ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PRIVATE LIMITED v. THE COMMISSIONER OF INCOME TAX & ANR.

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30Copy pinpoint30. It was in the context of section 194E of the Income Tax Act, that the Court went on to observe: “18. We now come to the issue of applicability of DTAA. As observed by the High Court, the matter was not argued before it in that behalf, yet the issue was dealt with by the High Court. In B our view, the reasoning that weighed with the High Court is quite correct. The obligation to deduct Tax at Source under Section 194E of the Act is not affected by the DTAA and in case the exigibility to tax is disputed by the assessee on whose account the deduction is made, the benefit of DTAA can be pleaded and if the case is made out, the amount in question will always be refunded with interest. But, that by itself, cannot absolve the liability under Section 194E of the Act.

19. In the premises, it must be held that the payments made to the Non Resident Sports Associations in the present case represented their income which accrued or arose or was deemed to have accrued or arisen in India. Consequently, the Appellant was liable to deduct Tax at Source in terms of Section 194E of the Act.”

31Copy pinpoint31. It will be seen that section 194E of the Income Tax Act belongs to a set of various provisions which deal with TDS, without any reference to chargeability of tax under the Income Tax Act by the concerned non- E resident assessee. This section is similar to sections 193 and 194 of the Income Tax Act by which deductions have to be made without any reference to the chargeability of a sum received by a non-resident assessee under the Income Tax Act. On the other hand, as has been noted in GE Technology (supra), at the heart of section 195 of the F Income 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 Income Tax Act in the first place.

32Copy pinpoint32. Thus, the judgment of this Court in PILCOM (supra), dealing with a completely different provision in a completely different setting, G has no application to the facts of this case. THE COPYRIGHT ACT, 1957

33Copy pinpoint33. The relevant provisions of the Copyright Act are as follows: “2. Interpretation.—In this Act, unless the context otherwise requires,— H

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(a) “adaptation” means,- A xxx xxx xxx (v) in relation to any work, any use of such work involving its rearrangement or alteration; xxx xxx xxx B (d) “author” means,— 24 (vi) in relation to any literary, dramatic, musical or artistic work which is computer-generated, the person who causes the work to be created; xxx xxx xxx C 25 (fa) “commercial rental” does not include the rental, lease or lending of a lawfully acquired copy of a computer programme, sound recording, visual recording or cinematographic film for non-profit purposes by a non-profit library or non-profit educational institution; xxx xxx xxx (ffb) “computer” includes any electronic or similar device having information processing capabilities (ffc) “computer programme” means a set of instructions expressed in words, codes, schemes or in any other form, including a machine readable medium, capable of causing a computer to perform a particular task or achieve a particular result; xxx xxx xxx F (m) “infringing copy” means— (i) in relation to a literary, dramatic, musical or artistic work, a reproduction thereof otherwise than in the form of a cinematograph film; (ii) in relation to a cinematographic film, a copy of the film G made on any medium by any means; (iii) in relation to a sound recording, any other recording embodying the same sound recording, made by any means; 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). H

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A (iv) in relation to a programme or performance in which such a broadcast reproduction right or a performer’s right subsists under the provisions of this Act, the sound recording or a cinematographic film of such programme or performance,; B if such reproduction, copy or sound recording is made or imported in contravention of the provisions of this Act; xxx xxx xxx 26 (o) “literary work” includes computer programmes, tables and compilations including computer databases;” C “14. Meaning of copyright.— For the purposes of this Act, copyright means the exclusive right subject to the provisions of this Act, to do or authorise the doing of any of the following acts in respect of a work or any substantial part thereof, namely— (a) in the case of a literary, dramatic or musical work, not D being a computer programme,— (i) to reproduce the work in any material form including the storing of it in any medium by electronic means; (ii) to issue copies of the work to the public not being copies already in circulation; E (iii) to perform the work in public, or communicate it to the public; (iv) to make any cinematograph film or sound recording in respect of the work; (v) to make any translation of the work; F (vi) to make any adaptation of the work; (vii) to do, in relation to a translation or an adaptation of the work, any of the acts specified in relation to the work in sub-clauses (i) to (vi); (b) in the case of a computer programme— G (i) to do any of the acts specified in clause (a); 27(ii) to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer programme: 26 Substituted by Act 38 of 1994, sec. 2 (w.e.f. 10-5-1995). 27 H Substituted by Act 49 of 1999, sec. 3 (w.e.f. 15-1-2000).

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Provided that such commercial rental does not apply in respect of computer programmes where the programme itself is not the essential object of the rental.” “16. No copyright except as provided in this Act.— No person shall be entitled to copyright or any similar right in any work, whether published or unpublished, otherwise than under and in accordance with the provisions of this Act or of any other law for the time being in force, but nothing in this section shall be construed as abrogating any right or jurisdiction to restrain a breach of trust or confidence.” “18. Assignment of copyright.— (1) The owner of the copyright in an existing work or the prospective owner of the copyright in a future work may assign to any person the copyright either wholly or partially and either generally or subject to limitations and either for the whole term of the copyright or any part thereof: Provided that in the case of the assignment of copyright in any future work, the assignment shall take effect only when the work comes into existence. 28 Provided further that no such assignment shall be applied to any medium or mode of exploitation of the work which did not exit or was not in commercial use at the time when the assignment was made, unless the assignment specifically referred to such medium or mode of exploitation of the work: Provided also that the author of the literary or musical work included in a cinematograph film shall not assign or waive the right to receive royalties to be shared on an equal basis with the assignee of copyright for the utilisation of such work in any form other than for the communication to the public of the work along with the cinematograph film in a cinema hall, except to the legal heirs of the authors or to a copyright society for collection and distribution and any agreement to contrary shall be void: G Provided also that the author of the literary or musical work included in the sound recording but not forming part of any cinematograph film shall not assign or waive the right to receive royalties to be shared on an equal basis with the assignee of copyright for any 28 Inserted by Act 27 of 2012, sec. 8 (w.e.f. 21-6-2012). H

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A utilisation of such work except to the legal heirs of the authors or to a collecting society for collection and distribution and any assignment to the contrary shall be void. (2) Where the assignee of a copyright becomes entitled to any right comprised in the copyright, the assignee as respects the rights so assigned, and the assignor as respects the rights not assigned, shall be treated for the purposes of this Act as the owner of copyright and the provisions of this Act shall have effect accordingly. (3) In this section, the expression “assignee” as respects the assignment of the copyright in any future work includes the legal representatives of the assignee, if the assignee dies before the work comes into existence.” “19. Mode of assignment.— xxx xxx xxx D (3) The assignment of copyright in any work shall also specify the amount of royalty and any other consideration payable, to the author or his legal heirs during the currency of the assignment and the assignment shall be subject to revision, extension or termination on terms mutually agreed upon by the parties.” “30. Licences by owners of copyright— The owner of the copyright in any existing work of the prospective owner of the copyright in any future work may grant any interest in the right by licence in writing by him or by his duly authorised agent: Provided that in the case of a licence relating to copyright in any future work, the licence shall take effect only when the work comes into existence. Explanation.—Where a person to whom a licence relating to copyright in any future work is granted under this section dies before the work comes into existence, his legal representatives shall, in the absence of any provision to the contrary in the licence, be entitled to the benefit of the licence. 29 30A. Application of section 19.— The provisions of section 19 shall, with any necessary adaptations and modifications, apply in relation to a licence under section 30 as they apply in relation to assignment of copyright in a work.” 29 H Inserted by Act 38 of 1994, s. 10 (w.e.f. 10-5-1995).

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“51. When copyright infringed. Copyright in a work shall be A deemed to be infringed— (a) when any person, without a licence granted by the owner of the copyright or the Registrar of Copyrights under this Act or in contravention of the conditions of a licence so granted or of any condition imposed by a competent authority under this Act— B (i) does anything, the exclusive right to do which is by this Act conferred upon the owner of the copyright, or (ii) permits for profit any place to be used for the communication of the work to the public where such communication constitutes an infringement of the copyright in the work, unless he was not aware and had no reasonable ground for believing that such communication to the public would be an infringement of copyright; or (b) when any person— (i) makes for sale or hire, or sells or lets for hire, or by way of trade displays or offers for sale or hire, or (ii) distributes either for the purpose of trade or to such an extent as to affect prejudicially the owner of the copyright, or (iii) by way of trade exhibits in public, or E (iv) imports into India, any infringing copies of the work: Provided that nothing in sub-clause (iv) shall apply to the import of one copy of any work for the private and domestic use of the importer.] Explanation.— For the purposes of this section, the reproduction F of a literary, dramatic, musical or artistic work in the form of a cinematograph film shall be deemed to be an “infringing copy”. “52. Certain acts not to be infringement of copyright. (1) The following acts shall not constitute an infringement of copyright, namely,— G xxx xxx xxx 30 (aa) the making of copies or adaptation of a computer programme by the lawful possessor of a copy of such computer programme, from such copy— 30 Inserted by Act 38 of 1994, sec. 17 (w.e.f. 10-5-1995). H

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A (i) in order to utilise the computer programme for the purpose for which it was supplied; or (ii) to make back-up copies purely as a temporary protection against loss, destruction or damage in order only to utilise the computer programme for the purpose for which it was supplied; B xxx xxx xxx (ad) the making of copies or adaptation of the computer programme from a personally legally obtained copy for non-commercial personal use;” C “58. Rights of owner against persons possessing or dealing with infringing copies.— All infringing copies of any work in which copyright subsists, and all plates used or intended to be used for the production of such infringing copies, shall be deemed to be the property of the owner of the copyright, who accordingly D may take proceedings for the recovery of possession thereof or in respect of the conversion thereof: Provided that the owner of the copyright shall not be entitled to any remedy in respect of the conversion of any infringing copies, if the opponent proves— E (a) that he was not aware and had no reasonable ground to believe that copyright subsisted in the work of which such copies are alleged to be infringing copies; or (b) that he had reasonable grounds for believing that such copies or plates do not involve infringement of the copyright in any work.”

