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

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A the submission that the payments, if not royalty, amounted to payments for the use of machinery or equipment. Such a submission was never advanced before any of the lower tax authorities; moreover, even in Ericsson (supra), a similar provision existed in the DTAA between India and Sweden.” B (pages 95-96)

117Copy pinpoint117. The conclusions that can be derived on a reading of the aforesaid judgments are as follows: i) Copyright is an exclusive right, which is negative in nature, being a right to restrict others from doing certain acts. C ii) Copyright is an intangible, incorporeal right, in the nature of a privilege, which is quite independent of any material substance. Ownership of copyright in a work is different from the ownership of the physical material in which the copyrighted work may happen to be embodied. An obvious example is the purchaser of a book or a CD/DVD, who becomes the owner of the physical article, but does not become the owner of the copyright inherent in the work, such copyright remaining exclusively with the owner. iii) Parting with copyright entails parting with the right to do any of the acts mentioned in section 14 of the Copyright Act. The transfer of the material substance does not, of itself, serve to transfer the copyright therein. The transfer of the ownership of the physical substance, in which copyright subsists, gives the purchaser the right to do with it whatever he pleases, except the right to reproduce the same and issue it to the public, unless such copies are already in circulation, and the other acts mentioned in section 14 of the Copyright Act. iv) A licence from a copyright owner, conferring no proprietary interest on the licensee, does not entail parting with any copyright, and is different from a licence issued under section 30 of the Copyright Act, which is a licence which grants the licensee an interest in the rights mentioned in section 14(a) and 14(b) of the Copyright Act. Where the core of a transaction is to authorize the end-user to have access to and make use of the “licensed” computer software product

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over which the licensee has no exclusive rights, no copyright is parted with and consequently, no infringement takes place, as is recognized by section 52(1)(aa) of the Copyright Act. It makes no difference whether the end-user is enabled to use computer software that is customised to its specifications or otherwise. B v) A non-exclusive, non-transferable licence, merely enabling the use of a copyrighted product, is in the nature of restrictive conditions which are ancillary to such use, and cannot be construed as a licence to enjoy all or any of the enumerated rights mentioned in section 14 of the Copyright Act, or create any interest in any such rights so as to attract section 30 of the Copyright Act. vi) The right to reproduce and the right to use computer software are distinct and separate rights, as has been recognized in SBI v. Collector of Customs, 2000 (1) SCC 727 (see paragraph 21), the former amounting to parting with copyright and the latter, in the context of non-exclusive EULAs, not being so.

118Copy pinpoint118. Consequently, the view contained in the determinations of the AAR in Dassault (AAR) (supra) and Geoquest (AAR) (supra) and the judgments of the High Court of Delhi in Ericsson A.B. (supra), E Nokia Networks OY (supra), Infrasoft (supra), ZTE (supra), state the law correctly and have our express approval. We may add that the view expressed in the aforesaid judgments and determinations also accords with the OECD Commentary on which most of India’s DTAAs are based. F DOCTRINE OF FIRST SALE/PRINCIPLE OF EXHAUSTION

119Copy pinpoint119. The learned Additional Solicitor General argued that on the facts of these cases, the doctrine of first sale/principle of exhaustion would have no application inasmuch as this doctrine is not statutorily G recognised in section 14(b)(ii) of the Copyright Act. This being so, since the distributors of copyrighted software “license” or sell such computer software to end-users, there would be a parting of a right or interest in copyright inasmuch as such “license” or sale would then be hit by section 14(b)(ii) of the Copyright Act. H

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120Copy pinpoint120. As has been mentioned hereinabove, section 14(b)(ii) of the Copyright Act was amended twice, first in 1994 and then again in 1999, with effect from 15.01.2000. Prior to the 1999 Amendment, section 14(b)(ii) of the Copyright Act read as follows: “(ii) to sell or give on hire, or offer for sale or hire any copy of the computer programme, regardless of whether such copy has been sold or given on hire on earlier occasions;” (emphasis supplied) After the 1999 Amendment, what is conspicuous by its absence is the phrase “regardless of whether such copy has been sold or given on hire on earlier occasions”. This is a statutory recognition of the doctrine of first sale/principle of exhaustion.

121Copy pinpoint121. The doctrine of first sale/principle of exhaustion is explained by the locus classicus on this subject, Copinger and Skone James on Copyright (14th Edition) (1999), as follows: D “The distribution right: general. One of the acts restricted by the copyright in all work is the issue of the original or copies of the work to the public, often called the “distribution right”. This right is provided for in section 18 of the 1988 Act. Infringement of the distribution right is a primary infringement under UK law, and so there is no need to prove knowledge or reason to believe that the copy in question is infringing. Thus it is a powerful weapon against those at the top of a chain of distribution. In accordance with general principles, section 18 must be interpreted so far as possible in such a way as to conform with relevant EU Directives, in this instance, the Software Directive and the Information Society Directive. Recent case law of the CJEU has made a conforming interpretation more difficult. An important aspect of the distribution right is that it is exhausted in relation to a particular article by the first sale (and, in the case of the Information Society Directive, the first transfer of ownership) of that article in the Community G by the rightholder or with his consent. For the purposes of the Software Directive, certain forms of distribution of electronic copies are considered to exhaust the distribution right in respect of such copies.” (pages 613-614) H

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“Exhaustion of the distribution right: tangible objects. A Exhaustion applies to the tangible object into which a protected work or its copy is incorporated if it has been placed on the market with the copyright holder’s consent. In the case of artistic works, the consent of the copyright holder does not cover the distribution of an object incorporating his work if that object has been altered after its initial marketing in such a way that it constitutes a new reproduction of the work; in such an event, the distribution right is exhausted only upon the first sale or transfer of ownership of that new object with the consent of the rightholder. Accordingly, where a defendant (without the licence of the rightholder) transferred an image of a work of a famous painter from a poster onto canvas by physically lifting the ink from the poster, producing a result closer to the original and leaving a blank piece of paper behind, and this amounted to copying, the rightholder’s distribution right had not been exhausted. Exhaustion: computer programs. Similar considerations apply in relation to tangible copies of computer programs as to other works: the first sale of a copy of a program by the rightholder or with his consent exhausts the distribution right with the exception of the right to control further rental of the program or a copy thereof. As to copies made available in intangible form (e.g. by downloading from a website), for these purposes the word “sale” E is to be given an autonomous Community interpretation. Where a seller makes a program available for download under a licence for an unlimited period in return for a licence fee, the intention is to make the copy usable by the customer, permanently, in return for payment of a fee designed to enable the copyright owner to obtain a remuneration corresponding to the economic value of the copy of the work. Accordingly, that amounts to a transfer of the right of ownership of the copy in question and thus a sale for the purposes of the exhaustion of the distribution right. The same applies if the copy is made available by means of a material medium such as a CD- ROM or DVD and if the download is free but the licence is granted and paid for separately. It does not matter if the software is the subject of a maintenance agreement: the exhaustion applies to the copy as corrected and updated pursuant to the agreement. Any other interpretation would undermine the effectiveness of article 4(2) of the Directive since H

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A suppliers would merely have to call a contract a licence rather than a sale in order to circumvent the rule of exhaustion and divest it of all scope. The result is that a purchaser from the original licensee and any subsequent acquirer are lawful acquirers of the software for the purposes of article 5(1) of the Software Directive and benefit from the right of reproduction provided for in that B provision.” (pages 621-622)

122Copy pinpoint122. In Warner Bros. Entertainment Inc. v. Santosh V.G., CS (OS) No. 1682/2006 [“Warner Bros.”] reported in 2009 SCC C OnLine Del 835, a Single Judge of the High Court of Delhi dealt with copyright in a cinematograph film, as a result of which, section 14(d)(ii) of the Copyright Act, before it was amended in 2012,46 came up for consideration. The said section, prior to being amended in 2012, read as follows:

D “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 xxx xxx xxx E (d) in the case of a cinematograph film,— xxx xxx xxx (ii) to sell or give on hire or offer for sale or hire, any copy of the film, regardless of whether such copy has been sold or given on hire on earlier occasion”

123Copy pinpoint123. The learned Single Judge of the High Court of Delhi explained the principle of exhaustion as follows: “57. The doctrine of exhaustion of copyright enables free trade in material objects on which copies of protected works have been fixed and put into circulation with the right holder’s consent. The “exhaustion” principle in a sense arbitrates the conflict between the right to own a copy of a work and the author’s right to control the distribution of copies. Exhaustion is decisive with respect to the priority of ownership and the freedom to trade in material carriers on the condition that a copy has been legally brought into 46 By Act 27 of 2012, s. 5(ii)(b) (w.e.f. 21.06.2012). H

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trading. Transfer of ownership of a carrier with a copy of a work fixed on it makes it impossible for the owner to derive further benefits from the exploitation of a copy that was traded with his consent. The exhaustion principle is thus termed legitimate by reason of the profits earned for the ownership transfer, which should be satisfactory to the author if the work is not being exploited in a different exploitation field.

