DTAAsare based.

DOCTRINE OF FIRST SALE/PRINCIPLE OFEXHAUSTION

119. The learned Additional Solicitor General argued that on thefacts of these cases, the doctrine of first sale/principle of exhaustionwould have no application inasmuch as this doctrine is not statutorilyrecognised in section 14(b)(ii) of the Copyright Act. This being so, sincethe distributors of copyrighted software “license” or sell such computersoftware to end-users, there would be a parting of a right or interest incopyright inasmuch as such “license” or sale would then be hit by section14(b)(ii) of the Copyright Act.

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A120. As has been mentioned hereinabove, section 14(b)(ii) of theCopyright Act was amended twice, first in 1994 and then again in 1999,with effect from 15.01.2000. Prior to the 1999 Amendment, section14(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 theBcomputer programme, regardless of whether such copy has beensold or given on hire on earlier occasions;”

After the 1999 Amendment, what is conspicuous by its absenceis the phrase “regardless of whether such copy has been sold or givenCon hire on earlier occasions”. This is a statutory recognition of the doctrineof first sale/principle of exhaustion.

121. The doctrine of first sale/principle of exhaustion is explainedby the locus classicus on this subject, Copinger and Skone James onCopyright (14[th] Edition) (1999), as follows:D

“The distribution right: general. One of the acts restricted bythe copyright in all work is the issue of the original or copies of thework to the public, often called the “distribution right”. This rightis provided for in section 18 of the 1988 Act. Infringement of thedistribution right is a primary infringement under UK law, and soEthere is no need to prove knowledge or reason to believe that thecopy in question is infringing. Thus it is a powerful weapon againstthose at the top of a chain of distribution. In accordance withgeneral principles, section 18 must be interpreted so far as possiblein such a way as to conform with relevant EU Directives, in thisFinstance, the Software Directive and the Information SocietyDirective. Recent case law of the CJEU has made a conforminginterpretation more difficult. An important aspect of the distributionright is that it is exhausted in relation to a particular article by thefirst sale (and, in the case of the Information Society Directive,the first transfer of ownership) of that article in the CommunityGby the rightholder or with his consent. For the purposes of theSoftware Directive, certain forms of distribution of electroniccopies are considered to exhaust the distribution right in respectof such copies.”

H

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“Exhaustion of the distribution right: tangible objects.Exhaustion applies to the tangible object into which a protectedwork or its copy is incorporated if it has been placed on the marketwith the copyright holder’s consent. In the case of artistic works,the consent of the copyright holder does not cover the distributionof an object incorporating his work if that object has been alteredafter its initial marketing in such a way that it constitutes a newreproduction of the work; in such an event, the distribution right isexhausted only upon the first sale or transfer of ownership of thatnew object with the consent of the rightholder. Accordingly, wherea defendant (without the licence of the rightholder) transferredan image of a work of a famous painter from a poster onto canvasby physically lifting the ink from the poster, producing a resultcloser to the original and leaving a blank piece of paper behind,and this amounted to copying, the rightholder’s distribution righthad not been exhausted.

Exhaustion: computer programs. Similar considerations applyin relation to tangible copies of computer programs as to otherworks: the first sale of a copy of a program by the rightholder orwith his consent exhausts the distribution right with the exceptionof the right to control further rental of the program or a copythereof. As to copies made available in intangible form (e.g. bydownloading from a website), for these purposes the word “sale”is to be given an autonomous Community interpretation. Where aseller makes a program available for download under a licencefor an unlimited period in return for a licence fee, the intention isto make the copy usable by the customer, permanently, in returnfor payment of a fee designed to enable the copyright owner toobtain a remuneration corresponding to the economic value of thecopy of the work. Accordingly, that amounts to a transfer of theright of ownership of the copy in question and thus a sale for thepurposes of the exhaustion of the distribution right. The sameapplies if the copy is made available by means of a materialmedium such as a CD- ROM or DVD and if the download is freebut the licence is granted and paid for separately. It does notmatter if the software is the subject of a maintenance agreement:the exhaustion applies to the copy as corrected and updatedpursuant to the agreement. Any other interpretation wouldundermine the effectiveness of article 4(2) of the Directive since A

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Asuppliers would merely have to call a contract a licence ratherthan a sale in order to circumvent the rule of exhaustion and divestit of all scope. The result is that a purchaser from the originallicensee and any subsequent acquirer are lawful acquirers of thesoftware for the purposes of article 5(1) of the Software Directiveand benefit from the right of reproduction provided for in thatBprovision.”

(pages 621-622)

122. In Warner Bros. Entertainment Inc. v. Santosh V.G.,CS (OS) No. 1682/2006 [“Warner Bros.”] reported in 2009 SCCCOnLine Del 835, a Single Judge of the High Court of Delhi dealt withcopyright 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 forconsideration. The said section, prior to being amended in 2012, read asfollows:

D“14. Meaning of Copyright.— For the purposes of this Act,“copyright” means the exclusive right subject to the provisions ofthis Act, to do or authorise the doing of any of the following actsin respect of a work or any substantial part thereof, namely xxx xxx xxx E(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 copyof the film, regardless of whether such copy has been soldor given on hire on earlier occasion”

123. The learned Single Judge of the High Court of Delhi explainedFthe principle of exhaustion as follows:

“57. The doctrine of exhaustion of copyright enables free trade inmaterial objects on which copies of protected works have beenfixed and put into circulation with the right holder’s consent. The“exhaustion” principle in a sense arbitrates the conflict betweenGthe right to own a copy of a work and the author’s right to controlthe distribution of copies. Exhaustion is decisive with respect tothe priority of ownership and the freedom to trade in materialcarriers on the condition that a copy has been legally brought into trading. Transfer of ownership of a carrier with a copy of a workfixed on it makes it impossible for the owner to derive furtherbenefits from the exploitation of a copy that was traded with hisconsent. The exhaustion principle is thus termed legitimate byreason of the profits earned for the ownership transfer, whichshould be satisfactory to the author if the work is not being exploitedin a different exploitation field.

58. Exhaustion of rights is linked to the distribution right. Theright to distribute objects (making them available to the public)means that such objects (or the medium on which a work is fixed)are released by or with the consent of the owner as a result of thetransfer of ownership. In this way, the owner is in control of thedistribution of copies since he decides the time and the form inwhich copies are released to the public. Content-wise thedistribution right are to be understood as an opportunity to providethe public with copies of a work and put them into circulation, aswell as to control the way the copies are used. The exhaustion ofrights principle thus limits the distribution right, by excluding controlover the use of copies after they have been put into circulation forthe first time.”

(emphasis in original)

124. The learned Single Judge then arrived at the followingconclusion:

“62. … The court is of opinion therefore that the existence orapplicability of the “exhaustion” principle cannot be inferredautomatically; it would have to depend on the situation, and thestructure of the legislation in question.”

125. Coming to section 14(a)(ii) of the Copyright Act, the learnedSingle Judge then held:

“63. The defendant in this case, accepts that the renting/hiring offilms carried on by it is without the plaintiffs’ license. The Plaintiffsurge that since the importation, for the purpose of renting of thesecinematographic films has not been authorized by them in India,the copies are infringing copies. Hence their import would be barredunder Section 51(b)(iv). The defendant’s argument, however, isthat the copies were legitimately purchased in the course of trade;they are rental copies, and can be used for purpose of renting, in AB

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AIndia. He says that the device of zoning, whereby the plaintiffsrestrict the licensee owner to use it in territories other than whatis indicated by them, is artificial, and unenforceable. Such “longarm” conditions are inapplicable. Particular reference is made tothe explanation to Section 14, which describes the content ofcopyright; it clarifies that “For the purposes of this section, aBcopy which has been sold once shall be deemed to be a copyalready in circulation.” Though attractive, this contention isunfeasible for more than one reason. The reference to copies incirculation is in the context of copyright in literary, artistic, dramaticor musical work, — not computer programme — (Section 14(a);Cthe statute enables the copyright owner to “issue copies of thework to the public not being copies already in circulation”.But for the explanation, it could arguably be said that the copyrightowner lost his domain, or right to control the manner of furtherdealing in copies which were in circulation. Yet, a careful readingof Section 14 would reveal that the content of copyrights in respectDof each nature of work (literary, dramatic, or musical work, onthe one hand, computer programme, artistic work, cinematographfilm, etc on the other) are distinct — evident from the listing outof such rights, separately, in clauses (a) to (f) of the section. Thereference to “copies in circulation” has to be therefore, in theEcontext; the phrase is used to limit the copyright owner’s right todictate further use of a literary, musical and dramatic work (Section14(a)(ii)). None of the owners of other classes of work are subjectto that limitation. The restriction of one class of copyright owner,structured in the statute serves a dual purpose- it limits the ownerof thatclass of copyright; and at the same time leaves it open toFthe copyright owner of other kinds of work, to place suchrestrictions.”