34Copy pinpoint34. A reading of the aforesaid provisions leads to the following conclusions. Under section 2(o) of the Copyright Act, a literary work includes a computer programme and a computer programme has been defined under section 2(ffc) of the Copyright Act to mean a set of instructions expressed in words, codes, schemes or in any other form capable of causing a computer to perform a particular task or achieve a particular result.

35Copy pinpoint35. Though the expression “copyright” has not been defined separately in the “definitions” section of the Copyright Act, yet, section H 14 makes it clear that “copyright” means the “exclusive right”, subject

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to the provisions of the Act, to do or authorise the doing of certain acts A “in respect of a work”. When an “author” in relation to a “literary work” which includes a “computer programme”, creates such work, such author has the exclusive right, subject to the provisions of the Copyright Act, to do or authorise the doing of several acts in respect of such work or any substantial part thereof. In the case of a computer programme, section B 14(b) specifically speaks of two sets of acts – the seven acts enumerated in sub-clause (a) and the eighth act of selling or giving on commercial rental or offering for sale or for commercial rental any copy of the computer programme. Insofar as the seven acts that are set out in sub- clause (a) are concerned, they all delineate how the exclusive right that is with the owner of the copyright may be parted with, i.e., if there is any parting with the right to reproduce the work in any material form; the right to issue copies of the work to the public, not being copies already in circulation; the right to perform the work in public or communicate it to the public; the right to make any cinematograph film or sound recording in respect of the work; the right to make any translation of the work; the right to make any adaptation of the work; or the right to do any of the specified acts in relation to a translation or an adaptation.

36Copy pinpoint36. In essence, such right is referred to as copyright, and includes the right to reproduce the work in any material form, issue copies of the work to the public, perform the work in public, or make translations or adaptations of the work. This is made even clearer by the definition of an “infringing copy” contained in section 2(m) of the Copyright Act, which in relation to a computer programme, i.e., a literary work, means reproduction of the said work. Thus, the right to reproduce a computer programme and exploit the reproduction by way of sale, transfer, license etc. is at the heart of the said exclusive right. F

37Copy pinpoint37. Section 14(b)(ii) of the Copyright Act was amended twice, first in 1994 and then again in 1999, with effect from 15.01.2000. Prior to the 1999 Amendment, section 14(b)(ii) of the Copyright Act read as follows: “(ii) to sell or give on hire, or offer for sale or hire any copy of the G computer programme, regardless of whether such copy has been sold or given on hire on earlier occasions;” What is conspicuous by its absence is the phrase “regardless of whether such copy has been sold or given on hire on earlier occasions”. H

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38Copy pinpoint38. Importantly, no copyright exists in India outside the provisions of the Copyright Act or any other special law for the time being in force, vide section 16 of the Copyright Act. When the owner of copyright in a literary work assigns wholly or in part, all or any of the rights contained in section 14(a) and (b) of the Copyright Act, in the said work for a consideration, the assignee of such right becomes entitled to all such B rights comprised in the copyright that is assigned, and shall be treated as the owner of the copyright of what is assigned to him (see section 18(2) read with section 19(3) of the Copyright Act). Also, under section 30 of the Copyright Act, the owner of the copyright in any literary work may grant any interest in any right mentioned in section 14(a) of the Copyright C Act by licence in writing by him to the licensee, under which, for parting with such interest, royalty may become payable (see section 30A of the Copyright Act). When such licence is granted, copyright is infringed when any use, relatable to the said interest/right that is licensed, is contrary to the conditions of the licence so granted. Infringement of copyright takes place when a person “makes for sale or hire or sells or lets for hire” or “offers for sale or hire” or “distributes…so as to affect prejudicially the owner of the copyright”, vide section 51(b) of the Copyright Act. Importantly, the making of copies or adaptation of a computer programme in order to utilise the said computer programme for the purpose for which it was supplied, or to make up back-up copies as a temporary protection against loss, destruction or damage so as to be able to utilise the computer programme for the purpose for which it was supplied, does not constitute an act of infringement of copyright under section 52(1)(aa) of the Copyright Act. In short, what is referred to in section 52(1)(aa) of the Copyright Act would not amount to reproduction so as to amount to an infringement of copyright.

39Copy pinpoint39. Section 52(1)(ad) is independent of section 52(1)(aa) of the Copyright Act, and states that the making of copies of a computer programme from a personally legally obtained copy for non-commercial personal use would not amount to an infringement of copyright. However, it is not possible to deduce from this what is sought to be deduced by the learned Additional Solicitor General, namely, that if personally legally obtained copies of a computer programme are to be exploited for commercial use, it would necessarily amount to an infringement of copyright. Section 52(1)(ad) of the Copyright Act cannot be read to negate the effect of section 52(1)(aa), since it deals with a subject matter that is separate and distinct from that contained in section 52(1)(aa) of the Copyright Act.

ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 373 THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

DOUBLE TAXATION AVOIDANCE AGREEMENTS A

40Copy pinpoint40. These appeals concern the DTAAs between India and the following countries/parties:

1. Commonwealth of Australia

2. Canada B

3. People’s Republic of China

4. Republic of Cyprus

5. Republic of Finland

6. Republic of France

7. Federal Republic of Germany C

8. Hong Kong Special Administrative Region of the People's Republic of China

9. Republic of Ireland

10. Republic of Italy

11. Japan D

12. Republic of Korea

13. Kingdom of Netherlands

14. Republic of Singapore

15. Kingdom of Sweden

16. India-Taipei Association in Taipei (Taiwan) E

17. United States of America

18. United Kingdom of Great Britain and Northern Ireland

41Copy pinpoint41. Insofar as is material, each of these DTAAs is based on the OECD Model Tax Convention on Income and on Capital, and are F therefore substantially similar, if not identical, in respect of the provisions concerning “business profits” and “royalties”. The provisions of one of these DTAAs, namely the India-Singapore DTAA, are set out as follows: “ARTICLE 2 - TAXES COVERED

1. The taxes to which this Agreement shall apply are: G (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”). H

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A 2. The Agreement shall also apply to any identical or substantially similar taxes which are imposed by either Contracting State after the date of signature of the present Agreement in addition to, or in place of, the taxes referred to in paragraph 1. The competent authorities of the Contracting States shall notify each other of any substantial changes which are made in their respective taxation B laws.” “ARTICLE 3 - GENERAL DEFINITIONS xxx xxx xxx

2. As regards the application of the Agreement by a Contracting C State, any term not defined therein shall, unless the context otherwise requires, have the meaning which it has under the law of that State concerning the taxes to which the Agreement applies.” “ARTICLE 7 - BUSINESS PROFITS D

1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but E only so much of them as is directly or indirectly attributable to that permanent establishment.” “ARTICLE 12 - ROYALTIES AND FEES FOR TECHNICAL SERVICES

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

2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the recipient is the G beneficial owner of the royalties or fees for technical services, the tax so charged shall not exceed: (a) in the case of royalties referred to in paragraph 3(a) and fees for technical services as defined in this Article (other than services described in subparagraph (b) of this paragraph), 15% H

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

3. The term “royalties” as used in this Article means payments of any kind received as a consideration for the use of, or the right to use: (a) any copyright of a literary, artistic or scientific work, including cinematograph films or films or tapes used for radio C or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right, property or information; D (b) any industrial, commercial or scientific equipment, other than payments derived by an enterprise from activities described in paragraph 4(b) or 4(c) of Article 8.” “ARTICLE 30 - ENTRY INTO FORCE E

1. Each of the Contracting States shall notify the other of the completion of the procedures required by its law for the bringing into force of this Agreement. This Agreement shall enter into force on the date of the later of these notifications and shall thereupon have effect: F (a) in India: in respect of income arising in any fiscal year beginning on or after the first day of April 1994; (b) in Singapore: in respect of income arising in any fiscal year beginning on or after the first day of January 1994.

2. The Agreement between the Government of the Republic of G India and the Government of the Republic of Singapore for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income signed in Singapore on 20th April, 1981 shall terminate and cease to be effective from the date on which this Agreement comes into effect.” H

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42Copy pinpoint42. The subject matter of each of the DTAAs with which we are concerned is income tax payable in India and a foreign country. Importantly, as is now reflected by explanation 4 to section 90 of the Income Tax Act and under Article 3(2) of the DTAA, the definition of the term “royalties” shall have the meaning assigned to it by the DTAA, meaning thereby that the expression “royalty”, when occurring in section B 9 of the Income Tax Act, has to be construed with reference to Article 12 of the DTAA. This position is also clarified by CBDT Circular No. 333 dated 02.04.1982,31 which states as follows: “Circular : No. 333 dated 2-4-1982. Specific provisions made in double taxation avoidance agreement - Whether it would prevail over general provisions contained in Income-tax Act

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

2. The correct legal position is that where a specific provision is made in the double taxation avoidance agreement, that provisions will prevail over the general provisions contained in the Income- E tax Act. In fact that the double taxation avoidance agreements which have been entered into by the Central Government under section 90 of the Income-tax Act, also provide that the laws in force in either country will continue to govern the assessment and taxation of income in the respective countries except where provisions to the contrary have been made in the agreement. F

3. Thus, where a double taxation avoidance agreement provides for a particular mode of computation of income, the same should be followed, irrespective of the provisions in the Income-tax Act. Where there is no specific provision in the agreement, it is basic law, i.e., the Income-tax Act, that will G govern the taxation of income.”