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

124Copy pinpoint124. The learned Single Judge then arrived at the following conclusion: “62. … The court is of opinion therefore that the existence or applicability of the “exhaustion” principle cannot be inferred automatically; it would have to depend on the situation, and the structure of the legislation in question.” F

125Copy pinpoint125. Coming to section 14(a)(ii) of the Copyright Act, the learned Single Judge then held: “63. The defendant in this case, accepts that the renting/hiring of films carried on by it is without the plaintiffs’ license. The Plaintiffs G urge that since the importation, for the purpose of renting of these cinematographic films has not been authorized by them in India, the copies are infringing copies. Hence their import would be barred under Section 51(b)(iv). The defendant’s argument, however, is that the copies were legitimately purchased in the course of trade; they are rental copies, and can be used for purpose of renting, in H

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A India. He says that the device of zoning, whereby the plaintiffs restrict the licensee owner to use it in territories other than what is indicated by them, is artificial, and unenforceable. Such “long arm” conditions are inapplicable. Particular reference is made to the explanation to Section 14, which describes the content of copyright; it clarifies that “For the purposes of this section, a B copy which has been sold once shall be deemed to be a copy already in circulation.” Though attractive, this contention is unfeasible for more than one reason. The reference to copies in circulation is in the context of copyright in literary, artistic, dramatic or musical work, — not computer programme — (Section 14(a); C the statute enables the copyright owner to “issue copies of the work to the public not being copies already in circulation”. But for the explanation, it could arguably be said that the copyright owner lost his domain, or right to control the manner of further dealing in copies which were in circulation. Yet, a careful reading of Section 14 would reveal that the content of copyrights in respect of each nature of work (literary, dramatic, or musical work, on the one hand, computer programme, artistic work, cinematograph film, etc on the other) are distinct — evident from the listing out of such rights, separately, in clauses (a) to (f) of the section. The reference to “copies in circulation” has to be therefore, in the context; the phrase is used to limit the copyright owner’s right to dictate further use of a literary, musical and dramatic work (Section 14(a)(ii)). None of the owners of other classes of work are subject to that limitation. The restriction of one class of copyright owner, structured in the statute serves a dual purpose- it limits the owner of that class of copyright; and at the same time leaves it open to the copyright owner of other kinds of work, to place such restrictions.” (emphasis in original)

126Copy pinpoint126. Contrasting the aforesaid with section 14(d)(ii) of the G Copyright Act, as it stood prior to the amendment in 2012, the learned Single Judge then went on to hold: “64. The second reason is that Section 14(1)(d) provides that the copyright owner has, in case of cinematographic films, the exclusive right to sell or give on hire or offer for sale or hire, any copy of the film, regardless of whether such copy has been sold

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or given on hire on earlier occasion. The copyright owner, therefore continues to be entitled to exercise rights in a particular copy of the film regardless of whether it has been sold previously- in express contrast to literary works, which are “already in circulation”. This is reinforced by Section 51(b)(i), which unambiguously provides that copyright in a work shall be infringed if a person does anything the exclusive right do which is by the Act, conferred upon the owner of the copyright; it is also emphasized by Section 51(b)(i) which makes for sale or hire, or sells or lets for hire, or by way of trade displays or offers for sale or hire, any infringing copies of the work. The proviso, crucially, exempts from the definition importation of a single infringing copy for “the private and domestic use of the importer”. As noted earlier, importation of a copy into India, in contravention of the Act — for instance, without the license, or authorization of the copyright owner, is an infringement; such copy is an infringing copy under Section 2(m).” D (emphasis in original)

127Copy pinpoint127. Thus, the Single Judge concluded: “67. The express indication in Section 14(a)(ii) that a copyright owner of literary works cannot exercise domain over copies in circulation, shows that exhaustion, if one may term it, applies only in relation to the class of copyrights in Section 14(a) and to the extent specified in clause (ii). Thus, the copyright owner of a literary work, cannot dictate how and under what conditions a copy can be re-sold, once it is “circulated”. This limited “exhaustion” negates the applicability of the principle in regard to other classes of copyrights. Thus, Parliament having intervened in one category of copyrights to grant a limited kind of “exhaustion” and consciously chosen not to extend it to others, sleight of judicial reasoning cannot extend its application…”

128Copy pinpoint128. However, the learned Additional Solicitor General relied upon the judgment of another learned Single Judge of the High Court of Delhi who had occasion to consider the aforesaid doctrine in John Wiley & Sons Inc. v. Prabhat Chander Kumar Jain, IA No. 11331/2008 in CS(OS) No. 1960/2008 reported in 2010 SCC OnLine Del 2000. The case involved the sale of low-priced editions of books meant for the Indian market in foreign territories, contrary to the terms prescribed by H

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A the copyright licence. After referring to a number of authorities, the learned Single Judge held: “68. The legal propositions which emanate from this discussion are as under: a) That the court will measure the infringement of the copyright from the rights of the owner of the copyright when the owner is before the court for violation of its rights. b) That the rights of the owner may be broader than the limited rights of the exclusive licencee, although the exclusive licencee has the independent right to sue for infringement of the copyright. c) The rights of the owner and exclusive licencee may not be the same and the rights of the exclusive licensee shall also be subject to the fetters imposed by the agreement between the licensor and licencee. D

69. Applying these principles to the present case, it can be seen that the plaintiff no. 1, 3 and 5 are the worldwide owners of the books and their copyright as mentioned and averred in the plaint. The plaintiff nos. 2, 4 and 6 are the exclusive licensees licensed to publish the said books in India and other territories. The plaintiffs’ E grievance is that Defendant no. 3 Technischer Overseas Pvt. Ltd. which is a bookseller in Delhi is purchasing the said Low Price Editions of the books meant for the Indian market and the territories defined from the plaintiffs no. 2, 4, 6 and is offering the said low prize books from the websites www.alibris.com, www.biblio.com F to territories outside the prescribed ones on the book is infringing the copyright of the plaintiffs.

70. The said acts of the defendants of purchase of the books from the exclusive licensees/licensees are legitimate in nature and do not hinder or take away anyone’s rights including the rights of exclusive licensees/licensee. But once the said defendant no. 3 G offers for sale the books or publications (which are fettered by territorial restrictions purchased from exclusive licensees) and puts them into circulation by selling or offering for sale or by taking orders for sale to the territories beyond the ones for which permission has been granted by the owners of the copyright, the said acts are prima facie tantamount to putting into circulation or

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issuance of copies not being in circulation in other territories where the right to do so is of the owner to exercise and violates the rights of the owner of the copyright under Section 14 read with Section 51 of the Act, if not the rights of the exclusive licensee. In other words, the said acts of selling the books from India or offering for sale from India through website and thereafter accepting the money and couriering the books to an unauthorized territory will violate the right of the owners of the copyright which are plaintiff no. 1, 3, 5 to issue the copies to the public not already in circulation (not of exclusive licensees) and thus will, prima facie, infringe their copyright. xxx xxx xxx C

79. The said position of the licensee is equally applicable in cases of computer software and is seen in normal course when anyone purchases the software. Computer software are mostly licensed and are sold and distributed with their own conditions and limitations. The purchasers of the said computer software either from the owner or from the licensee is aware of the arrangement or license agreement that the said computer software for instance is meant for single user or multiple usage. The said purchaser is within notice while making purchase of the said software and is thus bound by the said conditions of the license. Once the said purchaser violates the condition of the said license, he/she becomes liable for infringement of copyright of the owner.