(emphasis in original)

126. Contrasting the aforesaid with section 14(d)(ii) of theGCopyright Act, as it stood prior to the amendment in 2012, the learnedSingle Judge then went on to hold:

“64. The second reason is that Section 14(1)(d) provides that thecopyright owner has, in case of cinematographic films, theexclusive right to sell or give on hire or offer for sale or hire, anyHcopy of the film, regardless of whether such copy has been sold or given on hire on earlier occasion.The copyright owner, thereforecontinues to be entitled to exercise rights in a particular copy ofthe film regardless of whether it has been sold previously- inexpress contrast to literary works, which are “already incirculation”. This is reinforced by Section 51(b)(i), whichunambiguously provides that copyright in a work shall be infringedif a person does anything the exclusive right do which is by theAct, conferred upon the owner of the copyright; it is alsoemphasized by Section 51(b)(i) which makes for sale or hire,orsells or lets for hire, or by way of trade displays or offers for saleor hire, any infringing copies of the work. The proviso, crucially,exempts from the definition importation of a single infringing copyfor “the private and domestic use of the importer”. As noted earlier,importation of a copy into India, in contravention of the Act — forinstance, without the license, or authorization of the copyrightowner, is an infringement; such copy is an infringing copy underSection 2(m).”

(emphasis in original)

127. Thus, the Single Judge concluded:

(emphasis in original)

127. Thus, the Single Judge concluded:

“67. The express indication in Section 14(a)(ii) that a copyrightowner of literary works cannot exercise domain over copies incirculation, shows that exhaustion, if one may term it, applies onlyin relation to the class of copyrights in Section 14(a) and to theextent specified in clause (ii). Thus, the copyright owner of aliterary work, cannot dictate how and under what conditions acopy can be re-sold, once it is “circulated”. This limited“exhaustion” negates the applicability of the principle in regard toother classes of copyrights. Thus, Parliament having intervenedin one category of copyrights to grant a limited kind of “exhaustion”and consciously chosen not to extend it to others, sleight of judicialreasoning cannot extend its application…”

128. However, the learned Additional Solicitor General relied uponthe judgment of another learned Single Judge of the High Court of Delhiwho had occasion to consider the aforesaid doctrine in John Wiley &Sons Inc. v. Prabhat Chander Kumar Jain, IA No. 11331/2008 inCS(OS) No. 1960/2008 reported in 2010 SCC OnLine Del 2000.The case involved the sale of low-priced editions of books meant for theIndian market in foreign territories, contrary to the terms prescribed by AB

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Athe copyright licence. After referring to a number of authorities, thelearned Single Judge held:

“68. The legal propositions which emanate from this discussionare as under:

a) That the court will measure the infringement of the copyrightfrom the rights of the owner of the copyright when the owneris before the court for violation of its rights.

B

b) That the rights of the owner may be broader than the limitedrights of the exclusive licencee, although the exclusive licenceehas the independent right to sue for infringement of thecopyright.

C

c) The rights of the owner and exclusive licencee may not bethe same and the rights of the exclusive licensee shall also besubject to the fetters imposed by the agreement between thelicensor and licencee.

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69. Applying these principles to the present case, it can be seenthat the plaintiff no. 1, 3 and 5 are the worldwide owners of thebooks and their copyright as mentioned and averred in the plaint.The plaintiff nos. 2, 4 and 6 are the exclusive licensees licensed topublish the said books in India and other territories. The plaintiffs’Egrievance is that Defendant no. 3 Technischer Overseas Pvt. Ltd.which is a bookseller in Delhi is purchasing the said Low PriceEditions of the books meant for the Indian market and the territoriesdefined from the plaintiffs no. 2, 4, 6 and is offering the said lowprize books from the websites www.alibris.com, www.biblio.comFto territories outside the prescribed ones on the book is infringingthe copyright of the plaintiffs.

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70. The said acts of the defendants of purchase of the booksfrom the exclusive licensees/licensees are legitimate in nature anddo not hinder or take away anyone’s rights including the rights ofexclusive licensees/licensee. But once the said defendant no. 3Goffers for sale the books or publications (which are fettered byterritorial restrictions purchased from exclusive licensees) and putsthem into circulation by selling or offering for sale or by takingorders for sale to the territories beyond the ones for whichpermission has been granted by the owners of the copyright, theHsaid acts are prima facie tantamount to putting into circulation or

issuance of copies not being in circulation in other territories wherethe right to do so is of the owner to exercise and violates therights of the owner of the copyright under Section 14 read withSection 51 of the Act, if not the rights of the exclusive licensee. Inother words, the said acts of selling the books from India or offeringfor sale from India through website and thereafter accepting themoney and couriering the books to an unauthorized territory willviolate the right of the owners of the copyright which are plaintiffno. 1, 3, 5 to issue the copies to the public not already in circulation(not of exclusive licensees) and thus will, prima facie, infringetheir copyright.

xxx xxx xxx

79. The said position of the licensee is equally applicable in casesof computer software and is seen in normal course when anyonepurchases the software. Computer software are mostly licensedand are sold and distributed with their own conditions and limitations.The purchasers of the said computer software either from theowner or from the licensee is aware of the arrangement or licenseagreement that the said computer software for instance is meantfor single user or multiple usage. The said purchaser is withinnotice while making purchase of the said software and is thusbound by the said conditions of the license. Once the said purchaserviolates the condition of the said license, he/she becomes liablefor 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 ofthe plaintiffs from their exclusive licensee, they are conscious ofthe fact that the said editions are subject to territorial restrictionswhich are meant to be sold within the limited territories only. Thenotice on the book itself gives knowledge to the purchaser aboutthe said territorial restriction. The said knowledge is also evidentwhen the defendant themselves offer the same books to thecustomers outside the territories while representing that “it is aninternational edition in paperback. The contents are identicalto the American Edition, word for word. The ISBN differs fromthe American Edition and the book is in black and white butthe contents are completely same as the American Edition ata great price.””

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A129. The learned Single Judge then embarked upon a discussionof the doctrine of first sale/principle of exhaustion, finding the absenceof an express provision in the Copyright Act recognising internationalexhaustion, and summed up its impact in the context of the facts beforehim as follows:

B“100. a) At the outset, again, I would like to reiterate the threepropositions a) the meaning of copyright has been defined underSection 14 of the Copyright Act as is clear from the opening wordsof the Section; b) The rights of the owner have to be looked intoas per Section 51 of the Act while measuring infringement; c)The rights of the owner may be broader than that of the licensee.CIn the present case, the first sale has been effected by the exclusivelicensees plaintiff nos. 2, 4, 6 and their rights are limited and aresubject to the conditions and limitations imposed by the agreement.That being so, the applicability of the first sale doctrine qua thesales effected by the exclusive licensee to the defendants will atDbest exhaust the rights of the exclusive licensees to complain andnot the rights of the owner. The right of the owner to complain forremaining infringement in unauthorised territories for violation ofthe permission granted and violation of the rights will remain intact.Thus, the applicability of first sale doctrine will partially exhaustthe rights of the licencee and not of the owner of the copyrightEi.e. plaintiff nos. 1, 3 and 5. xxx xxx xxx

104. The discussion makes it apparent that the learned singlejudge has doubted the mode of the applicability of the first salesdoctrine in India as per the existing law. The same may lead topartial or regional exhaustion or international exhaustion. As perFmy opinion, as the express provision for international exhaustionis absent in our Indian law, it would be appropriate to confine theapplicability of the same to regional exhaustion. Be that as it may,in the present case, the circumstances do not even otherwisewarrant this discussion as the rights if at all are exhausted are to the extent to which they are available with the licensees as theGbooks are purchased from the exclusive licensees who have limitedrights and not from the owner. In these circumstances, the questionof exhaustion of rights of owner in the copyright does not arise atall.”

