CIT v. Synopsis International Old Ltd.

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The Tax Publishers2013 TaxPub(DT) 0529 (Karn-HC) : (2013) 051 (I) ITCL 0372 : (2013) 212 TAXMAN 0454 INCOME TAX ACT, 1961 --Income deemed to accrue or arise under section 9(1)(vi)Royalty Transfer of non-exclusive non-transferable software licence--S, us is the owner of the copyright. It was granted a licence to assessee. The technical licence agreement was for consideration to enable the assessee to use and commercially explost te intellectual property in Electronic Design Automation (EDA) tool and software in certain geographics in terms of aforesaid licence, the assessee in turn, has entered into End User Licence Agreement (EILA) with various customers. The agreement shown that Indian Customer has purchased a licenced product, i.e., EDA tool/software from assessee for his use as a tool on application software. The assessing officer treated the amount received by the assessee as royalty as defined under section 9(1)(vi) and thus assessee was entitled to pay tax in India. *Held:* What was transferred though the agreement was a licence to use the 'synopsys software' is a copy right owned by the assessee itself and not the copy of a copy righted article. Hence, the receipt squarely falls under the definition of royalty and therefore, taxable in India. It is no doubt true the provisions of the DTAA overrides the provisions of the Income Tax Act. In the DTAA the term 'royalty' means payments of any kind received as a consideration for the use or the right to use any copyright of literary, artistic or scientific work whereas in the Income Tax Act, royalty means consideration for the transfer of all or any rights including the granting of a licence. Therefore, under the DTAA to constitute royalty there need not be any transfer of or any rights in respect of any copyright. It is sufficient if consideration is received for use of or the right to use any copyright. Therefore, if the definition of royalty in the DTAA is taken into consideration it is not necessary there should be a transfer of any exclusive right. A mere right to use or the use of a copyright falls within the mischief of Explanation (2) to clause (v) of sub-section (1) of section 9 and is liable to tax. Therefore, we dc not see any substance in the said contention. What is a licence? [Para 39] A licence is a grant of authority to do a particular thing. It enables a person to do lawfully what he could not otherwise lawfully do. A licence does not, in law, confer a right. It only prevents that from being unlawful which, but for the licence, would be unlawful. It amounts to a consent or permission by an owner of copyright that another person should do an act which, but for that licence, would involve an infringement of the copyright of licensor. A licence gives no more than the right to do the thing actually licensed to be done. It transfers an interest to a limited extent, whereby the licensee acquires an equitable right only in the copyrighted article. [Para 40] Licences may be exclusive, or non-exclusive. Non-exclusive licence is not defined in the Act. The term 'exclusive licence' is defined in section 2, clause (j). It confers on the licensee and persons authorised by him, to the exclusion of all, other persons, including the owner of the copyright, any right comprised in the copyright in a work. A non-exclusive licence is the grant of authority to do a particular thing with no right of exclusion whatsoever. It never conveys, by itself, an interest in property. It merely enables a person to do that which he could not otherwise do, except unlawfully. [Para 41] The owner of the copyright in any existing work may grant any interest in the right by licence in writing signed by him or by his duly authorised agent. Copyright is different from the material object which is the subject of the copyright. So, a transfer of the material object does not necessarily involve a transfer of the copyright. The copyright in a book, picture or other work is disconnected and distinct from the general property in the material book, picture or other object. Hence, the sale or other transfer of the material object does not, of itself, constitute a transfer of the copyright therein. An assignment carries with it the whole interest in the thing assigned, including the right of reassign, while a licence is personal and not assignable without the grantor's consent. An exclusive licence is a leave to do a thing, and a contract not to give leave to anybody else to do the same thing, ft confers no interest, or property in the thing but only makes an action lawful, which, without it, would have been unlawful. [Para 42] A licence is a permission to do something that would otherwise be unlawful. The question arises, therefore, as to what legal permission is granted by a software licence. The answer is, briefly, that in some cases the licence will be a permission to use confidential information, and in virtually in all cases it will be a permission to copy a copyright work. If the software has been kept secret by the producer, or only supplied on conditions of confidentiality and has not been published too widely, then the software licence will be akin to a licence of confidential information or know-how. The owner or licensor of a copyright, has a right to grant permission to use the software or a computer programme, in