43Copy pinpoint43. Thus, by virtue of Article 12(3) of the DTAA, royalties are payments of any kind received as consideration for “the use of, or the right to use, any copyright” of a literary work, which includes a computer programme or software. H 31 F. No. 506/42/81-FTD.

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END-USER LICENCE AGREEMENTS AND DISTRIBUTION A AGREEMENTS

44Copy pinpoint44. Certain sample clauses of the EULAs that are illustrative of the transactions with which we are concerned in each category (outlined in paragraph 4 of this judgment), are set out hereinbelow:

44. i) Category 1: B The EULA between Samsung Electronics Co. and the end-user (updated on 16.11.2016) contains, inter alia, the following terms: “This End User Licence Agreement (“EULA”) is a legal agreement between you (either an individual or a single entity) and Samsung Electronics Co., Ltd. (“Samsung”) for software, whether pre-installed or downloaded, owned by Samsung and its affiliated companies and its third party suppliers and licensors, that accompanies this EULA, which includes computer software and may include associated media, content and data, printed materials, or electronic documentation in connection with your use of Samsung Mobile Device, which will be defined below (“Samsung Software”). xxx xxx xxx

1. GRANT OF LICENCE. Samsung grants you a limited non- exclusive licence to install, use, access, display and run one copy of the Samsung Software on a single Samsung Mobile Device, E local hard disk(s) or other permanent storage media of one computer and you may not make Samsung Software available over a network where it could be used by multiple computers at the same time. You may make one copy of the Samsung Software in machine readable form for backup purposes only; provided that the backup copy must include all copyright or other proprietary notices contained on the original. Certain items of the Samsung Software may be subject to open source licences. The open source licence provisions may override some of the terms of this EULA. We make the applicable open source licenses available to you on the Legal Notices section of the Settings menu of your device.

2. RESERVATION OF RIGHTS AND OWNERSHIP. Samsung reserves all rights not expressly granted to you in this EULA. The Software is protected by copyright and other H

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

3. LIMITATIONS ON END USER RIGHTS. You shall not, and shall not enable or permit others to, copy, reverse engineer, decompile, disassemble, or otherwise attempt to discover the source code or algorithms of, the Software (except and only to the extent that such activity is expressly permitted by applicable law notwithstanding this limitation), or modify, or disable any features of, the Software, or create derivative works based on the Software. You may not rent, lease, lend, sublicense or provide commercial hosting services with the Software. You may not transfer this EULA or the rights to the Samsung Software granted herein to any third party unless it is in connection with the sale of the mobile device which the Samsung Software accompanied. In such event, the transfer must include all of the Samsung Software D (including all component parts, the media and printed materials, any upgrades, this EULA) and you may not retain any copies of the Samsung Software. The transfer may not be an indirect transfer, such as a consignment. Prior to the transfer, the end user receiving the Samsung Software must agree to all the EULA terms. Where Samsung Mobile Device is being used by your E employee or other person using the Samsung Mobile Device as part of your undertaking (“Your Staff”), that member of your Staff is licenced to use the Samsung Software as if it were you and must comply with these terms on the same basis. Any failure to comply with these terms by your Staff shall be deemed [to be a] F failure to comply with these terms by you. xxx xxx xxx

7. EXPORT RESTRICTIONS. You acknowledge that the Samsung Software is subject to export restrictions of various countries. You agree to comply with all applicable international G and national laws that apply to the Samsung Software, including all the applicable export restriction laws and regulations.” (emphasis supplied)

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44. ii) Category 2: A

44. ii) a. The Remarketer Agreement dated 01.10.2004, between IBM Singapore, a foreign, non-resident supplier of computer programmes and IBM India, an Indian distributor/remarketer, with which C.A. No. 4419/2012 is concerned, contains, inter alia, the following terms: “IMB Distribution Agreement B

General Terms

1. Definitions IMB shall mean International Business Machines Corporation C Customer is either an End User or a Remarketer. You may market to End User or Remarketers or both. End User is anyone, who is not a Related Company, who acquires Programs for its own use and not for resale. Programs shall mean instructions written, contained or recorded on materials, documents or machine readable media capable of being executed on, or used in the operation of a machine and information technology or data related thereto. The term shall include, but is not limited to, instructions, documentation, information or data recorded on reels of magnetic tape, magnetic disks, microfiche cards, and other similar media, and logic manuals, flow charts, operational instruction guides, interface specifications, detailed listings, application manuals, modification guides, operating Instructions, functional specifications and design specifications containing or related to such information, instruments or data. In particular, the term Programs includes, but is not limited to supervisors, monitors, operating systems, language compiles, sorts conversion aid programs, general purpose utilities, industry application programs and other general purpose application programs. IMB Programs shall mean programs protected by IBM’s Patents G or IMB’s Copyrights, other than or in addition to Remarketer’s Patents and Remarkets, which are marketed by IMB or its Subsidiaries.” xxx xxx xxx H

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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- B exclusive. Neither of us is a legal representative or legal agent of the other. Neither of us is legally a partner of the other (for example, neither of us is responsible for debts incurred by the other), and neither of us is an employee or franchise of the other nor does this Agreement create joint venture between us

C xxx xxx xxx

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

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

3. Not to assign or otherwise transfer this Agreement, your rights under it, or any of its approvals or delegate any duties, other than to a Related Company, unless expressly permitted to do so under this Agreement.” “7. Patents, Copyrights and Intellectual Property Rights. You agree that you do not and shall not own any right, title or interest in and to any and all patents, copyrights and intellectual property rights. You shall not alter, deface, remove, cover, mutilate, or add to, in any manner whatsoever, any patent notice, copyright notice, trademark, service mark, trade name, serial number, model number, brand name or legend that we may attach or affix to the Programs. If a third party claims that Program we provide under this Agreement infringes that part’s patents or copyrights, we will defend you against that claim at our expense and pay all costs, damages, and attorney’s fees that a court finally awards, provided that you:

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

2. allow us to control, and cooperate with us in the defense and any related settlement negotiations;” “You may market to your Customers the Programs we sell to you. We will notify you from time to time of the types of Programs that are available for purchase by you under this Agreement. These B terms apply to all methods of distribution including to End Users and through distributors, resellers, solution providers, and systems integrators.” (emphasis supplied) C

44. ii) b. The EULA dated 01.07.2019, involved in C.A. No. 4419/ 2012, granting resident Indian end-users the licence to use the software remarketed or distributed in India through IBM India, contains the following terms: “1. Definitions and Interpretation D 1.1 In this Agreement, unless the context requires otherwise, the following words and expressions shall have the following meanings: “Authorized Use” – the specified level at which Licensee is authorized to execute or run the Program. That level may be measured by number of users, millions of service units (“MSUs”), E Processor Value Units (“PVUs” ), or other level of use specified by IBM. “IBM” – International Business Machines Corporation or one of its subsidiaries. “License Information” (“LI”) – a document that provides F information and any additional terms specific to a Program. “Program” – the following, including the original and all whole or partial copies: 1) machine-readable instructions and data, G 2) components, files and modules 3) audio-visual content (such as images, text, recordings, or pictures), 4) related licensed materials (such as keys and documentation).” H

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A “2. License Grant The Program is owned by IBM or an IBM supplier, and is copyrighted and licensed, not sold. Licensee receives a license to the Programs from Assimil8 Limited through a sublicensing agreement between IBM and Assimil8 Limited. Assimil8 Limited B grants Licensee a nonexclusive license to 1) use the Program up to the Authorized Use specified in the PoE 2) make and install copies to support such Authorized Use, and

C 3) make a backup copy, all provided that a. Licensee has lawfully obtained the Program and complies with the terms of the Agreement; b. The backup copy does not execute unless the backed-up Program cannot execute D c. Licensee reproduces all copyright notices and other legends of ownership on each copy, or partial copy of the Program d… E e. Licensee does not: 1) use, copy, modify, or distribute the Program except as expressly permitted in this agreement; 2) reverse assemble, reverse compile, otherwise translate, or reverse engineer the program, except as F expressly permitted by law without the possibility of contractual waiver; 3) use any of the Program’s components, files, modules, audio-visual content, or related licensed materials separately from that program; or G 4) sublicense, rent, or lease the Program;” (emphasis supplied)

44. iii) Category 3: The standard-form EULA accompanying Microsoft software products sold to resident Indian end-users by Microsoft

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Corporation, a non- resident, foreign vendor includes the following terms: “1. GRANT OF LICENSE: This EULA grants you the following rights: a. Systems Software - You may install and use one copy of the SOFTWARE PRODUCT B on a single computer, including a workstation, terminal, or other digital electronic device (“COMPUTER”). You may permit a maximum of five (5) COMPUTERS to connect to the single COMPUTER running the SOFTWARE PRODUCT solely to access the Internet using the Internet Connection Sharing feature of the SOFTWARE PRODUCT. You may not allow these connected COMPUTERS to use any other components of the SOFTWARE PRODUCT, nor to invoke application sharing as described below. The five (5) connection maximum includes any indirect connections made through software or hardware that pools or aggregates connections. b. Storage/Network Use - You may also store or install a copy of the SOFTWARE PRODUCT on a storage device, such as a network server, used on to install or run the SOFTWARE PRODUCT on your other E COMPUTERS over an internal network: however, you must acquire and run a licence for each separate COMPUTER on or from which the SOFTWARE PRODUCT is installed, used, accessed, displayed, or forgoing any number of COMPUTERS may access or otherwise utilize the file and print services and F peer web services of the SOFTWARE PRODUCT. In addition, you may use the “Multiple Display” feature of the SOFTWARE PRODUCT to expand your desktop as described in the online Help file without obtaining a license for each display.” “2. DESCRIPTION OF OTHER RIGHTS AND G LIMITATIONS xxx xxx xxx Limitations on Reverse Engineering, Decompilation, and Disassembly - You may not reverse engineer, decompile, or disassemble the SOFTWARE PRODUCT, except and only to H