130. Thus, since copies of the low-priced editions could not beHsaid to be “copies already in circulation” in the foreign territories that they were resold in, the learned Single Judge concluded that the principleof exhaustion would not apply. On the other hand, in the facts of theappeals before us, the distributors resell shrink-wrapped copies of thecomputer programmes that are already put in circulation by foreign, non-resident suppliers/manufacturers, since they have been sold and importedinto India via distribution agreements, and are thus not hit by section14(a)(ii) of the Copyright Act. This is made clear by the explanation tosection 14 of the Copyright Act, which states as follows:

“Explanation.—For the purposes of this section, a copy whichhas been sold once shall be deemed to be a copy already incirculation.”

131. In UsedSoft GmbH v. Oracle International Corp. (CaseC-128/11) [“UsedSoft v. Oracle (ECJ)”], the European Court ofJustice [“ECJ”] was concerned with Article 4 of Directive 2001/29/ECof the European Parliament and of the Council of 22 May 2001 on theharmonisation of certain aspects of copyright and related rights in theinformation society [“EC Directive 2001/29”], which provides asfollows:

“Article 4

Distribution right

1. Member States shall provide for authors, in respect of theoriginal of their works or of copies thereof, the exclusive right toauthorise or prohibit any form of distribution to the public by saleor otherwise.

2. The distribution right shall not be exhausted within theCommunity in respect of the original or copies of the work, exceptwhere the first sale or other transfer of ownership in the Communityof that object is made by the rightholder or with his consent.”

132. Coming to Article 4(2) of EC Directive 2001/29, the ECJposed a question, thus:

“35. By its second question, which should be addressed first, thereferring court essentially seeks to know whether and under whatconditions the downloading from the internet of a copy of acomputer program, authorised by the copyright holder, can giverise to exhaustion of the right of distribution of that copy in theEuropean Union within the meaning of Article 4(2) of Directive2009/24.

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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 computerprogram by the rightholder or with his consent exhausts thedistribution right within the European Union of that copy.

A

37. According to the order for reference, the copyright holderBitself, in this case Oracle, makes available to its customers in theEuropean Union who wish to use its computer program a copy ofthat program which can be downloaded from its website.

38. To determine whether, in a situation such as that at issue inthe main proceedings, the copyright holder’s distribution right isCexhausted, it must be ascertained, first, whether the contractualrelationship between the rightholder and its customer, within whichthe downloading of a copy of the program in question has takenplace, may be regarded as a ‘first sale … of a copy of a program’within the meaning of Article 4(2) of Directive 2009/24.”

D133. Concluding that the transfer of a copy of a computerprogramme, 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 2001/29 (see paragraph 48), the ECJ then went on todescribe the principle of exhaustion as follows:

E“70. An original acquirer who resells a tangible or intangible copyof a computer program for which the copyright holder’s right ofdistribution is exhausted in accordance with Article 4(2) ofDirective 2009/24 must, in order to avoid infringing the exclusiveright of reproduction of a computer program which belongs to itsauthor, laid down in Article 4(1)(a) of Directive 2009/24, make hisFown copy unusable at the time of its resale. In a situation such asthat mentioned in the preceding paragraph, the customer of thecopyright holder will continue to use the copy of the programinstalled on his server and will not thus make it unusable.

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71. Moreover, even if an acquirer of additional user rights for theGcomputer program concerned did not carry out a new installation— and hence a new reproduction — of the program on a serverbelonging to him, the effect of the exhaustion of the distributionright under Article 4(2) of Directive 2009/24 would in any eventnot extend to such user rights. In such a case the acquisition ofadditional user rights does not relate to the copy for which theH

distribution right was exhausted at the time of that transaction.On the contrary, it is intended solely to make it possible to extendthe number of users of the copy which the acquirer of additionalrights has himself already installed on his server.

72. On the basis of all the foregoing, the answer to Question 2 isthat Article 4(2) of Directive 2009/24 must be interpreted asmeaning that the right of distribution of a copy of a computerprogram is exhausted if the copyright holder who has authorised,even free of charge, the downloading of that copy from the internetonto a data carrier has also conferred, in return for payment of afee intended to enable him to obtain a remuneration correspondingto the economic value of the copy of the work of which he is theproprietor, a right to use that copy for an unlimited period.”

134. The ECJ concluded that the copyright owner exhausts hisdistribution right in copies of a computer programme upon making thefirst sale, provided that the copy is made unusable by the first acquirer,as follows:

“78. Admittedly, as stated in paragraph 70 above, the originalacquirer of a tangible or intangible copy of a computer programfor which the copyright holder’s distribution right is exhausted inaccordance with Article 4(2) of Directive 2009/24 who resellsthat copy must, in order to avoid infringing that rightholder’sexclusive right of reproduction of his computer program underArticle 4(1)(a) of Directive 2009/24, make the copy downloadedonto his computer unusable at the time of its resale.

79. As Oracle rightly observes, ascertaining whether such a copyhas been made unusable may prove difficult. However, a copyrightholder who distributes copies of a computer program on a materialmedium such as a CD ROM or DVD is faced with the sameproblem, since it is only with great difficulty that he can makesure that the original acquirer has not made copies of the programwhich he will continue to use after selling his material medium. Tosolve that problem, it is permissible for the distributor — whether‘classic’ or ‘digital’ — to make use of technical protectivemeasures such as product keys.

80. Since the copyright holder cannot object to the resale of acopy of a computer program for which that rightholder’s distribution A

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Aright is exhausted under Article 4(2) of Directive 2009/24, it mustbe concluded that a second acquirer of that copy and anysubsequent acquirer are ‘lawful acquirers’ of it within the meaningof Article 5(1) of Directive 2009/24.

81. Consequently, in the event of a resale of the copy of theBcomputer program by the first acquirer, the new acquirer will beable, in accordance with Article 5(1) of Directive 2009/24, todownload onto his computer the copy sold to him by the firstacquirer. Such a download must be regarded as a reproduction ofa computer program that is necessary to enable the new acquirerto use the program in accordance with its intended purpose.”C

135. The learned Additional Solicitor General, however, stronglyrelied upon the decision of the United States Court of Appeals for theNinth Circuit in Vernor v. Autodesk, Inc., 621 F.3d 1102 (9th Cir.2010), wherein it dealt with the doctrine of first sale/principle ofexhaustion. The facts of the case were set out as follows:D

“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, andmanufacturers. It has more than nine million customers. It firstEreleased its Auto CAD software in 1982. It holds registeredcopyrights in all versions of the software including the discontinuedRelease 14 version, which is at issue in this case. It providedRelease 14 to customers on CD-ROMs.

Since at least 1986, Autodesk has offered Auto CAD to customersFpursuant to an accompanying software license agreement(“SLA”), which customers must accept before installing thesoftware. A customer who does not accept the SLA can returnthe software for a full refund. Autodesk offers SLAs with differentterms for commercial, educational institution[s], and student users.GThe commercial license, which is the most expensive, imposesthe fewest restrictions on users and allows them software upgradesat discounted prices.

The SLA for Release 14 first recites that Autodesk retains title toall copies. Second, it states that the customer has a nonexclusiveHand 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 andfrom electronically or physically transferring the software out ofthe Western Hemisphere. Fourth, it imposes significant userestrictions:

YOU MAY NOT: (1) modify, translate, reverse engineer,decompile, or disassemble the Software … (3) remove anyproprietary notices, labels, or marks from the Software orDocumentation; (4) use the Software outside of the WesternHemisphere; (5) utilize any computer software or hardwaredesigned to defeat any hardware copy-protection device, shouldthe software you have licensed be equipped with suchprotection; or (6) use the Software for commercial or otherrevenue- generating purposes if the Software has been licensedor labeled for educational use only.