80. Likewise is the case with the books in the present matter. Once the defendants purchase the Low Price Editions books of the plaintiffs from their exclusive licensee, they are conscious of the fact that the said editions are subject to territorial restrictions which are meant to be sold within the limited territories only. The notice on the book itself gives knowledge to the purchaser about the said territorial restriction. The said knowledge is also evident when the defendant themselves offer the same books to the customers outside the territories while representing that “it is an international edition in paperback. The contents are identical to the American Edition, word for word. The ISBN differs from the American Edition and the book is in black and white but the contents are completely same as the American Edition at a great price.”” H

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129Copy pinpoint129. The learned Single Judge then embarked upon a discussion of the doctrine of first sale/principle of exhaustion, finding the absence of an express provision in the Copyright Act recognising international exhaustion, and summed up its impact in the context of the facts before him as follows: B “100. a) At the outset, again, I would like to reiterate the three propositions a) the meaning of copyright has been defined under Section 14 of the Copyright Act as is clear from the opening words of the Section; b) The rights of the owner have to be looked into as per Section 51 of the Act while measuring infringement; c) The rights of the owner may be broader than that of the licensee. C In the present case, the first sale has been effected by the exclusive licensees plaintiff nos. 2, 4, 6 and their rights are limited and are subject to the conditions and limitations imposed by the agreement. That being so, the applicability of the first sale doctrine qua the sales effected by the exclusive licensee to the defendants will at D best exhaust the rights of the exclusive licensees to complain and not the rights of the owner. The right of the owner to complain for remaining infringement in unauthorised territories for violation of the permission granted and violation of the rights will remain intact. Thus, the applicability of first sale doctrine will partially exhaust the rights of the licencee and not of the owner of the copyright E i.e. plaintiff nos. 1, 3 and 5. xxx xxx xxx

104. The discussion makes it apparent that the learned single judge has doubted the mode of the applicability of the first sales doctrine in India as per the existing law. The same may lead to partial or regional exhaustion or international exhaustion. As per my opinion, as the express provision for international exhaustion is absent in our Indian law, it would be appropriate to confine the applicability of the same to regional exhaustion. Be that as it may, in the present case, the circumstances do not even otherwise warrant this discussion as the rights if at all are exhausted are to the extent to which they are available with the licensees as the books are purchased from the exclusive licensees who have limited rights and not from the owner. In these circumstances, the question of exhaustion of rights of owner in the copyright does not arise at all.”

130Copy pinpoint130. Thus, since copies of the low-priced editions could not be said to be “copies already in circulation” in the foreign territories that

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they were resold in, the learned Single Judge concluded that the principle of exhaustion would not apply. On the other hand, in the facts of the appeals before us, the distributors resell shrink-wrapped copies of the computer programmes that are already put in circulation by foreign, non- resident suppliers/manufacturers, since they have been sold and imported into India via distribution agreements, and are thus not hit by section B 14(a)(ii) of the Copyright Act. This is made clear by the explanation to section 14 of the Copyright Act, which states as follows: “Explanation.—For the purposes of this section, a copy which has been sold once shall be deemed to be a copy already in circulation.” C

131Copy pinpoint131. In UsedSoft GmbH v. Oracle International Corp. (Case C-128/11) [“UsedSoft v. Oracle (ECJ)”], the European Court of Justice [“ECJ”] was concerned with Article 4 of Directive 2001/29/EC of the European Parliament and of the Council of 22 May 2001 on the harmonisation of certain aspects of copyright and related rights in the information society [“EC Directive 2001/29”], which provides as follows: “Article 4 Distribution right

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

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

132Copy pinpoint132. Coming to Article 4(2) of EC Directive 2001/29, the ECJ posed a question, thus: “35. By its second question, which should be addressed first, the G referring court essentially seeks to know whether and under what conditions the downloading from the internet of a copy of a computer program, authorised by the copyright holder, can give rise to exhaustion of the right of distribution of that copy in the European Union within the meaning of Article 4(2) of Directive 2009/24. H

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A 36. It should be recalled that under Article 4(2) of Directive 2009/ 24 the first sale in the European Union of a copy of a computer program by the rightholder or with his consent exhausts the distribution right within the European Union of that copy.

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

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

133Copy pinpoint133. Concluding that the transfer of a copy of a computer programme, accompanied by the conclusion of an EULA constituted a “first sale… of a copy of a program” within the meaning of Article 4(2) of EC Directive 2001/29 (see paragraph 48), the ECJ then went on to describe the principle of exhaustion as follows:

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

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

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

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

134Copy pinpoint134. The ECJ concluded that the copyright owner exhausts his distribution right in copies of a computer programme upon making the first sale, provided that the copy is made unusable by the first acquirer, as follows: D

“78. Admittedly, as stated in paragraph 70 above, the original acquirer of a tangible or intangible copy of a computer program for which the copyright holder’s distribution right is exhausted in accordance with Article 4(2) of Directive 2009/24 who resells that copy must, in order to avoid infringing that rightholder’s E exclusive right of reproduction of his computer program under Article 4(1)(a) of Directive 2009/24, make the copy downloaded onto his computer unusable at the time of its resale.

79. As Oracle rightly observes, ascertaining whether such a copy has been made unusable may prove difficult. However, a copyright F holder who distributes copies of a computer program on a material medium such as a CD ROM or DVD is faced with the same problem, since it is only with great difficulty that he can make sure that the original acquirer has not made copies of the program which he will continue to use after selling his material medium. To G solve that problem, it is permissible for the distributor — whether ‘classic’ or ‘digital’ — to make use of technical protective measures such as product keys.

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

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A right is exhausted under Article 4(2) of Directive 2009/24, it must be concluded that a second acquirer of that copy and any subsequent acquirer are ‘lawful acquirers’ of it within the meaning of Article 5(1) of Directive 2009/24.

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

135Copy pinpoint135. The learned Additional Solicitor General, however, strongly relied upon the decision of the United States Court of Appeals for the Ninth Circuit in Vernor v. Autodesk, Inc., 621 F.3d 1102 (9th Cir. 2010), wherein it dealt with the doctrine of first sale/principle of exhaustion. The facts of the case were set out as follows: D “A. Autodesk’s Release 14 software and licensing practices The material facts are not in dispute. Autodesk makes computer- aided design software used by architects, engineers, and manufacturers. It has more than nine million customers. It first released its Auto CAD software in 1982. It holds registered copyrights in all versions of the software including the discontinued Release 14 version, which is at issue in this case. It provided Release 14 to customers on CD-ROMs. Since at least 1986, Autodesk has offered Auto CAD to customers pursuant to an accompanying software license agreement (“SLA”), which customers must accept before installing the software. A customer who does not accept the SLA can return the software for a full refund. Autodesk offers SLAs with different terms for commercial, educational institution[s], and student users. G The commercial license, which is the most expensive, imposes the fewest restrictions on users and allows them software upgrades at discounted prices. The SLA for Release 14 first recites that Autodesk retains title to all copies. Second, it states that the customer has a nonexclusive and nontransferable license to use Release 14. Third, it imposes

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transfer restrictions, prohibiting customers from renting, leasing, or transferring the software without Autodesk’s prior consent and from electronically or physically transferring the software out of the Western Hemisphere. Fourth, it imposes significant use restrictions: YOU MAY NOT: (1) modify, translate, reverse engineer, decompile, or disassemble the Software … (3) remove any proprietary notices, labels, or marks from the Software or Documentation; (4) use the Software outside of the Western Hemisphere; (5) utilize any computer software or hardware designed to defeat any hardware copy-protection device, should the software you have licensed be equipped with such protection; or (6) use the Software for commercial or other revenue- generating purposes if the Software has been licensed or labeled for educational use only. Fifth, the SLA provides for license termination if the user copies the software without authorization or does not comply with the D SLA’s restrictions. Finally, the SLA provides that if the software is an upgrade of a previous version: [Y]ou must destroy the software previously licensed to you, including any copies resident on your hard disk drive $ within sixty (60) days of the purchase of the license to use the upgrade or update$ Autodesk reserves the right to require you to show satisfactory proof that previous copies of the software have been destroyed. Autodesk takes measures to enforce these license requirements. It assigns a serial number to each copy of AutoCAD and tracks registered licensees. It requires customers to input “activation codes” within one month after installation to continue using the software.1 The customer obtains the code by providing the product’s serial number to Autodesk. Autodesk issues the activation code after confirming that the serial number is authentic, the copy is not registered to a different customer, and the product has not been upgraded. Once a customer has an activation code, he or she may use it to activate the software on additional computers without notifying Autodesk.”’ (pages 1104-1105) H