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A the extent that such activity is expressly permitted by applicable law nothwithstanding this limitation.” “4. COPYRIGHT- All title and intellectual property rights in and to the SOFTWARE PRODUCT (including but not limited to any images, photographs, animations, video, audio, music, text, and B “applets” incorporated into the SOFTWARE PRODUCT), the accompanying printed materials, and any copies of the SOFTWARE PRODUCT are owned by Microsoft or its suppliers. All title and intellectual property rights in and to the content that is not contained in the Software Product, but may be accessed through use of the Software Product, is the property of the respective C content owners and may be protected by applicable copyright or other intellectual property laws and treaties. This EULA grants you no rights to use such content. All rights not expressly granted are reserved by Microsoft.” “6. BACKUP COPY- After installation of one copy of the D SOFTWARE PRODUCT pursuant to this EULA, you may keep the original media on which the SOFTWARE PRODUCT was provided by Microsoft solely for backup or archival purposes. If the original media is required to use the SOFTWARE PRODUCT on the COMPUTER, you may make one copy of the SOFTWARE E PRODUCT solely for backup or archival purposes. Except as expressly provided in this EULA, you may not otherwise make copies of the SOFTWARE PRODUCT or the printed materials accompanying the SOFTWARE PRODUCT” (emphasis supplied)

F 44. iv) Category 4 The Supply Contract (undated) between a resident Indian company, JT Mobiles Ltd., and a Swedish supplier, Ericsson Radio Systems A.B. concerning the supply of a Mobile Telephone System in C.A. Nos. 6386- 6387/2016, states the following in respect of the software licence granted: G “20. LICENSE 20.1 Subject to the terms of conditions set forth in this Article 20, Licence, JT MOBILES is hereby granted a non- exclusive restricted licence to use the Software and Documentation, but only for JT MOBILES’ own operation and H

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maintenance of the System in accordance with this contract, A and not otherwise. 20.2 Notwithstanding anything this Contract to the contrary, it is understood that JT MOBILES receives no title or ownership rights to the Software or Documentation, and all such rights shall remain with Contractor or its suppliers. B 20.3 JT MOBILES agrees that the Software or Documentation provided to it by Contractor under this Contract or any renewals, extension, or expansions thereof, shall, as between the parties hereto, be treated as proprietary and a trade secret of Contractor or its suppliers, and be subject to the provisions of Article 30, Confidentiality. 20.4 In pursuance of the foregoing JT MOBILES shall: a) not provide or make the Software or Documentation or any portions or aspects thereof (including any methods or concepts utilized or expressed therein) available to any person except to its employees on a “need to know” basis; b) not make any copies of Software or Documentation or parts thereof, except for archival backup purposes; E c) when making permitted copies as aforesaid transfer to the copy/copies any copyright or other marking on the Software or Documentation. d) not use the Software or Documentation for any other purpose than permitted in this Article 20, License or sell F or in any manner alienate or part with its possession. e) not use or transfer the Software and/or the Documentation outside India without the written consent of the Contractor and after having received necessary export or re-export permits from relevant authorities. G 20.5 JT MOBILES and any successor to JT MOBILES title to the Hardware or part of Hardware shall have the right without further consent of Contractor to transfer this license to a third party which acquires the System, provided any such third party agrees in writing to abide by all the terms and conditions of this license. H

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A 20.6. The obligations of JT MOBILES under this Article 20, Licence, shall survive the termination or expiration of this Contract for any reason. 20.7 The Software licensed under this Contract is delivered in an inseparable package also containing other B software functionality than the Software. In order to avoid doubt JT MOBILES may not in any use that other part of the software functionality. However, upon JT MOBILES’ request Contractor shall offer a licence to use such other software functionality to JT MOBILES on the same terms and conditions as stipulated in this Contract but not price.” C (emphasis supplied)

45Copy pinpoint45. A reading of the aforesaid distribution agreement would show that what is granted to the distributor is only a non-exclusive, non- transferable licence to resell computer software, it being expressly stipulated that no copyright in the computer programme is transferred either to the distributor or to the ultimate end-user. This is further amplified by stating that apart from a right to use the computer programme by the end-user himself, there is no further right to sub-license or transfer, nor is there any right to reverse-engineer, modify, reproduce in any manner otherwise than permitted by the licence to the end-user. What is paid by way of consideration, therefore, by the distributor in India to the foreign, non-resident manufacturer or supplier, is the price of the computer programme as goods, either in a medium which stores the software or in a medium by which software is embedded in hardware, which may be then further resold by the distributor to the end-user in India, the distributor making a profit on such resale. Importantly, the distributor does not get the right to use the product at all.

46Copy pinpoint46. When it comes to an end-user who is directly sold the computer programme, such end-user can only use it by installing it in the computer hardware owned by the end-user and cannot in any manner reproduce the same for sale or transfer, contrary to the terms imposed by the EULA.

47Copy pinpoint47. In all these cases, the “licence” that is granted vide the EULA, is not a licence in terms of section 30 of the Copyright Act, which transfers an interest in all or any of the rights contained in sections 14(a) and 14(b) of the Copyright Act, but is a “licence” which imposes restrictions or conditions for the use of computer software. Thus, it cannot be said H

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that any of the EULAs that we are concerned with are referable to section 30 of the Copyright Act, inasmuch as section 30 of the Copyright Act speaks of granting an interest in any of the rights mentioned in sections 14(a) and 14(b) of the Copyright Act. The EULAs in all the appeals before us do not grant any such right or interest, least of all, a right or interest to reproduce the computer software. In point of fact, such reproduction is expressly interdicted, and it is also expressly stated that no vestige of copyright is at all transferred, either to the distributor or to the end-user. A simple illustration to explain the aforesaid position will suffice. If an English publisher sells 2000 copies of a particular book to an Indian distributor, who then resells the same at a profit, no copyright in the aforesaid book is transferred to the Indian distributor, either by way of licence or otherwise, inasmuch as the Indian distributor only makes a profit on the sale of each book. Importantly, there is no right in the Indian distributor to reproduce the aforesaid book and then sell copies of the same. On the other hand, if an English publisher were to sell the same book to an Indian publisher, this time with the right to reproduce and make copies of the aforesaid book with the permission of the author, it can be said that copyright in the book has been transferred by way of licence or otherwise, and what the Indian publisher will pay for, is the right to reproduce the book, which can then be characterised as royalty for the exclusive right to reproduce the book in the territory mentioned by the licence. E

48Copy pinpoint48. An instructive judgment of this Court in this respect is to be found in State Bank of India v. Collector of Customs, (2000) 1 SCC 727. In this case, the State Bank of India imported a consignment of computer software and manuals from Kindle Software Ltd., Dublin, Ireland, and cleared the goods for home consumption, and filed an F application before the Additional Collector of Customs, claiming a refund of customs duty. After setting out section 14 of the Customs Act 1962 and rule 9(1)(c) of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988, the Court stated: “9. Now, if we refer to the interpretative note relating to Rule G 9(1)(c) it says that royalties and licence fees may include, among other things, payments in respect to patents, trademarks and copyrights. There is, however, an exception which says that the charges for the right to reproduce the imported goods in the country of importation shall not be added to the price actually paid or payable for the imported goods in determining the customs value. H

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A Further payments made by the buyer for the right to distribute or resell the imported goods shall not be added to the price actually paid or payable for the imported goods if such payments are not a condition of the sale for the exports to the country of importation of the imported goods. B xxx xxx xxx

11. What we have now to see is if under the agreement SBI has the right to reproduce the imported software and for that purpose SBI has paid “royalties and licence fee” which have been added to the price actually paid for the imported software for use at the C principal place called the Support Centre. If that is so under the press note no customs duty is leviable on the royalty so paid. This takes us to the relevant terms of the agreement which would indicate as to whether or not the royalty/licence fees needed to be included in the value of the imported goods.”