Fifth, the SLA provides for license termination if the user copiesthe software without authorization or does not comply with theSLA’s restrictions. Finally, the SLA provides that if the softwareis 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 $ withinsixty (60) days of the purchase of the license to use the upgradeor update$ Autodesk reserves the right to require you to showsatisfactory proof that previous copies of the software havebeen destroyed.

Autodesk takes measures to enforce these license requirements.It assigns a serial number to each copy of AutoCAD and tracksregistered licensees. It requires customers to input “activationcodes” within one month after installation to continue using thesoftware.1 The customer obtains the code by providing theproduct’s serial number to Autodesk. Autodesk issues the activationcode after confirming that the serial number is authentic, the copyis not registered to a different customer, and the product has notbeen upgraded. Once a customer has an activation code, he orshe may use it to activate the software on additional computerswithout notifying Autodesk.”’

(pages 1104-1105)

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A136. The Court noted that the application of the doctrine turnedon the following question:

“This case requires us to decide whether Autodesk sold Release14 copies to its customers or licensed the copies to its customers.If CTA owned its copies of Release 14, then both its sales toVernor and Vernor’s subsequent sales were non-infringing underthe first sale doctrine. However, if Autodesk only licensed CTAto use copies of Release 14, then CTA’s and Vernor’s sales ofthose copies are not protected by the first sale doctrine and wouldtherefore infringe Autodesk’s exclusive distribution right.”

B

(page 1107)

C

137. On these facts, the doctrine of first sale/principle ofexhaustion, as applicable in USA, was set out as follows:

“A. The first sale doctrine

D

The Supreme Court articulated the first sale doctrine in 1908,holding that a copyright owner’s exclusive distribution right isexhausted after the owner’s first sale of a particular copy of thecopyrighted work. See Bobbs-Merrill Co. v. Straus, 210 U.S.339, 350-51 (1908). In Bobbs-Merrill, the plaintiff-copyrightEowner sold its book with a printed notice announcing that anyretailer who sold the book for less than one dollar was responsiblefor copyright infringement. (Id. at 341). Plaintiff sought injunctiverelief against defendants- booksellers who failed to comply withthe price restriction. (Id. at 341-42). The Supreme Court rejectedFthe plaintiff’s claim, holding that its exclusive distribution rightapplied only to first sales of copies of the work. (Id. at 350-51).The distribution right did not permit [the] plaintiff to dictate thatsubsequent sales of the work below a particular price wereinfringing. Id. The Court noted that its decision solely applied tothe rights of a copyright owner that distributed its work without aGlicense agreement. (Id. at 350) (“There is no claim in this case ofcontract limitation, nor license agreement controlling the subsequentsales of the book.”).

Congress codified the first sale doctrine the following year. See17 U.S.C. § 41 (1909). In its current form, it allows the “owner of H

a particular copy” of a copyrighted work to sell or dispose of hiscopy without the copyright owner’s authorization. (Id. § 109(a)(enacted 1976)). The first sale doctrine does not apply to a personwho 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)(“[T]he first sale doctrine would not provide a defense to $ anynon-owner such as a bailee, a licensee, a consignee, or one whosepossession of the copy was unlawful.”).”

(pages 1107-1108)

138. Given the restrictions specifically imposed by the softwarelicence agreement in the facts of the case, the Court held that thecopyright owner retained the title to the copies of the software, and thusthe resale of such copies violated the distribution right of the copyrightowner, as follows:

“B. Analysis

We hold today that a software user is a licensee rather than anowner of a copy where the copyright owner (1) specifies that theuser is granted a license; (2) significantly restricts the user’s abilityto transfer the software; and (3) imposes notable use restrictions.12Applying our holding to Autodesk’s SLA, we conclude that CTAwas a licensee rather than an owner of copies of Release 14 andthus was not entitled to invoke the first sale doctrine or the essentialstep defense.

Autodesk retained title to the software and imposed significanttransfer restrictions: it stated that the license is non-transferable,the software could not be transferred or leased without Autodesk’swritten consent, and the software could not be transferred outsidethe Western Hemisphere. The SLA also imposed use restrictionsagainst the use of the software outside the Western Hemisphereand against modifying, translating, or reverse-engineering thesoftware, removing any proprietary marks from the software ordocumentation, or defeating any copy protection device.Furthermore, the SLA provided for termination of the license uponthe licensee’s unauthorized copying or failure to comply with otherlicense restrictions. Thus, because Autodesk reserved title toRelease 14 copies and imposed significant transfer and use A

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Arestrictions, we conclude that its customers are licensees of theircopies 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 14copies to Vernor under the first sale doctrine. 17 U.S.C. § 109(a).BTherefore, Vernor did not receive title to the copies from CTAand accordingly could not pass ownership on to others. Both CTA’sand Vernor’s sales infringed Autodesk’s exclusive right to distributecopies of its work. Id. § 106(3).”

(pages 1111-1112)

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139. As a result, given the conditions of the software licenceagreement in the facts before it, the Court held that the doctrine of firstsale would not apply, as Autodesk, the copyright owner, did not part withtitle to the copies of the software. On the other hand, as has been held inparagraph 52 of this judgment, the EULAs and distribution agreementsDthat the appeals before us are concerned with, do not grant a licence interms of section 30 of the Copyright Act, but do in fact convey title tothe material object embedded with a copy of the computer software tothe distributors/end-users.

140. A conspectus of the aforesaid authorities would show thatEthe doctrine of first sale/principle of exhaustion is dependent, in the firstplace, upon legislation which either recognises or refuses to recognisethe doctrine (thereby continuing to vest distribution rights in the copyrightowner, even beyond the first sale of the copyrighted work). Thus, forexample, prior to the amendment of section 14(d)(ii) in 2012, dealingwith a cinematograph film, the distribution right to sell or give on hire orFoffer for sale or hire, any copy of the film, would continue to vest in thecopyright owner, “regardless of whether such copy ha[d] been soldor given on hire on earlier occasion”, which manifested the legislativeintent against the application of the doctrine of first sale/principle ofexhaustion. Post 2012, however, the balance between the copyrightGowner’s distribution right and the right of the purchaser to further resale,was tilted in favour of the latter, the words “regardless of whether suchcopy has been sold or given on hire on earlier occasion” being deletedby the amendment. Likewise, when it comes to section 14(a)(ii) of theCopyright Act, the distribution right subsists with the owner of copyrightto issue copies of the work to the public, to the extent such copies areHnot copies already in circulation, thereby manifesting a legislative intent to apply the doctrine of first sale/principle of exhaustion, as has beenfound by the High Court of Delhi in Warner Bros. (supra).

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 deletedthe words “regardless of whether such copy has been sold or given onhire on earlier occasions’’, thereby making it clear that the same tilt thathad been made in section 14(d)(ii) of the Copyright Act vide theamendment in 2012 in favour of the purchaser, is also to be found postthe 1999 Amendment, in section 14(b)(ii) of the Copyright Act.

142. The language of section 14(b)(ii) of the Copyright Act makesit clear that it is the exclusive right of the owner to sell or to give oncommercial rental or offer for sale or for commercial rental “any copyof the computer programme”. Thus, a distributor who purchasescomputer software in material form and resells it to an end-user cannotbe said to be within the scope of the aforesaid provision. The sale orcommercial rental spoken of in section 14(b)(ii) of the Copyright Act isof “any copy of a computer programme”, making it clear that the sectionwould only apply to the making of copies of the computer programmeand then selling them, i.e., reproduction of the same for sale or commercialrental.