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136Copy pinpoint136. The Court noted that the application of the doctrine turned on the following question: “This case requires us to decide whether Autodesk sold Release 14 copies to its customers or licensed the copies to its customers. If CTA owned its copies of Release 14, then both its sales to B Vernor and Vernor’s subsequent sales were non-infringing under the first sale doctrine. However, if Autodesk only licensed CTA to use copies of Release 14, then CTA’s and Vernor’s sales of those copies are not protected by the first sale doctrine and would therefore infringe Autodesk’s exclusive distribution right.” C (page 1107) (emphasis supplied)

137Copy pinpoint137. On these facts, the doctrine of first sale/principle of exhaustion, as applicable in USA, was set out as follows:

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a particular copy” of a copyrighted work to sell or dispose of his A copy without the copyright owner’s authorization. (Id. § 109(a) (enacted 1976)). The first sale doctrine does not apply to a person who possesses a copy of the copyrighted work without owning it, such as a licensee. See id. § 109(d); cf. Quality King Distribs., Inc. v. L’Anza Research Int’l Inc., 523 U.S. 135, 146-47 (1998) B (“[T]he first sale doctrine would not provide a defense to $ any non-owner such as a bailee, a licensee, a consignee, or one whose possession of the copy was unlawful.”).” (pages 1107-1108)

138Copy pinpoint138. Given the restrictions specifically imposed by the software C licence agreement in the facts of the case, the Court held that the copyright owner retained the title to the copies of the software, and thus the resale of such copies violated the distribution right of the copyright owner, as follows: “B. Analysis D We hold today that a software user is a licensee rather than an owner of a copy where the copyright owner (1) specifies that the user is granted a license; (2) significantly restricts the user’s ability to transfer the software; and (3) imposes notable use restrictions.12 Applying our holding to Autodesk’s SLA, we conclude that CTA E was a licensee rather than an owner of copies of Release 14 and thus was not entitled to invoke the first sale doctrine or the essential step defense. Autodesk retained title to the software and imposed significant transfer restrictions: it stated that the license is non-transferable, the software could not be transferred or leased without Autodesk’s written consent, and the software could not be transferred outside the Western Hemisphere. The SLA also imposed use restrictions against the use of the software outside the Western Hemisphere and against modifying, translating, or reverse-engineering the software, removing any proprietary marks from the software or documentation, or defeating any copy protection device. Furthermore, the SLA provided for termination of the license upon the licensee’s unauthorized copying or failure to comply with other license restrictions. Thus, because Autodesk reserved title to Release 14 copies and imposed significant transfer and use H

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A restrictions, we conclude that its customers are licensees of their copies of Release 14 rather than owners. CTA was a licensee rather than an “owner of a particular copy” of Release 14, and it was not entitled to resell its Release 14 copies to Vernor under the first sale doctrine. 17 U.S.C. § 109(a). B Therefore, Vernor did not receive title to the copies from CTA and accordingly could not pass ownership on to others. Both CTA’s and Vernor’s sales infringed Autodesk’s exclusive right to distribute copies of its work. Id. § 106(3).” (pages 1111-1112)

139Copy pinpoint139. As a result, given the conditions of the software licence agreement in the facts before it, the Court held that the doctrine of first sale would not apply, as Autodesk, the copyright owner, did not part with title to the copies of the software. On the other hand, as has been held in paragraph 52 of this judgment, the EULAs and distribution agreements that the appeals before us are concerned with, do not grant a licence in terms of section 30 of the Copyright Act, but do in fact convey title to the material object embedded with a copy of the computer software to the distributors/end-users.

140Copy pinpoint140. A conspectus of the aforesaid authorities would show that the doctrine of first sale/principle of exhaustion is dependent, in the first place, upon legislation which either recognises or refuses to recognise the doctrine (thereby continuing to vest distribution rights in the copyright owner, even beyond the first sale of the copyrighted work). Thus, for example, prior to the amendment of section 14(d)(ii) in 2012, dealing with a cinematograph film, the distribution right to sell or give on hire or offer for sale or hire, any copy of the film, would continue to vest in the copyright owner, “regardless of whether such copy ha[d] been sold or given on hire on earlier occasion”, which manifested the legislative intent against the application of the doctrine of first sale/principle of exhaustion. Post 2012, however, the balance between the copyright owner’s distribution right and the right of the purchaser to further resale, was tilted in favour of the latter, the words “regardless of whether such copy has been sold or given on hire on earlier occasion” being deleted by the amendment. Likewise, when it comes to section 14(a)(ii) of the Copyright Act, the distribution right subsists with the owner of copyright to issue copies of the work to the public, to the extent such copies are not copies already in circulation, thereby manifesting a legislative intent

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to apply the doctrine of first sale/principle of exhaustion, as has been found by the High Court of Delhi in Warner Bros. (supra).

141Copy pinpoint141. Like section 14(d)(ii) of the Copyright Act, section 14(b)(ii), has, after the 1999 Amendment, with effect from 15.01.2000, also deleted the words “regardless of whether such copy has been sold or given on hire on earlier occasions’’, thereby making it clear that the same tilt that had been made in section 14(d)(ii) of the Copyright Act vide the amendment in 2012 in favour of the purchaser, is also to be found post the 1999 Amendment, in section 14(b)(ii) of the Copyright Act.

142Copy pinpoint142. The language of section 14(b)(ii) of the Copyright Act makes it clear that it is the exclusive right of the owner to sell or to give on commercial rental or offer for sale or for commercial rental “any copy of the computer programme”. Thus, a distributor who purchases computer software in material form and resells it to an end-user cannot be said to be within the scope of the aforesaid provision. The sale or commercial rental spoken of in section 14(b)(ii) of the Copyright Act is of “any copy of a computer programme”, making it clear that the section would only apply to the making of copies of the computer programme and then selling them, i.e., reproduction of the same for sale or commercial rental.

143Copy pinpoint143. The object of section 14(b)(ii) of the Copyright Act, in the context of a computer program, is to interdict reproduction of the said computer programme and consequent transfer of the reproduced computer programme to subsequent acquirers/end-users. By way of contrast, once a book is sold, on further resale of the same book, the purchaser loses the material book altogether, as such purchaser has, for consideration, parted with the book once and for all. This may not be so in the case of a computer programme, which is why the ECJ in UsedSoft v. Oracle (ECJ) (supra) held that unless a further resale of a computer software stored on a floppy disc/CD is accompanied by the destruction of the said software on the computer of the reseller/first acquirer, the copyright owner’s rights would be easily infringed by mere reproduction thereof. This is also recognised in section 65A of the Copyright Act G which punishes the circumvention of technological protection measures, such as encryption codes, product keys etc. designed to ensure that the first acquirer’s copy is made unusable. Thus, once it is understood that the object of section 14(b)(ii) of the Copyright Act is not to interdict the sale of computer software that is “licensed” to be sold by a distributor, H

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A but that it is to prevent copies of computer software once sold being reproduced and then transferred by way of sale or otherwise, it becomes clear that any sale by the author of a computer software to a distributor for onward sale to an end-user, cannot possibly be hit by the said provision. Further, as has rightly been pointed out by Shri S. Ganesh, learned Senior Advocate appearing on behalf of Sonata Information Technology Ltd. in B C.A. Nos. 8737- 8941/2018, the distributor cannot use the computer software at all and has to pass on the said software, as shrink-wrapped by the owner, to the end-user for a consideration, the distributor’s profit margin being that of an intermediary who merely resells the same product to the end-user.