49Copy pinpoint49. The contention of the State Bank of India that the countrywide licence fee paid by it by way of royalty was for the reproduction of the said software and was thus exempt from customs duty, was turned down by this Court as follows: “17. The question that arises for consideration is if licence fee charged towards countrywide use of software in the second invoice could be the charges for the right to reproduction and were these added to the price actually paid or payable for the imported goods. If we refer to the agreement, software is not sold to SBI as such but it was to remain the property of Kindle. There is no other value of the software indicated in the agreement except the licence fee. Price is payable only for allowing SBI to use the software in a limited way at its own centres for a limited period and that is why the amount charged is called the licence fee. After five years SBI is required to pay only recurring licence fee. Countrywide use of the software and reproduction of software are two different things and licence fee for countrywide use cannot be considered as the charges for the right to reproduce the imported goods. Under the agreement copying, storage, removal, etc. are under the strict control of Kindle and all copies are the property of Kindle. SBI can use the software for its internal requirements only. Licence has been given to SBI to use the property of Kindle H at its branches and not for reproduction of the software as claimed

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

50Copy pinpoint50. The Court then made an important observation, stating: “21. Reproduction and use are two different things. Now under the agreement user is specifically limited to licence sites. The B transaction as a whole is to be seen. The press note is of no help to SBI. Rule 9(1)(c) and the interpretative note thereto did not apply as nothing was added to the price actually paid for the imported goods by way of royalties etc. Refund would be allowable only if there was something added on to the royalty payment which was not in the present case. The invoice originally presented was complete in itself. The second invoice was not filed along with the bill of entry. In the second invoice also it is the licence fee for the right to use countrywide and it is not the right to reproduce as claimed by SBI. Schedule I to the agreement is module and copies are modalities for the use of software by SBI with various restrictions. If we again refer to clause 6.4 of the agreement there is a complete restraint on SBI which says SBI shall not use, print, copy, reproduce or disclose the software or documentation in whole or in part except as is expressly permitted by the agreement nor shall SBI permit any of the foregoing. SBI is also barred from allowing access to its software or documentation except what is permitted under the agreement. Again SBI is barred from selling, charging or otherwise making the software or documentation available to any person except what is expressly permitted under the agreement. Clause 6.5 of the agreement says that SBI shall not copy or permit copying of the software supplied to it by Kindle F save as may be strictly required for delivery to licence sites. The terms of the agreement also apply to the copies.” (emphasis supplied) Though this judgment has been delivered under the Customs Act 1962, yet the important differentiation made between the right to G reproduce and the right to use computer software has been recognized by this judgment. Whereas the former would amount to a parting of copyright by the owner thereof, the latter would not.

51Copy pinpoint51. An argument was advanced by the learned Additional Solicitor General that in some of the aforestated EULAs, it was clearly stated H

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A that what was licensed to the distributor/end-user by the non-resident, foreign supplier would not amount to a sale, thereby making it clear that what was transferred was not goods. This argument has no legs to stand on. It is settled law that in all such cases, the real nature of the transaction must be looked at upon reading the agreement as a whole. Thus, in Sundaram Finance Ltd. v. State of Kerala, (1966) 2 SCR 828, one of the questions that was raised before this Court was as to the execution of a “sale letter” acknowledging the sale of a vehicle. This “sale letter” was dealt with by the Court as follows: “The appellants are financiers and their business is to advance loans on favourable terms on the security of vehicles. This is effected by obtaining a promissory-note for repayment of the amount advanced, and a hire-purchase agreement which provides a mechanism for recovery of the amount. It is true that a “sale letter” is obtained from the customer, but the consideration for the sale letter is only the balance remaining payable to the dealer, after giving credit against the price of the vehicle the amount paid by the customer. The application for a loan, and the letter addressed to the appellants undertaking to insure the vehicle expressly mention that a loan is asked for and granted on the security of the motor-vehicle under the hire- purchase agreement. It is the customer who insures the vehicle, and in the books of the Motor E Vehicle Authorities he remains, with the consent of the appellants, owner of the vehicle. Undue importance to the acknowledgment of sale in the “sale letter” and the recital of sale in the bill and in the receipt cannot therefore be attached. These documents — “sale letter”, bill and receipt — must be read with the application F for granting a loan on the security of the vehicles, the letter in which the customer requests the appellants to pay the balance of the price remaining to be paid by him to the dealer, the promissory- note executed by him for that amount, the undertaking to insure the vehicle, and intimation to the Motor Vehicles Authorities to make note of the hire- purchase agreement.” G (page 839) “The true effect of a transaction may be determined from the terms of the agreement considered in the light of the surrounding circumstances. In each case, the Court has, unless prohibited by statute, power to go behind the documents and to determine the H

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nature of the transaction, whatever may be the form of the documents. An owner of goods who purports absolutely to convey or acknowledges to have conveyed goods and subsequently purports to hire them under a hire-purchase agreement is not estopped from proving that the real bargain was a loan on the security of the goods. If there is a bona fide and completed sale of goods, evidenced by documents, anterior to and independent of a subsequent and distinct hiring to the vendor, the transaction may not be regarded as a loan transaction, even though the reason for which it was entered into was to raise money. If the real transaction is a loan of money secured by a right of seizure of the goods, the property ostensibly passes under the documents embodying the transaction, but subject to the terms of the hiring agreement, which become part of the buyer’s title, and confer a licence to seize. When a person desiring to purchase goods and not having sufficient money on hand borrows the amount needed from a third person and pays it over to the vendor, the transaction between the customer and the lender will unquestionably be a loan transaction. The real character of the transaction would not be altered if the lender himself is the owner of the goods and the owner accepts the promise of the purchaser to pay the price or the balance remaining due against delivery of goods. But a hire- purchase agreement is a more complex transaction. The owner under the hire-purchase agreement enters into a transaction of hiring out goods on the terms and conditions set out in the agreement, and the option to purchase exercisable by the customer on payment of all the instalments of hire arises when the instalments are paid and not before. In such a hire-purchase agreement there is no agreement to buy goods; the hirer being under no legal obligation to buy, has an option either to return the goods or to become its owner by payment in full of the stipulated hire and the price for exercising the option. This class of hire- purchase agreements must be distinguished from transactions in which the customer is the owner of the goods and with a view to finance his purchase he enters into an arrangement which is in the form of a hire-purchase agreement with the financier, but in substance evidences a loan transaction, subject to a hiring agreement under which the lender is given the license to seize the goods.” (pages 841-842) (emphasis supplied) H

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A “In the light of these principles the true nature of the transactions of the appellants may now be stated. The appellants are carrying on the business of financiers: they are not dealing in motor-vehicles. The motor-vehicle purchased by the customer is registered in the name of the customer and remains at all material times so registered in his name. In the letter taken from the customer under B which the latter agrees to keep the vehicle insured, it is expressly recited that the vehicle has been given as security for the loan advanced by the appellants. As a security for repayment of the loan, the customer executes a promissory- note for the amount paid by the appellants to the dealer of the vehicle. The so-called C “sale letter” is a formal document which is not made effective by registering the vehicle in the name of the appellants and even the insurance of the vehicle has to be effected as if the customer is the owner. Their right to seize the vehicle is merely a licence to ensure compliance with the terms of the hire-purchase agreement. The customer remains qua the world at large the owner and D remains in possession, and on condition of performing the covenants, has a right to continue to remain in possession. The right of the appellants may be extinguished by payment of the amount due to them under the terms of the hire- purchase agreement even before the dates fixed for payment. The E agreement undoubtedly contains several onerous covenants, but they are all intended to secure to the appellants recovery of the amount advanced. We are accordingly of the view that the intention of the appellants in obtaining the hire-purchase and the allied agreements was to secure the return of loans advanced to their customers, and no real sale of the vehicle was intended by the customer to the appellants. The transactions were merely financing transactions.” (page 844)

52Copy pinpoint52. There can be no doubt as to the real nature of the transactions in the appeals before us. What is “licensed” by the foreign, non-resident supplier to the distributor and resold to the resident end-user, or directly supplied to the resident end-user, is in fact the sale of a physical object which contains an embedded computer programme, and is therefore, a sale of goods, which, as has been correctly pointed out by the learned counsel for the assessees, is the law declared by this Court in the context H

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of a sales tax statute in Tata Consultancy Services v. State of A.P., A 2005 (1) SCC 308 (see paragraph 27). APPLICABILITY OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT’S PROVISIONS

53Copy pinpoint53. The learned Additional Solicitor General sought to reopen a contention made by the Revenue in the earlier round of litigation in GE B Technology (supra) which led to this Court framing the question of law and sending it back to the High Court to decide “on merits”. He sought to argue, based in particular on Article 30 of the India-USA DTAA, that the DTAA’s provisions in these cases would not apply at all, inasmuch as provisions relatable to deduction of TDS under section 195 of the C Income Tax Act do not refer to tax at all, but are deductions that are to be made before assessments to tax are made. He argued that these deductions do not partake the character of tax at all, section 195 of the Income Tax Act speaking of “any person responsible to pay”, as opposed to an “assessee”. He therefore differentiated between the language used in section 9 and section 195 of the Income Tax Act and argued that the deductions made under section 195, not being in the nature of tax at all and at a stage prior to the person responsible for paying defaulting, and being declared an assessee in default (under section 201 of the Income Tax Act), the DTAA provisions would not apply at all.