143. The object of section 14(b)(ii) of the Copyright Act, in thecontext of a computer program, is to interdict reproduction of the saidcomputer programme and consequent transfer of the reproducedcomputer programme to subsequent acquirers/end-users. By way ofcontrast, once a book is sold, on further resale of the same book, thepurchaser loses the material book altogether, as such purchaser has, forconsideration, parted with the book once and for all. This may not be soin the case of a computer programme, which is why the ECJ in UsedSoftv. Oracle (ECJ) (supra) held that unless a further resale of a computersoftware stored on a floppy disc/CD is accompanied by the destructionof the said software on the computer of the reseller/first acquirer, thecopyright owner’s rights would be easily infringed by mere reproductionthereof. This is also recognised in section 65A of the Copyright Actwhich punishes the circumvention of technological protection measures,such as encryption codes, product keys etc. designed to ensure that thefirst acquirer’s copy is made unusable. Thus, once it is understood thatthe object of section 14(b)(ii) of the Copyright Act is not to interdict thesale of computer software that is “licensed” to be sold by a distributor, AB

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472SUPREME COURT REPORTS

Abut that it is to prevent copies of computer software once sold beingreproduced and then transferred by way of sale or otherwise, it becomesclear that any sale by the author of a computer software to a distributorfor 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 SeniorAdvocate appearing on behalf of Sonata Information Technology Ltd. inBC.A. Nos. 8737- 8941/2018, the distributor cannot use the computersoftware at all and has to pass on the said software, as shrink-wrappedby the owner, to the end-user for a consideration, the distributor’s profitmargin being that of an intermediary who merely resells the same productto the end-user.C

144. For all these reasons, we cannot accede to the argumentmade by the learned Additional Solicitor General that the distribution ofcopyrighted 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 sourceDunder section 195 of the Income Tax Act.

145. The DTAAs that have been entered into by India with otherEContracting States have to be interpreted liberally with a view to implementthe 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 DTC5188 at p. 5190] the principle of liberal interpretation of tax treatiesFwas reiterated by the Federal Court, which observed:

“Contrary to an ordinary taxing statute a tax treaty orconvention must be given a liberal interpretation with a view toimplementing the true intentions of the parties. A literal orlegalistic interpretation must be avoided when the basic objectGof the treaty might be defeated or frustrated insofar as theparticular item under consideration is concerned.””

“Interpretation of treaties

130. The principles adopted in interpretation of treaties are notthe same as those in interpretation of a statutory legislation. While H

commenting on the interpretation of a treaty imported into amunicipal law, Francis Bennion observes:

“With indirect enactment, instead of the substantive legislationtaking the well-known form of an Act of Parliament, it has theform of a treaty. In other words, the form and language foundsuitable for embodying an international agreement become, atthe stroke of a pen, also the form and language of a municipallegislative instrument. It is rather like saying that, by Act ofParliament, a woman shall be a man. Inconveniences mayensue. One inconvenience is that the interpreter is likely to berequired to cope with disorganised composition instead ofprecision drafting. The drafting of treaties is notoriously sloppyusually for a very good reason. To get agreement, politicuncertainty is called for.

… The interpretation of a treaty imported into municipal lawby indirect enactment was described by Lord Wilberforce asbeing ‘unconstrained by technical rules of English law, or byEnglish legal precedent, but conducted on broad principles ofgeneral acceptation. This echoes the optimistic dictum of LordWidgery, C.J. that the words ‘are to be given their generalmeaning, general to lawyer and layman alike … the meaningof the diplomat rather than the lawyer’.” [Francis Bennion:Statutory Interpretation, p. 461 [Butterworths, 1992 (2ndEdn.)].]

131. An important principle which needs to be kept in mind in theinterpretation of the provisions of an international treaty, includingone for double taxation relief, is that treaties are negotiated andentered into at a political level and have several considerations astheir 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 mainfunction of a Double Taxation Avoidance Treaty should be seenin the context of aiding commercial relations between treatypartners and as being essentially a bargain between two treatycountries as to the division of tax revenues between them in respectof income falling to be taxed in both jurisdictions. It is observed(vide paragraph 1.06):

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“The benefits and detriments of a double tax treaty will probablyonly be truly reciprocal where the flow of trade and investmentbetween treaty partners is generally in balance. Where this isnot the case, the benefits of the treaty may be weighed morein favour of one treaty partner than the other, even though theprovisions of the treaty are expressed in reciprocal terms. Thishas been identified as occurring in relation to tax treatiesbetween developed and developing countries, where the flowof trade and investment is largely one-way.

Because treaty negotiations are largely a bargaining processwith each side seeking concessions from the other, the finalagreement will often represent a number of compromises, andit may be uncertain as to whether a full and sufficient quidpro 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 obtainbenefits 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 ajudgment 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 ofdouble taxation began, at any rate so far as the United Kingdomwas concerned, in 1946. The form employed, which, for obviousreasons, employs similar forms and similar language in allagreements, is derived, I believe, from a set of model clausesproposed by the financial commission of the League of Nations.The aim is to provide by treaty for the tax claims of twogovernments, both legitimately interested in taxing a particularsource of income either by resigning to one of the two the wholeclaim or else by prescribing the basis on which the tax claim is tobe shared between them. For our purpose it is convenient to notethat the language employed in this agreement is what may becalled international tax language and that such categories as“enterprise,” “commercial or industrial profits” and “permanentestablishment” have no exact counterpart in the taxing code ofthe United Kingdom.”

(page 480)

147. All the DTAAs with which we are concerned, have, as theirstarting point, either the OECD Model Tax Convention on Income andCapital [“OECD Model Tax Convention”] and/or the United NationsModel Double Taxation Convention between Developed and DevelopingCountries [“UN Model Convention”] insofar as the taxation of royaltyfor parting with copyright is concerned.

148. The OECD Model Tax Convention speaks of the importanceof the OECD Commentary, as follows:

“2. It has long been recognised among the member countries ofthe Organisation for Economic Co-operation and Developmentthat it is desirable to clarify, standardise, and confirm the fiscalsituation of taxpayers who are engaged in commercial, industrial,financial, or any other activities in other countries through theapplication by all countries of common solutions to identical casesof double taxation. These countries have also long recognised theneed to improve administrative co-operation in tax matters, notablythrough exchange of information and assistance in collection oftaxes, for the purpose of preventing tax evasion and avoidance.

3. These are the main purposes of the OECD Model TaxConvention on Income and on Capital, which provides a means ofsettling on a uniform basis the most common problems that arisein the field of international juridical double taxation. Asrecommended by the Council of OECD, member countries, whenconcluding or revising bilateral conventions, should conform tothis Model Convention as interpreted by the Commentaries thereonand having regard to the reservations contained therein and theirtax authorities should follow these Commentaries, as modifiedfrom time to time and subject to their observations thereon, whenapplying and interpreting the provisions of their bilateral taxconventions that are based on the Model Convention.”

“29.2 Similarly, taxpayers make extensive use of theCommentaries in conducting their businesses and planning theirbusiness transactions and investments. The Commentaries are ofparticular importance in countries that do not have a procedurefor obtaining an advance ruling on tax matters from the taxadministration as the Commentaries may be the only availablesource of interpretation in that case.”

(OECD Model Tax Convention 2017 - Condensed Version)

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A149. The OECD Model Tax Convention, in Article 12 thereof,defines the term “royalties” as follows:

“Article 12

ROYALTIES

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2. The term “royalties” as used in this Article means payments ofany kind received as a consideration for the use of, or the right touse, any copyright of literary, artistic or scientific work includingcinematograph films, any patent, trade mark, design or model,Cplan, secret formula or process, or for information concerningindustrial, commercial or scientific experience.”

150. When the definition of “royalties” is seen in all the DTAAsthat we are concerned with, it is found that “royalties” is defined in amanner either identical with or similar to the definition contained in ArticleD12 of the OECD Model Tax Convention. This being the case, the OECDCommentary on the provisions of the OECD Model Tax Conventionthen becomes relevant. The OECD Commentary has been referred toand relied upon in several earlier judgments. See:

i. Union of India v. Azadi Bachao Andolan, (2004) 10 SCC 1at pages 42-43;E

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 atpages 322-323.F

151. The importance of the OECD Commentary, when it comesto DTAAs, was also underscored by the High Court of Australia inThiel v. Federal Commissioner of Taxation, High Court ofAustralia, [1990] 94 ALR 647, which put it thus:

“Article 31 of the Vienna Convention provides that a treaty is toGbe interpreted “in good faith in accordance with the ordinarymeaning to be given to the terms of the treaty in their context andin the light of its object and purpose’’. The context includes, inaddition to the text, any instrument which was made by one ormore parties in connection with the conclusion of the treaty andHaccepted by the other parties as an instrument related to the treaty.