144Copy pinpoint144. For all these reasons, we cannot accede to the argument made by the learned Additional Solicitor General that the distribution of copyrighted computer software, on the facts of the appeals before us, would constitute the grant of an interest in copyright under section 14(b)(ii) of the Copyright Act, thus necessitating the deduction of tax at source D under section 195 of the Income Tax Act. INTERPRETATION OF TREATIES, OECD COMMENTARY AND THE REVENUE’S OWN UNDERSTANDING

145Copy pinpoint145. The DTAAs that have been entered into by India with other E Contracting States have to be interpreted liberally with a view to implement the true intention of the parties. This Court, in Azadi Bachao Andolan (supra) put it thus: “98. In John N. Gladden v. Her Majesty the Queen [85 DTC 5188 at p. 5190] the principle of liberal interpretation of tax treaties was reiterated by the Federal Court, which observed: “Contrary to an ordinary taxing statute a tax treaty or convention must be given a liberal interpretation with a view to implementing the true intentions of the parties. A literal or legalistic interpretation must be avoided when the basic object of the treaty might be defeated or frustrated insofar as the particular item under consideration is concerned.”” “Interpretation of treaties

130. The principles adopted in interpretation of treaties are not the same as those in interpretation of a statutory legislation. While H

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commenting on the interpretation of a treaty imported into a A municipal law, Francis Bennion observes: “With indirect enactment, instead of the substantive legislation taking the well-known form of an Act of Parliament, it has the form of a treaty. In other words, the form and language found suitable for embodying an international agreement become, at the stroke of a pen, also the form and language of a municipal legislative instrument. It is rather like saying that, by Act of Parliament, a woman shall be a man. Inconveniences may ensue. One inconvenience is that the interpreter is likely to be required to cope with disorganised composition instead of precision drafting. The drafting of treaties is notoriously sloppy usually for a very good reason. To get agreement, politic uncertainty is called for. … The interpretation of a treaty imported into municipal law by indirect enactment was described by Lord Wilberforce as being ‘unconstrained by technical rules of English law, or by D English legal precedent, but conducted on broad principles of general acceptation. This echoes the optimistic dictum of Lord Widgery, C.J. that the words ‘are to be given their general meaning, general to lawyer and layman alike … the meaning of the diplomat rather than the lawyer’.” [Francis Bennion: E Statutory Interpretation, p. 461 [Butterworths, 1992 (2nd Edn.)].]

131. An important principle which needs to be kept in mind in the interpretation of the provisions of an international treaty, including one for double taxation relief, is that treaties are negotiated and entered into at a political level and have several considerations as their bases. Commenting on this aspect of the matter, David R. Davis in Principles of International Double Taxation Relief [ David R. Davis: Principles of International Double Taxation Relief, p. 4 (London, Sweet & Maxwell, 1985).], points out that the main function of a Double Taxation Avoidance Treaty should be seen in the context of aiding commercial relations between treaty partners and as being essentially a bargain between two treaty countries as to the division of tax revenues between them in respect of income falling to be taxed in both jurisdictions. It is observed (vide paragraph 1.06): H

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A “The benefits and detriments of a double tax treaty will probably only be truly reciprocal where the flow of trade and investment between treaty partners is generally in balance. Where this is not the case, the benefits of the treaty may be weighed more in favour of one treaty partner than the other, even though the provisions of the treaty are expressed in reciprocal terms. This B has been identified as occurring in relation to tax treaties between developed and developing countries, where the flow of trade and investment is largely one-way. Because treaty negotiations are largely a bargaining process with each side seeking concessions from the other, the final agreement will often represent a number of compromises, and it may be uncertain as to whether a full and sufficient quid pro quo is obtained by both sides.” And, finally, in paragraph 1.08: “Apart from the allocation of tax between the treaty partners, tax treaties can also help to resolve problems and can obtain benefits which cannot be achieved unilaterally.””

146Copy pinpoint146. Further, the House of Lords in Ostime (Inspector of Taxes) v. Australian Mutual Provident Society, [1959] AC 259 by a judgment dated 16.07.1959 remarked upon, what it termed the “international tax language” of bilateral taxation agreements, as follows: E “Bilateral agreements for regulating some of the problems of double taxation began, at any rate so far as the United Kingdom was concerned, in 1946. The form employed, which, for obvious reasons, employs similar forms and similar language in all agreements, is derived, I believe, from a set of model clauses proposed by the financial commission of the League of Nations. The aim is to provide by treaty for the tax claims of two governments, both legitimately interested in taxing a particular source of income either by resigning to one of the two the whole claim or else by prescribing the basis on which the tax claim is to be shared between them. For our purpose it is convenient to note that the language employed in this agreement is what may be called international tax language and that such categories as “enterprise,” “commercial or industrial profits” and “permanent establishment” have no exact counterpart in the taxing code of the United Kingdom.” H (page 480)

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147Copy pinpoint147. All the DTAAs with which we are concerned, have, as their A starting point, either the OECD Model Tax Convention on Income and Capital [“OECD Model Tax Convention”] and/or the United Nations Model Double Taxation Convention between Developed and Developing Countries [“UN Model Convention”] insofar as the taxation of royalty for parting with copyright is concerned. B

148Copy pinpoint148. The OECD Model Tax Convention speaks of the importance of the OECD Commentary, as follows: “2. It has long been recognised among the member countries of the Organisation for Economic Co-operation and Development that it is desirable to clarify, standardise, and confirm the fiscal situation of taxpayers who are engaged in commercial, industrial, financial, or any other activities in other countries through the application by all countries of common solutions to identical cases of double taxation. These countries have also long recognised the need to improve administrative co-operation in tax matters, notably through exchange of information and assistance in collection of taxes, for the purpose of preventing tax evasion and avoidance.

3. These are the main purposes of the OECD Model Tax Convention on Income and on Capital, which provides a means of settling on a uniform basis the most common problems that arise in the field of international juridical double taxation. As recommended by the Council of OECD, member countries, when concluding or revising bilateral conventions, should conform to this Model Convention as interpreted by the Commentaries thereon and having regard to the reservations contained therein and their tax authorities should follow these Commentaries, as modified from time to time and subject to their observations thereon, when applying and interpreting the provisions of their bilateral tax conventions that are based on the Model Convention.” “29.2 Similarly, taxpayers make extensive use of the Commentaries in conducting their businesses and planning their business transactions and investments. The Commentaries are of particular importance in countries that do not have a procedure for obtaining an advance ruling on tax matters from the tax administration as the Commentaries may be the only available source of interpretation in that case.” (OECD Model Tax Convention 2017 - Condensed Version) (emphasis supplied) H

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149Copy pinpoint149. The OECD Model Tax Convention, in Article 12 thereof, defines the term “royalties” as follows: “Article 12 ROYALTIES B xxx xxx xxx

2. The term “royalties” as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, C plan, secret formula or process, or for information concerning industrial, commercial or scientific experience.”

150Copy pinpoint150. When the definition of “royalties” is seen in all the DTAAs that we are concerned with, it is found that “royalties” is defined in a manner either identical with or similar to the definition contained in Article D 12 of the OECD Model Tax Convention. This being the case, the OECD Commentary on the provisions of the OECD Model Tax Convention then becomes relevant. The OECD Commentary has been referred to and relied upon in several earlier judgments. See: i. Union of India v. Azadi Bachao Andolan, (2004) 10 SCC 1 at pages 42-43; E ii. Formula One World Championship Ltd. v. CIT, (2017) 15 SCC 602 at pages 629-630; and iii. CIT v. E-Funds IT Solution Inc., (2018) 13 SCC 294 at pages 322-323.

151Copy pinpoint151. The importance of the OECD Commentary, when it comes to DTAAs, was also underscored by the High Court of Australia in Thiel v. Federal Commissioner of Taxation, High Court of Australia, [1990] 94 ALR 647, which put it thus: “Article 31 of the Vienna Convention provides that a treaty is to be interpreted “in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose’’. The context includes, in addition to the text, any instrument which was made by one or more parties in connection with the conclusion of the treaty and accepted by the other parties as an instrument related to the treaty.

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For my part, I do not see why the OECD model convention and commentaries should not be regarded as having been made in connection with and accepted by the parties to a bilateral treaty subsequently concluded in accordance with the framework of the model. However, some doubts have been expressed about the applicability, as a matter of language, of Art. 31 to the commentaries in the case of a bilateral treaty such as a double taxation agreement: see Jones et al., “The Interpretation of Tax Treaties with Particular Reference to Article 3(2) of the OECD Model-II’’, (1984) British Tax Review 90 at p. 92. I turn, therefore, to Art. 32 of the Vienna Convention which allows recourse to be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of Art. 31, or to determine the meaning when the interpretation according to Art. 31 leaves the meaning ambiguous or obscure or leads to a result which is manifestly absurd or unreasonable. Whilst the model convention and commentaries may not strictly amount to work preparatory to the double taxation agreement between Australia and Switzerland, they are documents which form the basis for the conclusion of bilateral double taxation agreements of the kind in question and, as with treaties in pari materia, provide a guide to the current usage of terms by the parties. They are, therefore, a supplementary means of interpretation to which recourse may be had under Art. 32 of the Vienna Convention.”47 (Concurring Opinion of Dawson J., pages 653-654) F “The Agreement is a treaty and is to be interpreted in accordance with the rules of interpretation recognised by international lawyers: Shipping Corporation of India Ltd. v. Gamlen Chemical Co. (A/Asia) Pty. Ltd. (1980) 147 C.L.R. 142 at p. 159. Those rules have now been codified by the Vienna Convention on the Law of Treaties to which Australia, but not Switzerland, is a party. G