respect of which they have a copyright, without transferring the right in copyright. It is one of the right of a copyright owner or licensor. Without such right being transferred, the end-user has no right to use the software or computer programme. If he uses it, it amounts to infringement of copyright. For transfer of such right if consideration is paid, it is not a consideration for transfer of a copyright but for use of intellectual property embedded in the copyright, and therefore it is for transfer of one of those rights of the owner of the copyright. It is not a right in copyright but it is in respect of a copyright. When a copyrighted article is sold also, the end-user gets the right to use the intellectual property embedded in the copyright and not a right in the copyright as such. Therefore the mode adopted or the terminology given is not decisive to decide the nature of transfer. Ultimately, it is the substance which has to be looked into. [Para 43] As is clear from the description of the agreement it is an end-user software licence agreement. Clause 2.1 deals with grant of rights. It provides, Software License Synopsys hereby grants licencee a non-exclusive, non-transferable license, without right of sub-licence of use the licensed software and design techniques only in the quantity authorized by a licensee in accordance with the documentation in the use area. Licensee may make a reasonable number of copies of the licensed software for backup and/or archival purposes only. Merely because the words non-exclusive and non-transferable is used in the said licence it does not take away the software out of the definition of the copyright. The word licenced software has been defined. Similarly, the words design, design technique is also defined. The word documentation is also defined and it is not in dispute what is granted is a license. Even if it is not transfer of exclusive right in the copyright, the right to use the confidential information embedded in the software in terms of the aforesaid licence makes it abundantly clear that there is transfer of certain rights which the owner of copyright possess in the said computer software/programme in respect of the copyright owned. In terms of the DTAA the consideration paid for the use or right to use the said confidential information in the form of computer programme software itself constitutes royalty and attracts tax. It is not necessary that there should be a transfer of exclusive right in the copyright as contended by the assessee. The consideration paid is for rights in respect of the copyright and for the user of the confidential information embedded in the software/computer programme. Therefore, it falls within the mischief of Explanation (2) of clause (vi) of sub-section (1) of section 9 of the Act and there is a liability to pay the tax. [Para 45] If there was any doubt regarding the taxability of this income the parliament by Finance Act, 2010 has substituted the explanation to section 9 which gives a clear intention of the legislature insofar as the liability of tax under this provision is concerned. A perusal of the said explanation makes it clear that as there was a doubt earlier, they want to remove the doubts by introducing this explanation. By the explanation they have declared that for the purpose of section 9 which deals with income deemed to accrue or arise in India, under clauses (v), (vi) and (vii) of sub-section (1), such income shall be included in the total income of the non-resident, whether or not (i) the non-resident has a residence or place of business or business connection in India, (ii) the non-resident has rendered services in India. Therefore, the object is to levy tax on the income of a non-resident, if it has accrued or arisen in India and one such income is the income from royalty. [Para 46] ORDER (a) All the appeals are allowed. (b) Impugned orders passed by the Income Tax Appellate Tribunal, Bangalore Bench, is hereby set aside. (c) The order passed by the Commissioner (Appeals) affirming the order passed by the Asstt. Commissioner, with modification is restored. [Para 46] SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2013 TaxPub(DT) 0529 (Karn-HC) : (2013) 051 (I) ITCL 0372 : (2013) 212 TAXMAN 0454

INCOME TAX ACT, 1961

--Income deemed to accrue or arise under section 9(1)(vi)Royalty Transfer of non-exclusive non-transferable software licence--S, us is the owner of the copyright. It was granted a licence to assessee. The technical licence agreement was for consideration to enable the assessee to use and commercially explost te intellectual property in Electronic Design Automation (EDA) tool and software in certain geographics in terms of aforesaid licence, the assessee in turn, has entered into End User Licence Agreement (EILA) with various customers. The agreement shown that Indian Customer has purchased a licenced product, i.e., EDA tool/software from assessee for his use as a tool on application software. The assessing officer treated the amount received by the assessee as royalty as defined under section 9(1)(vi) and thus assessee was entitled to pay tax in India. Held: What was transferred though the agreement was a licence to use the 'synopsys software' is a copy right owned by the assessee itself and not the copy of a copy righted article. Hence, the receipt squarely falls under the definition of royalty and therefore, taxable in India.