For my part, I do not see why the OECD model convention andcommentaries should not be regarded as having been made inconnection with and accepted by the parties to a bilateral treatysubsequently concluded in accordance with the framework of themodel. However, some doubts have been expressed about theapplicability, as a matter of language, of Art. 31 to thecommentaries in the case of a bilateral treaty such as a doubletaxation agreement: see Jones et al., “The Interpretation of TaxTreaties with Particular Reference to Article 3(2) of the OECDModel-II’’, (1984) British Tax Review 90 at p. 92.

I turn, therefore, to Art. 32 of the Vienna Convention which allowsrecourse to be had to supplementary means of interpretation,including the preparatory work of the treaty and the circumstancesof its conclusion, in order to confirm the meaning resulting fromthe application of Art. 31, or to determine the meaning when theinterpretation according to Art. 31 leaves the meaning ambiguousor obscure or leads to a result which is manifestly absurd orunreasonable. Whilst the model convention and commentaries maynot strictly amount to work preparatory to the double taxationagreement between Australia and Switzerland, they are documentswhich form the basis for the conclusion of bilateral double taxationagreements of the kind in question and, as with treaties in parimateria, provide a guide to the current usage of terms by theparties. They are, therefore, a supplementary means ofinterpretation to which recourse may be had under Art. 32 of theVienna Convention.”[47]

(Concurring Opinion of Dawson J., pages 653-654)

(Concurring Opinion of Dawson J., pages 653-654)

“The Agreement is a treaty and is to be interpreted in accordancewith 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 ruleshave now been codified by the Vienna Convention on the Law ofTreaties to which Australia, but not Switzerland, is a party.

47 This Court, in Ram Jethmalani v. Union of India, (2011) 8 SCC 1, noted thatthough India is not a party to the Vienna Convention on the Law of Treaties, theprinciples of international law and the principle of interpretation contained in Article31 thereof provide broad guidelines to interpret treaties in the Indian context also. (Seeparagraph 69).

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ANevertheless, because the interpretation provisions of the ViennaConvention reflect the customary rules for the interpretation oftreaties, it is proper to have regard to the terms of the Conventionin interpreting the Agreement, even though Switzerland is not aparty to that Convention: Fothergill v. Monarch Airlines Ltd.(1981) A.C. 251 at pp. 276, 282, 290; Commonwealth v. TasmaniaB(the Tasmanian Dam case) (1983) 158 C.L.R. 1 at p. 222; Goldercase (1975) 57 I.L.R. 201 at pp. 213-214. Article 31 of theConvention requires a treaty to be interpreted in accordance withthe ordinary meaning to be given to its terms “in their context andin the light of its object and purpose’’. The context includes theCpreamble and annexes to the treaty: Art. 31(2). Recourse mayalso be had to “supplementary means of interpretation, includingthe preparatory work of the treaty and the circumstances of itsconclusion’’ to confirm the meaning resulting from the applicationof Art. 31 or to determine the meaning of the treaty wheninterpretation according to Art. 31 leaves its meaning obscure orDambiguous or leads to a result which is manifestly absurd orunreasonable: Art. 32.

The Agreement is one “for the avoidance of double taxation withrespect to taxes on income’’. Accordingly, it is necessary tointerpret the words of the Agreement with that particular purposein mind. Moreover, the term “enterprise’’ in Art. 3 and 7 of theAgreement is ambiguous because, on the one hand, it can mean aproject or activity undertaken and, on the other hand, it can meana framework for making and carrying out decisions in respect ofactivities and projects. Consequently, it is proper to have regard E

Fto any “supplementary means of interpretation’’ in interpretingthe Agreement. In this case, the “supplementary means ofinterpretation’’ are the 1977 OECD Model Convention for theAvoidance of Double Taxation with respect to Taxes on Incomeand on Capital, which was the model for the Agreement, and acommentary issued by the OECD in relation to that modelGconvention. But before referring to those two documents, it isnecessary to describe the Agreement in more detail.”

(Concurring Opinion of McHugh J., pages 658-659)

152. The OECD Commentary on royalty payments under ArticleH12 is instructive, and states as follows :

“12. Whether payments received as consideration for computersoftware may be classified as royalties poses difficult problemsbut is a matter of considerable importance in view of the rapiddevelopment of computer technology in recent years and the extentof transfers of such technology across national borders. In 1992,the Commentary was amended to describe the principles by whichsuch classification should be made. Paragraphs 12 to 17 werefurther amended in 2000 to refine the analysis by which businessprofits are distinguished from royalties in computer softwaretransactions. In most cases, the revised analysis will not result ina different outcome.

12.1 Software may be described as a program, or series ofprograms, containing instructions for a computer required eitherfor the operational processes of the computer itself (operationalsoftware) or for the accomplishment of other tasks (applicationsoftware). It can be transferred through a variety of media, forexample in writing or electronically, on a magnetic tape or disk, oron a laser disk or CD-Rom. It may be standardised with a widerange of applications or be tailor-made for single users. It can betransferred as an integral part of computer hardware or in anindependent form available for use on a variety of hardware.

12.2 The character of payments received in transactions involvingthe transfer of computer software depends on the nature of therights that the transferee acquires under the particular arrangementregarding the use and exploitation of the program. The rights incomputer programs are a form of intellectual property. Researchinto the practices of OECD member countries has establishedthat all but one protect rights in computer programs either explicitlyor implicitly under copyright law. Although the term “computersoftware” is commonly used to describe both the program — inwhich the intellectual property rights (copyright) subsist — andthe medium on which it is embodied, the copyright law of mostOECD member countries recognises a distinction between thecopyright in the program and software which incorporates a copyof the copyrighted program. Transfers of rights in relation tosoftware occur in many different ways ranging from the alienationof the entire rights in the copyright in a program to the sale of aproduct which is subject to restrictions on the use to which it isput. The consideration paid can also take numerous forms. These A

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factors may make it difficult to determine where the boundarylies between software payments that are properly to be regardedas royalties and other types of payment. The difficulty ofdetermination is compounded by the ease of reproduction ofcomputer software, and by the fact that acquisition of softwarefrequently entails the making of a copy by the acquirer in order tomake possible the operation of the software.

13. The transferee’s rights will in most cases consist of partialrights or complete rights in the underlying copyright (see paragraphs13.1 and 15 below), or they may be (or be equivalent to) partial orcomplete rights in a copy of the program (the “program copy”),whether or not such copy is embodied in a material medium orprovided electronically (see paragraphs 14 to 14.2 below). Inunusual 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 thecopyright (without the transferor fully alienating the copyrightrights) will represent a royalty where the consideration is forgranting 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 reproduceand distribute to the public software incorporating the copyrightedprogram, or to modify and publicly display the program. In thesecircumstances, the payments are for the right to use the copyrightin the program (i.e. to exploit the rights that would otherwise bethe sole prerogative of the copyright holder). It should be notedthat where a software payment is properly to be regarded as aroyalty there may be difficulties in applying the copyright provisionsof the Article to software payments since paragraph 2 requiresthat software be classified as a literary, artistic or scientific work.None of these categories seems entirely apt. The copyright lawsof many countries deal with this problem by specifically classifyingsoftware as a literary or scientific work. For other countriestreatment as a scientific work might be the most realistic approach.Countries for which it is not possible to attach software to any ofthose categories might be justified in adopting in their bilateraltreaties an amended version of paragraph 2 which either omits allreferences to the nature of the copyrights or refers specifically tosoftware.

14. In other types of transactions, the rights acquired in relationto the copyright are limited to those necessary to enable the userto operate the program, for example, where the transferee isgranted limited rights to reproduce the program. This would bethe common situation in transactions for the acquisition of a programcopy. The rights transferred in these cases are specific to thenature of computer programs. They allow the user to copy theprogram, for example onto the user’s computer hard drive or forarchival purposes. In this context, it is important to note that theprotection afforded in relation to computer programs undercopyright law may differ from country to country. In somecountries the act of copying the program onto the hard drive orrandom access memory of a computer would, without a license,constitute a breach of copyright. However, the copyright laws ofmany countries automatically grant this right to the owner ofsoftware which incorporates a computer program. Regardless ofwhether this right is granted under law or under a licenseagreement with the copyright holder, copying the program ontothe computer’s hard drive or random access memory or makingan archival copy is an essential step in utilising the program.Therefore, rights in relation to these acts of copying, where theydo no more than enable the effective operation of the program bythe user,should be disregarded in analysing the character of thetransaction for tax purposes. Payments in these types oftransactions would be dealt with as commercial income inaccordance with Article 7.