47 This Court, in Ram Jethmalani v. Union of India, (2011) 8 SCC 1, noted that though India is not a party to the Vienna Convention on the Law of Treaties, the principles of international law and the principle of interpretation contained in Article 31 thereof provide broad guidelines to interpret treaties in the Indian context also. (See paragraph 69). H

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A Nevertheless, because the interpretation provisions of the Vienna Convention reflect the customary rules for the interpretation of treaties, it is proper to have regard to the terms of the Convention in interpreting the Agreement, even though Switzerland is not a party to that Convention: Fothergill v. Monarch Airlines Ltd. (1981) A.C. 251 at pp. 276, 282, 290; Commonwealth v. Tasmania B (the Tasmanian Dam case) (1983) 158 C.L.R. 1 at p. 222; Golder case (1975) 57 I.L.R. 201 at pp. 213-214. Article 31 of the Convention requires a treaty to be interpreted in accordance with the ordinary meaning to be given to its terms “in their context and in the light of its object and purpose’’. The context includes the preamble and annexes to the treaty: Art. 31(2). Recourse may also be had to “supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion’’ to confirm the meaning resulting from the application of Art. 31 or to determine the meaning of the treaty when interpretation according to Art. 31 leaves its meaning obscure or ambiguous or leads to a result which is manifestly absurd or unreasonable: Art. 32. The Agreement is one “for the avoidance of double taxation with respect to taxes on income’’. Accordingly, it is necessary to interpret the words of the Agreement with that particular purpose in mind. Moreover, the term “enterprise’’ in Art. 3 and 7 of the Agreement is ambiguous because, on the one hand, it can mean a project or activity undertaken and, on the other hand, it can mean a framework for making and carrying out decisions in respect of activities and projects. Consequently, it is proper to have regard to any “supplementary means of interpretation’’ in interpreting the Agreement. In this case, the “supplementary means of interpretation’’ are the 1977 OECD Model Convention for the Avoidance of Double Taxation with respect to Taxes on Income and on Capital, which was the model for the Agreement, and a commentary issued by the OECD in relation to that model convention. But before referring to those two documents, it is necessary to describe the Agreement in more detail.” (Concurring Opinion of McHugh J., pages 658-659)

152Copy pinpoint152. The OECD Commentary on royalty payments under Article H 12 is instructive, and states as follows :

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“12. Whether payments received as consideration for computer software may be classified as royalties poses difficult problems but is a matter of considerable importance in view of the rapid development of computer technology in recent years and the extent of transfers of such technology across national borders. In 1992, the Commentary was amended to describe the principles by which such classification should be made. Paragraphs 12 to 17 were further amended in 2000 to refine the analysis by which business profits are distinguished from royalties in computer software transactions. In most cases, the revised analysis will not result in a different outcome. 12.1 Software may be described as a program, or series of programs, containing instructions for a computer required either for the operational processes of the computer itself (operational software) or for the accomplishment of other tasks (application software). It can be transferred through a variety of media, for example in writing or electronically, on a magnetic tape or disk, or on a laser disk or CD-Rom. It may be standardised with a wide range of applications or be tailor-made for single users. It can be transferred as an integral part of computer hardware or in an independent form available for use on a variety of hardware. 12.2 The character of payments received in transactions involving the transfer of computer software depends on the nature of the rights that the transferee acquires under the particular arrangement regarding the use and exploitation of the program. The rights in computer programs are a form of intellectual property. Research into the practices of OECD member countries has established that all but one protect rights in computer programs either explicitly or implicitly under copyright law. Although the term “computer software” is commonly used to describe both the program — in which the intellectual property rights (copyright) subsist — and the medium on which it is embodied, the copyright law of most OECD member countries recognises a distinction between the copyright in the program and software which incorporates a copy of the copyrighted program. Transfers of rights in relation to software occur in many different ways ranging from the alienation of the entire rights in the copyright in a program to the sale of a product which is subject to restrictions on the use to which it is put. The consideration paid can also take numerous forms. These H

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A factors may make it difficult to determine where the boundary lies between software payments that are properly to be regarded as royalties and other types of payment. The difficulty of determination is compounded by the ease of reproduction of computer software, and by the fact that acquisition of software frequently entails the making of a copy by the acquirer in order to B make possible the operation of the software.

13. The transferee’s rights will in most cases consist of partial rights or complete rights in the underlying copyright (see paragraphs 13.1 and 15 below), or they may be (or be equivalent to) partial or complete rights in a copy of the program (the “program copy”), C whether or not such copy is embodied in a material medium or provided electronically (see paragraphs 14 to 14.2 below). In unusual cases, the transaction may represent a transfer of “know- how” or secret formula (paragraph 14.3). 13.1 Payments made for the acquisition of partial rights in the copyright (without the transferor fully alienating the copyright rights) will represent a royalty where the consideration is for granting of rights to use the program in a manner that would, without such license, constitute an infringement of copyright. Examples of such arrangements include licenses to reproduce and distribute to the public software incorporating the copyrighted program, or to modify and publicly display the program. In these circumstances, the payments are for the right to use the copyright in the program (i.e. to exploit the rights that would otherwise be the sole prerogative of the copyright holder). It should be noted that where a software payment is properly to be regarded as a F royalty there may be difficulties in applying the copyright provisions of the Article to software payments since paragraph 2 requires that software be classified as a literary, artistic or scientific work. None of these categories seems entirely apt. The copyright laws of many countries deal with this problem by specifically classifying software as a literary or scientific work. For other countries treatment as a scientific work might be the most realistic approach. Countries for which it is not possible to attach software to any of those categories might be justified in adopting in their bilateral treaties an amended version of paragraph 2 which either omits all references to the nature of the copyrights or refers specifically to software.

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14. In other types of transactions, the rights acquired in relation to the copyright are limited to those necessary to enable the user to operate the program, for example, where the transferee is granted limited rights to reproduce the program. This would be the common situation in transactions for the acquisition of a program copy. The rights transferred in these cases are specific to the nature of computer programs. They allow the user to copy the program, for example onto the user’s computer hard drive or for archival purposes. In this context, it is important to note that the protection afforded in relation to computer programs under copyright law may differ from country to country. In some countries the act of copying the program onto the hard drive or random access memory of a computer would, without a license, constitute a breach of copyright. However, the copyright laws of many countries automatically grant this right to the owner of software which incorporates a computer program. Regardless of whether this right is granted under law or under a license agreement with the copyright holder, copying the program onto the computer’s hard drive or random access memory or making an archival copy is an essential step in utilising the program. Therefore, rights in relation to these acts of copying, where they do no more than enable the effective operation of the program by the user, should be disregarded in analysing the character of the transaction for tax purposes. Payments in these types of transactions would be dealt with as commercial income in accordance with Article 7. 14.1 The method of transferring the computer program to the transferee is not relevant. For example, it does not matter whether the transferee acquires a computer disk containing a copy of the program or directly receives a copy on the hard disk of her computer via a modem connection. It is also of no relevance that there may be restrictions on the use to which the transferee can put the software. G 14.2 The ease of reproducing computer programs has resulted in distribution arrangements in which the transferee obtains rights to make multiple copies of the program for operation only within its own business. Such arrangements are commonly referred to as “site licences”, “enterprise licenses”, or “network licences”. H

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A Although these arrangements permit the making of multiple copies of the program, such rights are generally limited to those necessary for the purpose of enabling the operation of the program on the licensee’s computers or network, and reproduction for any other purpose is not permitted under the license. Payments under such arrangements will in most cases be dealt with as business profits in accordance with Article 7. 14.3 Another type of transaction involving the transfer of computer software is the more unusual case where a software house or computer programmer agrees to supply information about the ideas and principles underlying the program, such as logic, algorithms or programming languages or techniques. In these cases, the payments may be characterised as royalties to the extent that they represent consideration for the use of, or the right to use, secret formulas or for information concerning industrial, commercial or scientific experience which cannot be separately copyrighted. This contrasts with the ordinary case in which a program copy is acquired for operation by the end user. 14.4 Arrangements between a software copyright holder and a distribution intermediary frequently will grant to the distribution intermediary the right to distribute copies of the program without the right to reproduce that program. In these transactions, the rights acquired in relation to the copyright are limited to those necessary for the commercial intermediary to distribute copies of the software program. In such transactions, distributors are paying only for the acquisition of the software copies and not to exploit any right in the software copyrights. Thus, in a transaction where F a distributor makes payments to acquire and distribute software copies (without the right to reproduce the software), the rights in relation to these acts of distribution should be disregarded in analysing the character of the transaction for tax purposes. Payments in these types of transactions would be dealt with as G business profits in accordance with Article 7. This would be the case regardless of whether the copies being distributed are delivered on tangible media or are distributed electronically (without the distributor having the right to reproduce the software), or whether the software is subject to minor customisation for the purposes of its installation. H

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15. Where consideration is paid for the transfer of the full ownership of the rights in the copyright, the payment cannot represent a royalty and the provisions of the Article are not applicable. Difficulties can arise where there is a transfer of rights involving: — exclusive right of use of the copyright during a specific period or in a limited geographical area; — additional consideration related to usage; — consideration in the form of a substantial lump sum payment.