54Copy pinpoint54. There is no doubt that section 9 of the Income Tax Act refers to persons who are non-residents and taxes their income as income which is deemed to accrue or arise in India, thus, making such persons assessees under the Income Tax Act, who are liable to pay tax. There is also no doubt that the “person responsible for paying” spoken of in section 195 of the Income Tax Act is not a non-resident assessee, but a person resident in India, who is liable to make deductions under section 195 of the Income Tax Act when payments are made by it to the non-resident assessee. The submission of the learned Additional Solicitor General is answered by the judgment of this Court in GE Technology (supra). This judgment, after setting out section 195 of the Income Tax Act, held: G “8. The most important expression in Section 195(1) consists of the words chargeable under the provisions of the Act. A person paying interest or any other sum to a non- resident is not liable to deduct tax if such sum is not chargeable to tax under the IT Act. For instance, where there is no obligation on the part of the payer and no right to receive the sum by the recipient and that the H

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

9. It may be noted that Section 195 contemplates not merely amounts, the whole of which are pure income payments, it also covers composite payments which have an element of income embedded or incorporated in them. Thus, where an amount is payable to a non-resident, the payer is under an obligation to deduct TAS in respect of such composite payments. The obligation to deduct TAS is, however, limited to the appropriate proportion of income chargeable under the Act forming part of the gross sum of money payable to the non-resident. This obligation being limited to the appropriate proportion of income flows from the words used in Section 195(1), namely, “chargeable under the provisions of the Act”. It is for this reason that vide Circular No. 728 dated 30-10-1995 CBDT has clarified that the tax deductor can take into consideration the effect of DTAA in respect of payment of royalties and technical fees while deducting TAS. It may also be noted that Section 195(1) is in identical terms with Section 18(3- B) of the 1922 Act. xxx xxx xxx

E 11. While deciding the scope of Section 195(2) it is important to note that the tax which is required to be deducted at source is deductible only out of the chargeable sum. This is the underlying principle of Section 195. Hence, apart from Section 9(1), Sections 4, 5, 9, 90, 91 as well as the provisions of DTAA are also relevant, while applying tax deduction at source provisions. F xxx xxx xxx

13. If the contention of the Department that the moment there is remittance the obligation to deduct TAS arises is to be accepted then we are obliterating the words “chargeable under the provisions of the Act” in Section 195(1). The said expression in Section 195(1) G shows that the remittance has got to be of a trading receipt, the whole or part of which is liable to tax in India. The payer is bound to deduct TAS only if the tax is assessable in India. If tax is not so assessable, there is no question of TAS being deducted. (See Vijay Ship Breaking Corpn. v. CIT [(2010) 10 SCC 39 : (2009) 314 H ITR 309] .)

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14. One more aspect needs to be highlighted. Section 195 falls in A Chapter XVII which deals with collection and recovery. Chapter XVII-B deals with deduction at source by the payer. On analysis of various provisions of Chapter XVII one finds the use of different expressions, however, the expression “sum chargeable under the provisions of the Act” is used only in Section 195. For example, B Section 194-C casts an obligation to deduct TAS in respect of “any sum paid to any resident”. Similarly, Sections 194-EE and 194-F inter alia provide for deduction of tax in respect of “any amount” referred to in the specified provisions. In none of the provisions we find the expression “sum chargeable under the provisions of the Act”, which as stated above, is an expression C used only in Section 195(1). Therefore, this Court is required to give meaning and effect to the said expression. It follows, therefore, that the obligation to deduct TAS arises only when there is a sum chargeable under the Act. xxx xxx xxx D

18. If the contention of the Department that any person making payment to a non-resident is necessarily required to deduct TAS then the consequence would be that the Department would be entitled to appropriate the monies deposited by the payer even if the sum paid is not chargeable to tax because there is no provision in the IT Act by which a payer can obtain refund. Section 237 read with Section 199 implies that only the recipient of the sum i.e. the payee could seek a refund. It must therefore follow, if the Department is right, that the law requires tax to be deducted on all payments. The payer, therefore, has to deduct and pay tax, even if the so-called deduction comes out of his own pocket and he has no remedy whatsoever, even where the sum paid by him is not a sum chargeable under the Act. The interpretation of the Department, therefore, not only requires the words “chargeable under the provisions of the Act” to be omitted, it also leads to an absurd consequence. The interpretation placed by the Department G would result in a situation where even when the income has no territorial nexus with India or is not chargeable in India, the Government would nonetheless collect tax. In our view, Section 195(2) provides a remedy by which a person may seek a determination of the “appropriate proportion of such sum so H

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A chargeable” where a proportion of the sum so chargeable is liable to tax. xxx xxx xxx

20. We find no merit in these contentions. As stated hereinabove, Section 195(1) uses the expression “sum chargeable under the provisions of the Act”. We need to give weightage to those words. Further, Section 195 uses the word “payer” and not the word “assessee”. The payer is not an assessee. The payer becomes an assessee-in-default only when he fails to fulfil the statutory obligation under Section 195(1). If the payment does not contain the element of income the payer cannot be made liable. He cannot be declared to be an assessee-in-default.

21. The abovementioned contention of the Department is based on an apprehension which is ill-founded. The payer is also an assessee under the ordinary provisions of the IT Act. When the payer remits an amount to a non-resident out of India he claims deduction or allowances under the Income Tax Act for the said sum as an “expenditure”. Under Section 40(a)(i), inserted vide the Finance Act, 1988 w.e.f. 1-4-1989, payment in respect of royalty, fees for technical services or other sums chargeable under the Income Tax Act would not get the benefit of deduction if the assessee fails to deduct TAS in respect of payments outside India which are chargeable under the IT Act. This provision ensures effective compliance with Section 195 of the IT Act relating to tax deduction at source in respect of payments outside India in respect of royalties, fees or other sums chargeable under the IT F Act. In a given case where the payer is an assessee he will definitely claim deduction under the IT Act for such remittance and on inquiry if the AO finds that the sums remitted outside India come within the definition of royalty or fees for technical service or other sums chargeable under the IT Act then it would be open to the AO to disallow such claim for deduction. Similarly, vide the G Finance Act, 2008 w.e.f. 1-4-2008 sub-section (6) has been inserted in Section 195 which requires the payer to furnish information relating to payment of any sum in such form and manner as may be prescribed by the Board. This provision is brought into force only from 1-4-2008. It will not apply for the period with which we are concerned in these cases before us. Therefore, in our view,

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there are adequate safeguards in the Act which would prevent revenue leakage. xxx xxx xxx

24. In our view, Section 195(2) is based on the “principle of proportionality”. The said sub-section gets attracted only in cases where the payment made is a composite payment in which a B certain proportion of payment has an element of “income” chargeable to tax in India. It is in this context that the Supreme Court stated: (Transmission Corpn. case [(1999) 7 SCC 266 : (1999) 239 ITR 587], SCC p. 274, para 10) “10. … If no such application is filed income tax on such sum C is to be deducted and it is the statutory obligation of the person responsible for paying such ‘sum’ to deduct tax thereon before making payment. He has to discharge the obligation [to TDS].” (emphasis supplied) D If one reads the observation of the Supreme Court, the words “such sum” clearly indicate that the observation refers to a case of composite payment where the payer has a doubt regarding the inclusion of an amount in such payment which is exigible to tax in India. In our view, the above observations of this Court in Transmission Corpn. case [(1999) 7 SCC 266 : (1999) 239 ITR E 587] which is put in italics has been completely, with respect, misunderstood by the Karnataka High Court to mean that it is not open for the payer to contend that if the amount paid by him to the non-resident is not at all “chargeable to tax in India”, then no TAS is required to be deducted from such payment. This interpretation F of the High Court completely loses sight of the plain words of Section 195(1) which in clear terms lays down that tax at source is deductible only from “sums chargeable” under the provisions of the IT Act i.e. chargeable under Sections 4, 5 and 9 of the IT Act. G

25. Before concluding we may clarify that in the present case on facts ITO(TDS) had taken the view that since the sale of the software concerned, included a licence to use the same, the payment made by the appellant(s) to foreign suppliers constituted “royalty” which was deemed to accrue or arise in India and, therefore, TAS was liable to be deducted under Section 195(1) of H

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

55Copy pinpoint55. What is made clear by the judgment in GE Technology (supra) is the fact that the “person” spoken of in section 195(1) of the Income C Tax Act is liable to make the necessary deductions only if the non-resident is liable to pay tax as an assessee under the Income Tax Act, and not otherwise. This judgment also clarifies, after referring to CBDT Circular No.728 dated 30.10.1995, that the tax deductor must take into consideration the effect of the DTAA provisions. The crucial link, D therefore, is that a deduction is to be made only if tax is payable by the non-resident assessee, which is underscored by this judgment, stating that the charging and machinery provisions contained in sections 9 and 195 of the Income Tax Act are interlinked.

56Copy pinpoint56. This conclusion is also echoed in Vodafone International E Holdings BV v. Union of India, (2012) 6 SCC 613, wherein the following observations were made on the scope and applicability of section 195 of the Income Tax Act: “171. Section 195 casts an obligation on the payer to deduct tax at source (“TAS”, for short) from payments made to non- residents F which payments are chargeable to tax. Such payment(s) must have an element of income embedded in it which is chargeable to tax in India. If the sum paid or credited by the payer is not chargeable to tax then no obligation to deduct the tax would arise. Shareholding in companies incorporated outside India (CGP) is property located outside India. Where such shares become subject- G matter of offshore transfer between two non-residents, there is no liability for capital gains tax. In such a case, question of deduction of TAS would not arise.

172. If in law the responsibility for payment is on a non- resident, the fact that the payment was made, under the instructions of the non-resident, to its agent/nominee in India or its PE/Branch Office

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will not absolve the payer of his liability under Section 195 to deduct TAS. Section 195(1) casts a duty upon the payer of any income specified therein to a non-resident to deduct therefrom TAS unless such payer is himself liable to pay income tax thereon as an agent of the payee. Section 201 says that if such person fails to so deduct TAS he shall be deemed to be an assessee-in- B default in respect of the deductible amount of tax (Section 201).