14.1 The method of transferring the computer program to thetransferee is not relevant. For example, it does not matter whetherthe transferee acquires a computer disk containing a copy of theprogram or directly receives a copy on the hard disk of hercomputer via a modem connection. It is also of no relevance thatthere may be restrictions on the use to which the transferee canput the software.

14.2 The ease of reproducing computer programs has resulted indistribution arrangements in which the transferee obtains rights tomake multiple copies of the program for operation only within itsown business. Such arrangements are commonly referred to as“site licences”, “enterprise licenses”, or “network licences”.

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Although these arrangements permit the making of multiple copiesof the program, such rights are generally limited to those necessaryfor the purpose of enabling the operation of the program on thelicensee’s computers or network, and reproduction for any otherpurpose is not permitted under the license. Payments under sucharrangements will in most cases be dealt with as business profitsin accordance with Article 7.

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14.4 Arrangements between a software copyright holder andadistribution intermediary frequently will grant to the distributionintermediary the right to distribute copies of the program withoutEthe right to reproduce that program. In these transactions, therights acquired in relation to the copyright are limited to thosenecessary for the commercial intermediary to distribute copies ofthe software program. In such transactions, distributors are payingonly for the acquisition of the software copies and not to exploitany right in the software copyrights. Thus, in a transaction whereFa distributor makes payments to acquire and distribute softwarecopies (without the right to reproduce the software), the rights inrelation to these acts of distribution should be disregarded inanalysing the character of the transaction for tax purposes.Payments in these types of transactions would be dealt with asGbusiness profits in accordance with Article 7. This would be thecase regardless of whether the copies being distributed aredelivered 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 thepurposes of its installation.

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15. Where consideration is paid for the transfer of the fullownership of the rights in the copyright, the payment cannotrepresent a royalty and the provisions of the Article are notapplicable. Difficulties can arise where there is a transfer of rightsinvolving:

— exclusive right of use of the copyright during a specificperiod or in a limited geographical area; — additional consideration related to usage; — consideration in the form of a substantial lump sum payment.

16. Each case will depend on its particular facts but in general ifthe payment is in consideration for the transfer of rights thatconstitute a distinct and specific property (which is more likely inthe case of geographically-limited than time limited rights), suchpayments are likely to be business profits within Article 7 or acapital gain within Article 13 rather than royalties within Article12. That follows from the fact that where the ownership of rightshas been alienated, the consideration cannot be for the use of therights. The essential character of the transaction as an alienationcannot be altered by the form of the consideration, the paymentof 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 hardwarewith built-in software and concessions of the right to use softwarecombined with the provision of services. The methods set out inparagraph 11 above for dealing with similar problems in relationto patent royalties and know-how are equally applicable tocomputer software. Where necessary the total amount of theconsideration payable under a contract should be broken down onthe basis of the information contained in the contract or by meansof a reasonable apportionment with the appropriate tax treatmentbeing applied to each apportioned part.”

153. However, the learned Additional Solicitor General has takenus through the positions taken by India (in the capacity of an OECDnon-member) with regard to Article 12 of the OECD Model TaxConvention and the OECD Commentary, first in 2008, reiterated in 2014and 2017, as follows:

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“4.1 India reserves the right to: tax royalties and fees for technicalservices at source; define these, particularly by reference to itsdomestic law; define the source of such payments, which mayextend beyond the source defined in paragraph 5 of Article 11,and modify paragraphs 3 and 4 accordingly.”

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B“17. India reserves its position on the interpretations provided inparagraphs 8.2, 10.1, 10.2, 14, 14.1, 14.2, 14.4, 15, 16 and 17.3; itis of the view that some of the payments referred to may constituteroyalties”

(Positions on Article 12, OECD Commentary 2014)

C154. From these positions taken, which use the language “reservesthe right to” and “is of the view that some of the payments referred tomayconstitute royalties”, it is not at all clear as to what exactly thenature of these positions are. This may be contrasted with the categoricallanguage used by India in its positions taken with respect to other aspectsD(“India does not agree to”), as follows:

“18. India does not agree with the interpretation that informationconcerning industrial, commercial or scientific experience isconfined to only previous experience.”

“20. India does not agree with the interpretation in paragraph 9.1Eof the Commentary on Article 12 according to which a paymentfor transponder leasing will not constitute royalty. This notion iscontrary to the Indian position that income from transponder leasingconstitutes an equipment royalty taxable both under India’sdomestic law and its treaties with many countries. It is also contraryFto India’s position that a payment for the use of a transponder is apayment for the use of a process resulting in a royalty under Article12. India also does not agree with the conclusion included in theparagraph concerning undersea cables and pipelines as it considersthat undersea cables and pipelines are industrial, commercial orscientific equipment and that payments made for their use constituteGequipment royalties.

21. India does not agree with the interpretation in paragraph 9.2of the Commentary on Article 12. It considers that a roaming callconstitutes the use of a process. Accordingly, the payment madefor the use of that process constitutes a royalty for the purposesHof 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 useof industrial, commercial or scientific equipment.

22. India does not agree with the interpretation in paragraph 9.3of the Commentary on Article 12. It considers that a payment forspectrum license constitutes a royalty taxable both under India’sdomestic 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 ofthe High Court of Delhi correctly observed that mere positions takenwith respect to the OECD Commentary do not alter the DTAA’sprovisions, 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 OECDCommentary cannot be a fact that influences the interpretation ofthe words defining royalty as they stand today. The only mannerin which such change in position can be relevant is if such changeis incorporated into the agreement itself and not otherwise. Achange in executive position cannot bring about a unilaterallegislative amendment into a treaty concluded between twosovereign states. It is fallacious to assume that any change madeto domestic law to rectify a situation of mistaken interpretationcan spontaneously further their case in an international treaty.Therefore, mere amendment to Section 9(1)(vi) cannot result in achange. It is imperative that such amendment is brought aboutin the agreement as well. Any attempt short of this, even if it isevidence of the State’s discomfort at letting data broadcastrevenues slip by, will be insufficient to persuade this Court to holdthat such amendments are applicable to the DTAAs.”

(emphasis in original)

156. It is significant to note that after India took such positionsqua the OECD Commentary, no bilateral amendment was made by Indiaand the other Contracting States to change the definition of royaltiescontained in any of the DTAAs that we are concerned with in theseappeals, in accordance with its position. As a matter of fact, DTAAsthat were amended subsequently, such as the Convention between theRepublic of India and the Kingdom of Morocco for the Avoidance ofDouble Taxation and the Prevention of Fiscal Evasion with respect to A

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ATaxes On Income,[48] [“India-Morocco DTAA”], which was amendedon 22.10.2019,[49] incorporated a definition of royalties, not very differentfrom the definition contained in the OECD Model Tax Convention, asfollows:

“The term “royalties” as used in this Article means:B(a) payments of any kind received as a consideration for the useof, or the right to use, any copyright of a literary, artistic or scientificwork, including cinematograph films or recordings on any meansof reproduction for use for radio or television broadcasting, anypatent, trade mark, design or model, plan, computer softwareCprogramme, secret formula or process, or for informationconcerning 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 scientificequipment”

D

(Article 12.3)

157. Similarly, though the India-Singapore DTAA came into forceon 08.08.1994, it has been amended several times, including on01.09.2011,[50] and 23.03.2017.[51] However, the definition of “royalties”has been retained without any changes. Likewise, the Convention betweenEthe Government of the Republic of India and the Government of Mauritiusfor the Avoidance of Double Taxation and the Prevention of FiscalEvasion with respect to Taxes on Income and Capital Gains and for theEncouragement of Mutual Trade and Investment,[52] [“India-MauritiusDTAA”] was entered into on 06.12.1983, and was amended subsequentlyon 10.08.2016,[53] without making any change to the definition ofF“royalties”.