16. Each case will depend on its particular facts but in general if the payment is in consideration for the transfer of rights that constitute a distinct and specific property (which is more likely in the case of geographically-limited than time limited rights), such payments are likely to be business profits within Article 7 or a capital gain within Article 13 rather than royalties within Article

12. That follows from the fact that where the ownership of rights has been alienated, the consideration cannot be for the use of the rights. The essential character of the transaction as an alienation cannot be altered by the form of the consideration, the payment of the consideration in instalments or, in the view of most countries, by the fact that the payments are related to a contingency.

17. Software payments may be made under mixed contracts. E Examples of such contracts include sales of computer hardware with built-in software and concessions of the right to use software combined with the provision of services. The methods set out in paragraph 11 above for dealing with similar problems in relation to patent royalties and know-how are equally applicable to F computer software. Where necessary the total amount of the consideration payable under a contract should be broken down on the basis of the information contained in the contract or by means of a reasonable apportionment with the appropriate tax treatment being applied to each apportioned part.” (emphasis supplied) G

153Copy pinpoint153. However, the learned Additional Solicitor General has taken us through the positions taken by India (in the capacity of an OECD non-member) with regard to Article 12 of the OECD Model Tax Convention and the OECD Commentary, first in 2008, reiterated in 2014 and 2017, as follows: H

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A “4.1 India reserves the right to: tax royalties and fees for technical services at source; define these, particularly by reference to its domestic law; define the source of such payments, which may extend beyond the source defined in paragraph 5 of Article 11, and modify paragraphs 3 and 4 accordingly.” B “17. India reserves its position on the interpretations provided in paragraphs 8.2, 10.1, 10.2, 14, 14.1, 14.2, 14.4, 15, 16 and 17.3; it is of the view that some of the payments referred to may constitute royalties” (Positions on Article 12, OECD Commentary 2014)

154Copy pinpoint154. From these positions taken, which use the language “reserves the right to” and “is of the view that some of the payments referred to may constitute royalties”, it is not at all clear as to what exactly the nature of these positions are. This may be contrasted with the categorical language used by India in its positions taken with respect to other aspects D (“India does not agree to”), as follows: “18. India does not agree with the interpretation that information concerning industrial, commercial or scientific experience is confined to only previous experience.” “20. India does not agree with the interpretation in paragraph 9.1 E of the Commentary on Article 12 according to which a payment for transponder leasing will not constitute royalty. This notion is contrary to the Indian position that income from transponder leasing constitutes an equipment royalty taxable both under India’s domestic law and its treaties with many countries. It is also contrary to India’s position that a payment for the use of a transponder is a payment for the use of a process resulting in a royalty under Article

12. India also does not agree with the conclusion included in the paragraph concerning undersea cables and pipelines as it considers that undersea cables and pipelines are industrial, commercial or scientific equipment and that payments made for their use constitute equipment royalties.

21. India does not agree with the interpretation in paragraph 9.2 of the Commentary on Article 12. It considers that a roaming call constitutes the use of a process. Accordingly, the payment made for the use of that process constitutes a royalty for the purposes of Article 12. It is also the position of India that a payment for a

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roaming call constitutes a royalty since it is a payment for the use of industrial, commercial or scientific equipment.

22. India does not agree with the interpretation in paragraph 9.3 of the Commentary on Article 12. It considers that a payment for spectrum license constitutes a royalty taxable both under India’s domestic law and its treaties with many countries.” B (Positions on Article 12, OECD Commentary 2014)

155Copy pinpoint155. In Director of Income Tax v. New Skies Satellite BV, (2016) 382 ITR 114 [“New Skies Satellite”], a Division Bench of the High Court of Delhi correctly observed that mere positions taken with respect to the OECD Commentary do not alter the DTAA’s C provisions, unless it is actually amended by way of bilateral re-negotiation. This was put thus: “68. On a final note, India’s change in position to the OECD Commentary cannot be a fact that influences the interpretation of the words defining royalty as they stand today. The only manner in which such change in position can be relevant is if such change is incorporated into the agreement itself and not otherwise. A change in executive position cannot bring about a unilateral legislative amendment into a treaty concluded between two sovereign states. It is fallacious to assume that any change made to domestic law to rectify a situation of mistaken interpretation can spontaneously further their case in an international treaty. Therefore, mere amendment to Section 9(1)(vi) cannot result in a change. It is imperative that such amendment is brought about in the agreement as well. Any attempt short of this, even if it is evidence of the State’s discomfort at letting data broadcast revenues slip by, will be insufficient to persuade this Court to hold that such amendments are applicable to the DTAAs.” (emphasis in original)

156Copy pinpoint156. It is significant to note that after India took such positions qua the OECD Commentary, no bilateral amendment was made by India and the other Contracting States to change the definition of royalties contained in any of the DTAAs that we are concerned with in these appeals, in accordance with its position. As a matter of fact, DTAAs that were amended subsequently, such as the Convention between the Republic of India and the Kingdom of Morocco for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to H

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A Taxes On Income,48 [“India-Morocco DTAA”], which was amended on 22.10.2019,49 incorporated a definition of royalties, not very different from the definition contained in the OECD Model Tax Convention, as follows: “The term “royalties” as used in this Article means: B (a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work, including cinematograph films or recordings on any means of reproduction for use for radio or television broadcasting, any patent, trade mark, design or model, plan, computer software C programme, secret formula or process, or for information concerning industrial, commercial or scientific experience; and (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment” D (Article 12.3)

157Copy pinpoint157. Similarly, though the India-Singapore DTAA came into force on 08.08.1994, it has been amended several times, including on 01.09.2011,50 and 23.03.2017.51 However, the definition of “royalties” has been retained without any changes. Likewise, the Convention between E the Government of the Republic of India and the Government of Mauritius for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital Gains and for the Encouragement of Mutual Trade and Investment,52 [“India-Mauritius DTAA”] was entered into on 06.12.1983, and was amended subsequently on 10.08.2016,53 without making any change to the definition of F “royalties”.

158Copy pinpoint158. It is thus clear that the OECD Commentary on Article 12 of the OECD Model Tax Convention, incorporated in the DTAAs in the cases before us, will continue to have persuasive value as to the interpretation of the term “royalties” contained therein. G 48 Notification : No. GSR 245(E), dated 15-3-2000. 49 Amended by Notification No. S.O. 3789(E) [No.84/2019/F.No.503/09/2009-FTD- II], Dated 22-10-2019. 50 Notification No. S.O. 2031(E). 51 Notification No. S.O. 935(E). 52 Notification No. GSR 920(E). H 53 Notification No. S.O. 2680(E) (No.68/2016 (F.No.500/3/2012-FTD-II).

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159Copy pinpoint159. Viewed from another angle, persons who pay TDS and/or assessees in the nations governed by a DTAA have a right to know exactly where they stand in respect of the treaty provisions that govern them. Such persons and/or assessees can thus place reliance upon the OECD Commentary for provisions of the OECD Model Tax Convention, which are used without any substantial change by bilateral DTAAs, in the absence of judgments of municipal courts clarifying the same, or in the event of conflicting municipal decisions. From this point of view also, the OECD Commentary is significant, as the Contracting States to which the persons deducting tax/assessees belong, can conclude business transactions on the basis that they are to be taxed either on income by way of royalties for parting with copyright, or income derived from licence agreements which is then taxed as business profits depending on the existence of a PE in the Contracting State.