173. Liability to deduct tax is different from “assessment” under the Act. Thus, the person on whom the obligation to deduct TAS is cast is not the person who has earned the income. Assessment has to be done after liability to deduct TAS has arisen. The object of Section 195 is to ensure that tax due from non-resident persons is secured at the earliest point of time so that there is no difficulty in collection of tax subsequently at the time of regular assessment.” (emphasis supplied)

57Copy pinpoint57. The absurd consequence that the resident in India, after making the deduction/payment, would not then get any excess payment made by way of refund when regular assessment takes place, as the non- resident assessee alone would be entitled to such refund, is also pointed out in paragraph 18 of the judgment in GE Technology (supra). It was after keeping all this in view that this Court then set aside the judgment of the High Court of Karnataka dated 24.09.2009 and remanded the case to the High Court for a decision of the question “on merits”, i.e., on the sole question as to whether the ITAT was justified in holding that the amounts paid by the appellants to the foreign software suppliers did not amount to royalty, as a result of which, no liability to deduct TDS arose.

58Copy pinpoint58. Even otherwise, a look at Article 12(2) of the India-Singapore F DTAA would demonstrate the fallacy of the aforesaid submission of the learned Additional Solicitor General. Under Article 12(2) of the India- Singapore DTAA, royalties may be taxed in the Contracting State in which they arise (India) and according to the laws of that Contracting State (Indian laws), if the recipient is a beneficial owner of the royalties, G and the tax so charged is capped at the rate of 10% or 15%. If the learned Additional Solicitor General is correct in his submission, as the DTAA would then not apply, royalty would be liable to be taxed in India at the rate mentioned in the Income Tax Act which can be much higher than the DTAA rate, as a result of which, the deduction made under section 195 of the Income Tax Act by the “person responsible” would H

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A have to be a proportion of a much higher sum than the tax that is ultimately payable by the non-resident assessee. This equally absurd result cannot be countenanced given the fact that the person liable to deduct tax is only liable to deduct tax first and foremost if the non- resident person is liable to pay tax, and second, that if so liable, is then liable to deduct tax depending on the rate mentioned in the DTAA. B

59Copy pinpoint59. Further, tearing an article of a specific DTAA, namely Article 30 of the India-USA DTAA, out of context in order to buttress his submission, in a manner far removed from the actual rationale behind that provision, does not commend itself to us.

C 59. i) Article 30 of the India-USA DTAA, relied upon by the learned Additional Solicitor General, reads: “1. Each Contracting State shall notify the other Contracting State in writing, through diplomatic channels, upon the completion of their respective legal procedures to bring this Convention into force.

D 2. The Convention shall enter into force on the date of the latter of such notifications and its provisions shall have effect: (a) in the United States (i) in respect of taxes withheld at source, for amounts paid or credited on or after the first day of January next following the date on which the Convention enters into force; (ii) in respect of other taxes, for taxable periods beginning on or after the first day of January next following the date on which the Convention enters into force; and (b) in India, in respect of income arising in any taxable year beginning on or after the first day of April next following the calendar year in which the Convention enters into force.”

59. ii) By way of contrast, under the Convention between the Republic of India and the Kingdom of Netherlands for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to G Taxes on Income and on Capital,32 [“India-Netherlands DTAA”], Article 29 reads: “1. Each of the States shall notify to the other the completion of the procedures required by its law for the bringing into force of 32 Notification No. GSR 382(E), dated 27-3-1989, as amended by Notification No. H S.O. 693(E), dated 30-8-1999.

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this Convention. This Convention shall enter into force on the thirtieth day after the latter of the dates on which the respective Governments have notified each other in writing that the formalities constitutionally required in their respective States have been complied with, and its provisions shall have effect: (a) in the Netherlands for taxable years and periods beginning on or after the first day of January next following the calendar year in which the latter of the notifications is given; (b) in India in respect of income arising in any fiscal year beginning on or after the first day of April next following the calendar year in which the latter of the notifications is given. C

2. Notwithstanding the provisions of paragraph 1, the provisions of Article 8 shall have effect: (a) in the Netherlands for taxable years and periods beginning on or after the first day of January, 1987; (b) in India in respect of income arising in any fiscal year beginning on or after the first day of April, 1987.”

59. iii) Under the Convention between the Government of Japan and the Government of the Republic of India for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income,33 [“India-Japan DTAA”] Article 28 is set out in the following terms: “1. This Convention shall be ratified and the instruments of ratification shall be exchanged at Tokyo as soon as possible.

2. This Convention shall enter into force on the thirtieth day after the date of the exchange of instruments of ratification and shall have effect : (a) In Japan : as regards income for any taxable year beginning on or after the first day of January of the calendar year next following that in which this Convention enters into force; and G (b) in India : as regards income for any ‘previous year’ beginning on or after the first day of April of the calendar year next following that in which this Convention enters into force. 33 Notification : No. GSR 101(E), dated 1-3-1990, as amended by Notification Nos. SO 753(E), dated 16-8-2000 (w.r.e.f. 1-10-1999), SO 1136(E), dated 19-7-2006, w.r.e.f. 28- 6-2006 and SO 2528(E), dated 8-10-2008, w.e.f. 1-10-2008. H

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A 3. The Agreement between Japan and India for the Avoidance of Double Taxation in respect of Taxes on Income signed at New Delhi on January 5, 1960 shall terminate and cease to have effect in respect of income to which this Convention applies under the provisions of paragraph 2.”

B 59. iv) Under the Convention between the Government of the Republic of India and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital Gains,34 [“India-UK DTAA”] Article 30 reads as follows: C (1) Each of the Contracting States shall notify to the other the completion of the procedures required by its law for the bringing into force of this Convention. This Convention shall enter into force on the date of the later of these notifications and shall thereupon have effect:

D (a) in the United Kingdom: (i) in respect of income tax and capital gains tax, for any year of assessment beginning on or after 6th April in the calendar year next following that in which the later of the notifications is given; E (ii) in respect of corporation tax, for any financial year beginning on or after 1st April in the calendar year next following that in which the later of the notifications is given; (iii) in respect of petroleum revenue tax, for any chargeable period beginning on or after 1st January in the calendar F year next following that in which the later of the notifications is given; (b) in India, in respect of income arising in any fiscal year beginning on or after the first day of April next following the calendar year in which the later of the notifications is given. G (2) Subject to the provisions of paragraph (3) of this Article, the Convention between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of India for the Avoidance of Double Taxation and the Prevention of Fiscal 34 GSR 91(E), dated 11-2-1994, as amended by Notification No. 10/2014 [F.No. 505/ H 1986 FTD-I], dated 10-2-2014.

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Evasion with Respect to Taxes on Income and Capital Gains signed A in New Delhi on 16th April 1981 (hereinafter referred to as “the 1981 Convention”) shall terminate and cease to be effective from the date upon which this Convention has effect in respect of the taxes to which this Convention applies in accordance with the provisions of paragraph (1) of this Article. B (3) Where any provisions of the 1981 Convention would have afforded any greater relief from tax than is due under this Convention, any such provision as aforesaid shall continue to have effect: (a) in the United Kingdom, for any year of assessment or financial year; and (b) in India, for any fiscal year; beginning, in either case, before the entry into force of this Convention.” C

59. v) Article 28 of the Agreement between the Government of the Republic of India and the Government of the People’s Republic of China for the Elimination of Double Taxation with respect to Taxes on Income and the Prevention of Tax Evasion and Avoidance,35 [“India- China DTAA”], is again worded differently, as follows: D

“This Agreement shall enter into force on the thirtieth day after the date on which diplomatic notes indicating the completion of internal legal procedures necessary in each country for the entry into force of this Agreement have been exchanged. This Agreement shall have effect : E

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

60Copy pinpoint60. Obviously, the logic behind Article 30 of the India-USA DTAA is for reasons connected with USA’s municipal taxation laws, and has nothing to do with Indian municipal law governing the liability of persons to deduct tax at source under section 195 of the Income Tax Act. This is reinforced by the fact that the OECD Commentary on Articles 30 and 31 acknowledges the fact that the “entry into force” provisions, unlike the 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. H

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A and on Capital, depend on the domestic laws of Contracting States, as follows: “COMMENTARY ON ARTICLES 30 AND 31 CONCERNING THE ENTRY INTO FORCE AND THE TERMINATION OF THE CONVENTION B xxx xxx xxx

3. It is open to Contracting States to agree that the Convention shall enter into force when a specified period has elapsed after the exchange of the instruments of ratification or after the confirmation that each State has completed the procedures required for such entry into force.

4. No provisions have been drafted as to the date on which the Convention shall have effect or cease to have effect, since such provisions would largely depend on the domestic laws of the Contracting States concerned. Some of the States assess tax on the income received during the current year, others on the income received during the previous year, others again have a fiscal year which differs from the calendar year. Furthermore, some conventions provide, as regards taxes levied by deduction at the source, a date for the application or termination which differs from the date applying to taxes levied by assessment.” E (emphasis supplied)

61Copy pinpoint61. For all these reasons, we do not permit the learned Additional Solicitor General to have a second bite at the same cherry, albeit through the ingenious argument made by him based on Article 30 of the India- USA DTAA. F DEFINITION OF ROYALTY IN THE DTAAs VIS-À-VIS THE INCOME TAX ACT

62Copy pinpoint62. In order to ascertain whether the question which was posed by this Court in GE Technology (supra) was correctly answered by the High Court of Karnataka vide the impugned judgment dated G 15.10.2011,36 the first expression that has to be considered by us is the expression “royalty”.

63Copy pinpoint63. Firstly, it will be seen that when Article 12 of the India- Singapore DTAA defines the term “royalties” in sub-article (3) thereof, H 36 CIT v. Samsung Electronics Co. Ltd., (2012) 345 ITR 494.