158. It is thus clear that the OECD Commentary on Article 12 ofthe OECD Model Tax Convention, incorporated in the DTAAs in thecases before us, will continue to have persuasive value as to theinterpretation of the term “royalties” contained therein.G

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.

50 Notification No. S.O. 2031(E).

51 Notification No. S.O. 935(E).

52 Notification No. GSR 920(E).H53 Notification No. S.O. 2680(E) (No.68/2016 (F.No.500/3/2012-FTD-II).

159. Viewed from another angle, persons who pay TDS and/orassessees in the nations governed by a DTAA have a right to knowexactly where they stand in respect of the treaty provisions that governthem. Such persons and/or assessees can thus place reliance upon theOECD Commentary for provisions of the OECD Model Tax Convention,which are used without any substantial change by bilateral DTAAs, inthe absence of judgments of municipal courts clarifying the same, or inthe event of conflicting municipal decisions. From this point of view also,the OECD Commentary is significant, as the Contracting States to whichthe persons deducting tax/assessees belong, can conclude businesstransactions on the basis that they are to be taxed either on income byway of royalties for parting with copyright, or income derived from licenceagreements which is then taxed as business profits depending on theexistence of a PE in the Contracting State.

160. The learned Additional Solicitor General, however, relied uponthe HPC Report 2003 and the E-Commerce Report 2016. The HPCReport 2003, noting the various characterisation issues in relation to e-commerce payments, recommended as follows:

“...The Committee also recommends that a clear position on eachcategory of transactions should be taken by the Central Board ofDirect Taxes (“CBDT”). This will ensure uniformity of approachamong all the assessing officers. Since new categories oftransactions are likely to emerge at a fast pace with advances intechnology, it is also recommended that the CBDT should closelymonitor the developments and issue guidelines to the assessingofficers on new emerging categories of transactions as a continuingprocess. The monitoring should be through an expert advisorybody on which the tax administration, the profession and theconcerned industry is represented.”

(pages 146-147)

(pages 146-147)

161. The E-Commerce Report 2016 proposed an equalizationlevy to be chargeable on specified digital services (see paragraph 11.2)and noted that its recommendation to impose a withholding tax on digitaltransactions would require an express inclusion in tax treaties in order tobe feasible, as follows:

“108. After taking cognizance of these observations, theCommittee considers that the option of “withholding tax” offers a A

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Apractical way of allocating partial taxing rights in respect of incomefrom digital economy, which shares attributes that may be similarto royalty or fee for technical services, and which can be compliedin respect of B2B transactions by the process of withholding.However, such a tax on income would be feasible only if it isincluded in the tax treaties, which take precedence over IndianBdomestic laws, unless it is designed as a tax on the gross payment.”

162. These reports also do not carry the matter much further asthey are recommendatory reports expressing the views of the committeeCmembers, which the Government of India may accept or reject. When itcomes to DTAA provisions, even if the position put forth in theaforementioned reports were to be accepted, a DTAA would have to bebilaterally amended before any such recommendation can become lawin force for the purposes of the Income Tax Act.

D163. The learned Additional Solicitor General also sought to relyon a decision of the Audiencia Nacional (Spanish National Court) inCase No. 207019/1990 dated 28.02.1995 and a decision of the TribunalSupremo (Spanish Supreme Court) in Case No. 8066/1994 dated02.10.1999. Quite apart from the fact that he only presented certainextracts and not the entire judgment rendered in these cases, theseEauthorities have no relevance to the appeals before us, having beendecided on the basis of the taxation law of Spain.

164. The learned Additional Solicitor General then referred to thejudgment of this Court in Commissioner of Customs v. G.M. Exports,(2016) 1 SCC 91, and in particular on the four propositions that wereFculled out in the context of the levy of an anti-dumping duty in consonancewith the General Agreement on Tariffs and Trade (GATT), 1994, asfollows:

“23. A conspectus of the aforesaid authorities would lead to thefollowing conclusions:G

(1) Article 51(c) of the Constitution of India is a directiveprinciple of State policy which states that the State shallendeavour to foster respect for international law and treatyobligations. As a result, rules of international law which arenot contrary to domestic law are followed by the courts in thisH

country. This is a situation in which there is an internationaltreaty to which India is not a signatory or general rules ofinternational law are made applicable. It is in this situation thatif there happens to be a conflict between domestic law andinternational law, domestic law will prevail.

(2) In a situation where India is a signatory nation to aninternational treaty, and a statute is passed pursuant to the saidtreaty, it is a legitimate aid to the construction of the provisionsof such statute that are vague or ambiguous to have recourseto the terms of the treaty to resolve such ambiguity in favourof a meaning that is consistent with the provisions of the treaty.

(3) In a situation where India is a signatory nation to aninternational treaty, and a statute is made in furtherance ofsuch treaty, a purposive rather than a narrow literal constructionof such statute is preferred. The interpretation of such a statuteshould be construed on broad principles of general acceptancerather than earlier domestic precedents, being intended to carryout treaty obligations, and not to be inconsistent with them.

(4) In a situation in which India is a signatory nation to aninternational treaty, and a statute is made to enforce a treatyobligation, and if there be any difference between the languageof such statute and a corresponding provision of the treaty, thestatutory language should be construed in the same sense asthat of the treaty. This is for the reason that in such caseswhat is sought to be achieved by the international treaty is auniform international code of law which is to be applied by thecourts of all the signatory nations in a manner that leads to thesame result in all the signatory nations.”

165. The conclusions in the aforestated paragraph have no directrelevance to the facts at hand as the effect of section 90(2) of the IncomeTax Act, read with explanation 4 thereof, is to treat the DTAA provisionsas the law that must be followed by Indian courts, notwithstanding whatmay be contained in the Income Tax Act to the contrary, unless morebeneficial to the assessee.

For all these reasons therefore, these submissions of the learnedAdditional Solicitor General are rejected.

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A166. At this juncture, it is also important to point out that videCircular No.10/2002 dated 09.10.2002, the Revenue, after referring tosection 195 of the Income Tax Act and deciding that a No ObjectionCertificate from the Department would not be necessary if the personmaking the remittance is to submit an undertaking along with thecertificate of an accountant to the Reserve Bank of India [“RBI”], hasBitself made a distinction in the proforma of the certificate to be issued inAnnexure B to the aforesaid Circular, between remittances for royalties(see Row No. 5) and remittances for supply of articles or computersoftware (see Row No. 7), as follows:

ANNEXURE ‘B’

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CERTIFICATE

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167. The Revenue, therefore, when referring to “royalties” underthe DTAA, makes a distinction between such royalties, no doubt in thecontext of technical services, and remittances for supply of computersoftware, which is then treated as business profits, taxable under therelevant DTAA depending upon whether there is a PE through whichthe assessee operates in India. This is one more circumstance to showthat the Revenue has itself appreciated the difference between thepayment of royalty and the supply/use of computer software in the formof goods, which is then treated as business income of the assessee taxablein India if it has a PE in India.

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CONCLUSION

168. Given the definition of royalties contained in Article 12 of theDTAAs mentioned in paragraph 41 of this judgment, it is clear that thereis no obligation on the persons mentioned in section 195 of the IncomeTax Act to deduct tax at source, as the distribution agreements/EULAsin the facts of these cases do not create any interest or right in suchdistributors/end-users, which would amount to the use of or right to use G

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Aany copyright. The provisions contained in the Income Tax Act (section9(1)(vi), along with explanations 2 and 4 thereof), which deal withroyalty, not being more beneficial to the assessees, have no applicationin the facts of these cases.

169. Our answer to the question posed before us, is that theBamounts paid by resident Indian end-users/distributors to non-residentcomputer software manufacturers/suppliers, as consideration for theresale/use of the computer software through EULAs/distributionagreements, is not the payment of royalty for the use of copyright in thecomputer software, and that the same does not give rise to any incometaxable in India, as a result of which the persons referred to in sectionC195 of the Income Tax Act were not liable to deduct any TDS undersection 195 of the Income Tax Act. The answer to this question willapply to all four categories of cases enumerated by us in paragraph 4 ofthis judgment.

170. The appeals from the impugned judgments of the High CourtDof 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 Delhiare dismissed.

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Devika Gujral

Appeals disposed of.

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