160Copy pinpoint160. The learned Additional Solicitor General, however, relied upon the HPC Report 2003 and the E-Commerce Report 2016. The HPC Report 2003, noting the various characterisation issues in relation to e- D commerce payments, recommended as follows: “...The Committee also recommends that a clear position on each category of transactions should be taken by the Central Board of Direct Taxes (“CBDT”). This will ensure uniformity of approach among all the assessing officers. Since new categories of transactions are likely to emerge at a fast pace with advances in technology, it is also recommended that the CBDT should closely monitor the developments and issue guidelines to the assessing officers on new emerging categories of transactions as a continuing process. The monitoring should be through an expert advisory body on which the tax administration, the profession and the concerned industry is represented.” (pages 146-147)

161Copy pinpoint161. The E-Commerce Report 2016 proposed an equalization levy to be chargeable on specified digital services (see paragraph 11.2) G and noted that its recommendation to impose a withholding tax on digital transactions would require an express inclusion in tax treaties in order to be feasible, as follows: “108. After taking cognizance of these observations, the Committee considers that the option of “withholding tax” offers a H

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A practical way of allocating partial taxing rights in respect of income from digital economy, which shares attributes that may be similar to royalty or fee for technical services, and which can be complied in respect of B2B transactions by the process of withholding. However, such a tax on income would be feasible only if it is included in the tax treaties, which take precedence over Indian B domestic laws, unless it is designed as a tax on the gross payment.” (emphasis supplied)

162Copy pinpoint162. These reports also do not carry the matter much further as they are recommendatory reports expressing the views of the committee C members, which the Government of India may accept or reject. When it comes to DTAA provisions, even if the position put forth in the aforementioned reports were to be accepted, a DTAA would have to be bilaterally amended before any such recommendation can become law in force for the purposes of the Income Tax Act.

163Copy pinpoint163. The learned Additional Solicitor General also sought to rely on a decision of the Audiencia Nacional (Spanish National Court) in Case No. 207019/1990 dated 28.02.1995 and a decision of the Tribunal Supremo (Spanish Supreme Court) in Case No. 8066/1994 dated 02.10.1999. Quite apart from the fact that he only presented certain extracts and not the entire judgment rendered in these cases, these authorities have no relevance to the appeals before us, having been decided on the basis of the taxation law of Spain.

164Copy pinpoint164. The learned Additional Solicitor General then referred to the judgment of this Court in Commissioner of Customs v. G.M. Exports, (2016) 1 SCC 91, and in particular on the four propositions that were culled out in the context of the levy of an anti-dumping duty in consonance with the General Agreement on Tariffs and Trade (GATT), 1994, as follows: “23. A conspectus of the aforesaid authorities would lead to the following conclusions: G (1) Article 51(c) of the Constitution of India is a directive principle of State policy which states that the State shall endeavour to foster respect for international law and treaty obligations. As a result, rules of international law which are not contrary to domestic law are followed by the courts in this H

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country. This is a situation in which there is an international treaty to which India is not a signatory or general rules of international law are made applicable. It is in this situation that if there happens to be a conflict between domestic law and international law, domestic law will prevail. (2) In a situation where India is a signatory nation to an international treaty, and a statute is passed pursuant to the said treaty, it is a legitimate aid to the construction of the provisions of such statute that are vague or ambiguous to have recourse to the terms of the treaty to resolve such ambiguity in favour of a meaning that is consistent with the provisions of the treaty. C (3) In a situation where India is a signatory nation to an international treaty, and a statute is made in furtherance of such treaty, a purposive rather than a narrow literal construction of such statute is preferred. The interpretation of such a statute should be construed on broad principles of general acceptance rather than earlier domestic precedents, being intended to carry out treaty obligations, and not to be inconsistent with them. (4) In a situation in which India is a signatory nation to an international treaty, and a statute is made to enforce a treaty obligation, and if there be any difference between the language of such statute and a corresponding provision of the treaty, the statutory language should be construed in the same sense as that of the treaty. This is for the reason that in such cases what is sought to be achieved by the international treaty is a uniform international code of law which is to be applied by the courts of all the signatory nations in a manner that leads to the same result in all the signatory nations.”

165Copy pinpoint165. The conclusions in the aforestated paragraph have no direct relevance to the facts at hand as the effect of section 90(2) of the Income Tax Act, read with explanation 4 thereof, is to treat the DTAA provisions as the law that must be followed by Indian courts, notwithstanding what may be contained in the Income Tax Act to the contrary, unless more beneficial to the assessee. For all these reasons therefore, these submissions of the learned Additional Solicitor General are rejected. H

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166Copy pinpoint166. At this juncture, it is also important to point out that vide Circular No.10/2002 dated 09.10.2002, the Revenue, after referring to section 195 of the Income Tax Act and deciding that a No Objection Certificate from the Department would not be necessary if the person making the remittance is to submit an undertaking along with the certificate of an accountant to the Reserve Bank of India [“RBI”], has B itself made a distinction in the proforma of the certificate to be issued in Annexure B to the aforesaid Circular, between remittances for royalties (see Row No. 5) and remittances for supply of articles or computer software (see Row No. 7), as follows: ANNEXURE ‘B’ C CERTIFICATE

1. Name and address of the beneficiary of the remittance and the name of theforeign country to which remittance isbeing made.

D 2. Amount of remittance is foreign currency indicating the proposed date/month and bank through whichremittance is being made.

3. Details of tax deducted at source, rate at which Foreign Indian tax has been deducted and date of deduction. Amount to be remitted ..... ..... E Tax deducted at source ..... ...... Actual Amount remitted ..... ..... Rate at which deducted ..... ..... Date of Deduction ...... .....

4. In case the remittance as indicated in F (2) above is net of taxes, whether tax payable has been grossed up? If so, computation thereof may be indicated.

5. If the remittance is for royalties, fee for technical services, interest, dividend, etc., the clause of the relevant DTAA under which the remittance is covered along with reasons and the rate at which G tax is required to be deducted in terms of such clause of the applicable DTAA.

6. In case that tax has been deducted at a rate lower than the rate prescribed under the applicable DTAA, the reasons thereof.

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7. In case remittance is for supply of articles or A things (e.g., plant, machinery, equipment, etc.) or computer software, please indicate :— i. Whether there is any permanent establishment in India through which the beneficiary of the remittance is directly or indirectly carrying on such activity of supply of articles or things? B ii. Whether such remittance is attributable to or connected with suchpermanent establishment? iii .If so, the amount of income comprised in such remittance which isliable to tax. iv. If not, the reasons in brief therefor.

8. In case remittance is on account ofbusiness C income please indicate :— i. Whether such income is liable to taxin India? ii. If so, the basis for arriving at the rateof deduction of tax. iii. If not, the reasons thereof. D

9. In case tax is not deducted at sourcefor any other reason, details thereof. (emphasis supplied)

167Copy pinpoint167. The Revenue, therefore, when referring to “royalties” under the DTAA, makes a distinction between such royalties, no doubt in the context of technical services, and remittances for supply of computer software, which is then treated as business profits, taxable under the relevant DTAA depending upon whether there is a PE through which the assessee operates in India. This is one more circumstance to show that the Revenue has itself appreciated the difference between the payment of royalty and the supply/use of computer software in the form of goods, which is then treated as business income of the assessee taxable in India if it has a PE in India. CONCLUSION

168Copy pinpoint168. Given the definition of royalties contained in Article 12 of the G DTAAs mentioned in paragraph 41 of this judgment, it is clear that there is no obligation on the persons mentioned in section 195 of the Income Tax Act to deduct tax at source, as the distribution agreements/EULAs in the facts of these cases do not create any interest or right in such distributors/end-users, which would amount to the use of or right to use H

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A any copyright. The provisions contained in the Income Tax Act (section 9(1)(vi), along with explanations 2 and 4 thereof), which deal with royalty, not being more beneficial to the assessees, have no application in the facts of these cases.

169Copy pinpoint169. Our answer to the question posed before us, is that the B amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India, as a result of which the persons referred to in section C 195 of the Income Tax Act were not liable to deduct any TDS under section 195 of the Income Tax Act. The answer to this question will apply to all four categories of cases enumerated by us in paragraph 4 of this judgment.

170Copy pinpoint170. The appeals from the impugned judgments of the High Court D of Karnataka are allowed, and the aforesaid judgments are set aside. The ruling of the AAR in Citrix Systems (AAR) (supra) is set aside. The appeals from the impugned judgments of the High Court of Delhi are dismissed.

E Devika Gujral Appeals disposed of.