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it does so stating that such definition is exhaustive – it uses the expression A “means”. Secondly, the term “royalties” refers to payments of any kind that are received as a consideration for the use of or the right to use any copyright in a literary work. As opposed to this, the definition contained in explanation 2 to section 9(1)(vi) of the Income Tax Act, is wider in at least three respects: B i. It speaks of “consideration”, but also includes a lump-sum consideration which would not amount to income of the recipient chargeable under the head “capital gains”; ii. When it speaks of the transfer of “all or any rights”, it expressly includes the granting of a licence in respect thereof; and iii. It states that such transfer must be “in respect of” any copyright of any literary work.

64Copy pinpoint64. However, even where such transfer is “in respect of” copyright, the transfer of all or any rights in relation to copyright is a sine qua non under explanation 2 to section 9(1)(vi) of the Income Tax Act. In short, there must be transfer by way of licence or otherwise, of all or any of the rights mentioned in section 14(b) read with section 14(a) of the Copyright Act.

65Copy pinpoint65. In State of Madras v. Swastik Tobacco Factory, (1966) 3 E SCR 79, this Court construed the words “in respect of” used in rule 5(1)(i) of the Madras General Sales Tax (Turnover and Assessment) Rules 1939, as follows: “The House of Lords in Inland Revenue Commissioners v. Coutts & Co. [(1963) 2 All ER 722, 732], in the context of payment of estate duty, construed the words “in respect of” in Section 5(2) of the Finance Act, 1894 (57 & 58 Vict, c. 30) and observed that the phrase denoted some imprecise kind of nexus between the property and the estate duty. The House of Lords in Asher v. Seaford Court Estates Ltd. [LR 1950 AC 608] in construing the provisions of Section 2, sub- section (3) of Increase of Rent and Mortgage Interest (Restrictions) Act, 1920 (10 & 11 Geo. 5, c. 17), held that the expression “in respect of” must be read as equivalent to “attributable”. The Privy Council in Bicher Ltd. v. CIT [(1962) 3 All ER 294] observed that the said words could mean more than “consisting of” or “namely”. H

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A It is not necessary to refer to other decisions. It may be accepted that the said expression received a wide interpretation, having regard to the object of the provisions and the setting in which the said words appeared. On the other hand, Indian tax laws use the expression “in respect of” as synonymous with the expression “on”: see Article 288 of the Constitution of India; Section 3 of the B Indian Income Tax Act, 1922; Sections 3(2) and 3(5), Second Proviso, of the Madras General Sales Tax Act, 1939; Section 3(1- A) of the Central Excise and Salt Act, 1944; and Section 9 of the Kerala Sales Tax Act. We should not be understood to have construed the said provisions, but only have referred to them to state the legislative practice. Consistent with the said practice, Rule 5(1)(i) of the Rules uses the same expression. When the said Rule says “excise duty paid in respect of the goods”, the excise duty referred to is the excise duty paid under Section 3(1), read with the Schedule of the Central Excises and Salt Act, 1944 (1 of 1944). Under the said Section, read with the Schedule, excise duty is levied on the goods described in the Schedule. Therefore, when Rule 5(1)(i) of the Rules refers to the duty paid in respect of the goods to the Central Government, it necessarily refers to the duty paid on the goods mentioned in the Schedule. As the duty exempted from the gross turnover is the duty so paid under the E Central Act, read with the Schedule, the expression “in respect of” in the context can only mean excise duty paid on goods. In our view, the expression “in respect of the goods” in Rule 5(1)(i) of the Rules means only “on the goods”. Even if the word “attributable” is substituted for the words “in respect of”, the result will not be different, for the duty paid shall be attributable to the F goods. If it was paid on the raw material it can be attributable only to raw material and not to the goods. We, therefore, hold that only excise duty paid on the goods sold by the assessee is deductible from the gross turnover under Rule 5(1)(i) of the Rules.” (pages 82-83) G (emphasis supplied)

66Copy pinpoint66. The aforesaid meaning accords with the meaning to be given to the expression “in respect of” contained in explanation 2(v) to section 9(1)(vi) of the Income Tax Act. H

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ROYALTY UNDER THE INCOME TAX ACT A

67Copy pinpoint67. The insertion of sub-sections (v), (vi) and (vii) in section 9(1) of the Income Tax Act, by way of an amendment through the Finance Act 1976,37 was to introduce source-based taxation for income in the hands of a non-resident by way of interest, royalty and fees for technical services. In Carborandum & Co. v. CIT, (1977) 2 SCC 862, this B Court, applying residence-based rules of taxation, held that the technical service fees received by the non-resident assessee (relatable to the assessment year 1957-1958) could only be deemed to accrue in India if such income could be attributed to a business connection in India. In the facts of that case, since no part of the foreign assessee’s operations were carried on in India, the technical services being rendered wholly in foreign territory, it was held that no part of the technical service fees received by the foreign assessee accrued in India.

68Copy pinpoint68. This position of law was altered by the Finance Act 1976, which introduced a “source-rule” to tax income by way of royalty in the hands of a non-resident, noted in the Memorandum explaining the provisions of the Finance Bill 1976, as follows:

38. “Source rule” regarding place of accrual of income by way of interest, royalty and fees for technical services. - A non-resident taxpayer is chargeable to tax in India in respect of income from whatever source derived which is received or is deemed to be received in India or which accrues or arises or is deemed to accrue or arise to him in India. The existing provisions in the Income-tax Act which provide that certain incomes will be deemed to accrue or arise in India are couched in general language. The absence of a clear- cut source rule sometimes creates uncertainty about the chargeability of certain types of incomes in the case of non- residents. In order to avoid any doubt or dispute in regard to the accrual of income by way of interest, royalty and fees for technical services in the case of non-residents, it is proposed to make certain provisions in the Income-tax Act clearly specifying the circumstances in which such income shall be deemed to accrue or arise in India. xxx xxx xxx

40. Income by way of royalty payable by the Government will be deemed to accrue or arise in India. Royalty payable by a person 37 Act 66 of 1976, (w.e.f 1-6-1976). H

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A who is resident in India will also be deemed to accrue or arise in India, except in cases where the royalty is payable for the transfer of any right or the use of any property or information or for utilising the services of the recipient for the purposes of a business or profession carried on outside India or for the purposes of making or earning any income from a source outside India. Royalty payable by a non-resident will be deemed to accrue or arise in India only in cases where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by the non- resident in India or for the purposes of making or earning any income from any source in India.”

69Copy pinpoint69. Consequently, section 9(1)(vi) of the Income Tax Act was brought into force. The definition of royalty contained in explanation 2(v) of section 9(1)(vi) of the Income Tax Act includes the transfer of all or any rights (including the granting of a licence) “in respect of any copyright, literary, artistic or scientific work”.

70Copy pinpoint70. The comma after the word “copyright” does not fit as copyright is obviously spoken of as existing in a literary, artistic or scientific work. As a matter of fact, this drafting error was rectified in the Draft Taxes Code 2010,38 under Chapter XIX in Part H thereof, which set out the definition of “royalty” as follows: “PART H - CHAPTER XIX INTERPRETATIONS AND CONSTRUCTIONS xxx xxx xxx (314)(220) “royalty” means consideration (including any lump- F sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head “Capital gains”) for— xxx xxx xxx (g) the transfer of all or any rights (including the granting of a G licence) in respect of — (i) any copyright of literary, artistic or scientific work; (ii) cinematographic films or work on films, tapes or any other means of reproduction; or (iii) live coverage of any event” (emphasis supplied) H 38 This Code has, however, remained in draft form and was never enacted.

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71Copy pinpoint71. The transfer of “all or any rights (including the granting of a A licence) in respect of any copyright”, in the context of computer software, is referable to sections 14(a), 14(b) and 30 of the Copyright Act. As has been held hereinabove, the expression “in respect of” is equivalent to “in” or “attributable to”. Thus, explanation 2(v) to section 9(1)(vi) of the Income Tax Act, when it speaks of “all of any rights…in respect of copyright” is certainly more expansive than the DTAA provision, which speaks of the “use of, or the right to use” any copyright. This has been recognised by the High Court of Delhi in CIT v. DCM Limited, ITA Nos. 87-89/1992 in its judgment dated 10.03.2011, as follows: “9. A bare perusal of Article XIII(3) would show that the expression “payments of any kind” is circumscribed by the latter part of the definition which speaks of consideration received (including in the form of rentals) for “use of” or “right to use” intellectual properties. The Tribunal, in our view, rightly observed that the CIT(A) had erred in coming to the conclusion that the expression “payments of any kind” was broad enough to include even an outright sale. To drive home this point the Tribunal, once again, has correctly drawn a distinction between the definition of royalty as appearing in the DTAA and that which finds mention in explanation 2 to section 9(1)(vi) of the I.T. Act. A perusal of the provisions of the said explanation would show that it brings within the ambit of royalty a wider range of transactions which would include payments made for “transfer of all” or “any right” in patents, inventions, model, design, etc. apart from payments based for use of such right, patent, innovation, model, design, secret formula or process or trade mark or similar property. As a matter of fact, a perusal of clause (i) of explanation 2 of section 9(1)(vi) of the F I.T. Act would show that “transfer of all” or “any right” could take place by execution of licences as well, which was the methodology adopted by Tate and the assessee in the present case…”

72Copy pinpoint72. However, when it comes to the expression “use of, or the G right to use”, the same position would obtain under explanation 2(v) of section 9(1)(vi) of the Income Tax Act, inasmuch as, there must, under the licence granted or sale made, be a transfer of any of the rights contained in sections 14(a) or 14(b) of the Copyright Act, for explanation 2(v) to apply. To this extent, there will be no difference in the position H