It is no doubt true the provisions of the DTAA overrides the provisions of the Income Tax Act. In the DTAA the term 'royalty' means payments of any kind received as a consideration for the use or the right to use any copyright of literary, artistic or scientific work whereas in the Income Tax Act, royalty means consideration for the transfer of all or any rights including the granting of a licence. Therefore, under the DTAA to constitute royalty there need not be any transfer of or any rights in respect of any copyright. It is sufficient if consideration is received for use of or the right to use any copyright. Therefore, if the definition of royalty in the DTAA is taken into consideration it is not necessary there should be a transfer of any exclusive right. A mere right to use or the use of a copyright falls within the mischief of Explanation (2) to clause (v) of sub-section (1) of section 9 and is liable to tax. Therefore, we dc not see any substance in the said contention. What is a licence? [Para 39] A licence is a grant of authority to do a particular thing. It enables a person to do lawfully what he could not otherwise lawfully do. A licence does not, in law, confer a right. It only prevents that from being unlawful which, but for the licence, would be unlawful. It amounts to a consent or permission by an owner of copyright that another person should do an act which, but for that licence, would involve an infringement of the copyright of licensor. A licence gives no more than the right to do the thing actually licensed to be done. It transfers an interest to a limited extent, whereby the licensee acquires an equitable right only in the copyrighted article. [Para 40] Licences may be exclusive, or non-exclusive. Non-exclusive licence is not defined in the Act. The term 'exclusive licence' is defined in section 2, clause (j). It confers on the licensee and persons authorised by him, to the exclusion of all, other persons, including the owner of the copyright, any right comprised in the copyright in a work. A non-exclusive licence is the grant of authority to do a particular thing with no right of exclusion whatsoever. It never conveys, by itself, an interest in property. It merely enables a person to do that which he could not otherwise do, except unlawfully. [Para 41] The owner of the copyright in any existing work may grant any interest in the right by licence in writing signed by him or by his duly authorised agent. Copyright is different from the material object which is the subject of the copyright. So, a transfer of the material object does not necessarily involve a transfer of the copyright. The copyright in a book, picture or other work is disconnected and distinct from the general property in the material book, picture or other object. Hence, the sale or other transfer of the material object does not, of itself, constitute a transfer of the copyright therein. An assignment carries with it the whole interest in the thing assigned, including the right of reassign, while a licence is personal and not assignable without the grantor's consent. An exclusive licence is a leave to do a thing, and a contract not to give leave to anybody else to do the same thing, ft confers no interest, or property in the thing but only makes an action lawful, which, without it, would have been unlawful. [Para 42] A licence is a permission to do something that would otherwise be unlawful. The question arises, therefore, as to what legal permission is granted by a software licence. The answer is, briefly, that in some cases the licence will be a permission to use confidential information, and in virtually in all cases it will be a permission to copy a copyright work. If the software has been kept secret by the producer, or only supplied on conditions of confidentiality and has not been published too widely, then the software licence will be akin to a licence of confidential information or know-how. The owner or licensor of a copyright, has a right to grant permission to use the software or a computer programme, in respect of which they have a copyright, without transferring the right in copyright. It is one of the right of a copyright owner or licensor. Without such right being transferred, the end-user has no right to use the software or computer programme. If he uses it, it amounts to infringement of copyright. For transfer of such right if consideration is paid, it is not a consideration for transfer of a copyright but for use of intellectual property embedded in the copyright, and therefore it is for transfer of one of those rights of the owner of the copyright. It is not a right in copyright but it is in respect of a copyright. When a copyrighted article is sold also, the end-user gets the right to use the intellectual property embedded in the copyright and not a right in the copyright as such. Therefore the mode adopted or the terminology given is not decisive to decide the nature of transfer. Ultimately, it is the substance which has to be looked into. [Para 43] As is clear from the description of the agreement it is an end-user software licence agreement. Clause 2.1 deals with grant of rights. It provides, Software License Synopsys hereby grants licencee a non-exclusive, non-transferable license, without right of sub-licence of use the licensed software and design techniques only in the quantity authorized by a licensee in accordance with the documentation in the use area. Licensee may make a reasonable number of copies of the licensed software for backup and/or archival purposes only. Merely because the words non-exclusive and non-transferable is used in the said licence it does not take away the software out of the definition of the copyright. The word licenced software has been defined. Similarly, the words design, design technique is also defined. The word documentation is also defined and it is not in dispute what is granted is a license. Even if it is not transfer of exclusive right in the copyright, the right to use the confidential information embedded in the software in terms of the aforesaid licence makes it abundantly clear that there is transfer of certain rights which the owner of copyright possess in the said computer software/programme in respect of the copyright owned. In terms of the DTAA the consideration paid for the use or right to use the said confidential information in the form of computer programme software itself constitutes royalty and attracts tax. It is not necessary that there should be a transfer of exclusive right in the copyright as contended by the assessee. The consideration paid is for rights in respect of the copyright and for the user of the confidential information embedded in the software/computer programme. Therefore, it falls within the mischief of Explanation (2) of clause (vi) of sub-section (1) of section 9 of the Act and there is a liability to pay the tax. [Para 45] If there was any doubt regarding the taxability of this income the parliament by Finance Act, 2010 has substituted the explanation to section 9 which gives a clear intention of the legislature insofar as the liability of tax under this provision is concerned. A perusal of the said explanation makes it clear that as there was a doubt earlier, they want to remove the doubts by introducing this explanation. By the explanation they have declared that for the purpose of section 9 which deals with income deemed to accrue or arise in India, under clauses (v), (vi) and (vii) of sub-section (1), such income shall be included in the total income of the non-resident, whether or not (i) the non-resident has a residence or place of business or business connection in India, (ii) the non-resident has rendered services in India. Therefore, the object is to levy tax on the income of a non-resident, if it has accrued or arisen in India and one such income is the income from royalty. [Para 46] ORDER (a) All the appeals are allowed. (b) Impugned orders passed by the Income Tax Appellate Tribunal, Bangalore Bench, is hereby set aside. (c) The order passed by the Commissioner (Appeals) affirming the order passed by the Asstt. Commissioner, with modification is restored. [Para 46]