Authority For Advance Rulings (Income Tax), New Delhi
Citrix Systems Asia Pacific Pty. Ltd., In Re
Section : 9
Justice P.K. Balasubramanyan, Chairman And V.K. Shridhar, Member
A.A.R. No. 822 Of 2009
February 6, 2012
Justice P.K. Balasubramanyan, Chairman – The applicant is a company incorporated in Australia. It claims to be one of the leading providers of software services which help in virtualization, networking and application delivery. It also offers a range of application collaboration, firewall, networking and streaming solutions. The applicant has entered into an agreement with independent Indian distributors for the distribution and sale of its software and hardware products in India. In the year 2006, the applicant entered into a distribution agreement with Ingram Micro India Limited (hereinafter referred to as “Ingram”), an independent Indian company engaged in the business of distribution of computer software and hardware. Under the agreement, Ingram was appointed as a non-exclusive distributor of the products of the applicant in India. Some of the key products distributed under the agreement are Citrix XenApp, Citrix Access Gatway and Citrix Netscaler. According to the applicant, under the agreement, the software products are purchased by the distributor from the applicant and sold by the distributor. With respect to the hardware products, the applicant shifted the products directly to the distributor which in turn supplied these products to re-sellers and end-user customers. But, for the software product, Citrix XenApp, while sale and collection is made through the distributor, no physical delivery of the product is made to the distributor. On the basis of the demand of the customers for Citrix XenApp, the distributor places orders of purchase with the applicant and makes payments for the same to the applicant. The applicant then directly transmits a “key” to the end-user customer who is required to download the XenApp software. On receipt of the key, the end-user customer downloads the software from the server of the applicant. The distributor Ingram owns the responsibility for collection of the price for the product from its customers. In addition to the distribution of hardware products and Citrix XenApp under the distribution agreement, Ingram also facilitates the execution of the Citrix Subscription Advantage Programme between the applicant and its existing customers. The programme is offered by the applicant in the form of a package of support services during the period of the programme. The support activities include product version updates, the subscription advantage news and updates and secure portal access. Ingram facilitates execution of the subscription programme in the same manner as in the case of software products. All transactions between Ingram and the applicant are on a principal to principal basis. Ingram effects direct sales to the customers at its discretion and earns a profit on every sale based on a percentage of the sale price.
2. The applicant is seeking an advance ruling on the taxability in India of the payments made by Ingram to it for the software product, Citrix XenApp and the Subscription Advantage Programme. The application under section 245Q of the Income-tax Act is made in that context.
3. While admitting the application for a ruling under section 245R(2) of the Act, this Authority accepted the following questions for the ruling.
1. “Whether the payments received by the applicant from the Distributor for sale of the software product is in the nature of ‘royalty’ within the meaning of the term in Explanation 2 to clause (vi) of Section 9(1) of the Income-tax Act, 1961 (“the Act”) ?
2. Whether the payments received by the applicant from the Distributor for sale of the software product is in the nature of ‘royalty’ within the meaning of the term in Article 12 of the Agreement between the Government of Australia and the Government of Republic of India for the avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on income’ (“the India-Australia Tax Treaty”) ?
3. Whether the payments received by the applicant from the Distributor for the right to downloand/receive version updates for the software products of the applicant (i.e. the Citrix Subscription Advantage Program) is in the nature of ‘royalty’ within the meaning of the term in Explanation 2 to clause (vi) of Section 9(1) of the Act?
4. Whether the payments received by the applicant from the Distributor for the Citrix Subscription Advantage Program is in the nature of “fees for technical services” within the meaning of the term in Explanation 2 to clause (vii) of Section 9(1) of the Act?
5. Whether the payment received by the applicant from the Distributor for the Citrix Subscription Advantage Program, is in the nature of ‘royalty’ within the meaning of the term in Article 12 of the India-Australia Tax Treaty?
6. Based on answers to questions (1) to (5) above, and in view of the facts as stated in Annexure 1, and also in the light of the declaration provided by the applicant that it does not have a permanent establishment in India in terms of Article 5 of the India-Australia Tax Treaty, whether the payment received by the applicant will be chargeable to tax in India.
7. Based on the answers to question (6) above, would the receipts by the applicant from the Distributor suffer withholding tax under section 195 of the Income-tax Act, 1961 and if yes, at what rate?”
4. Hearing under section 245R(4) was elaborate and more than once. Various statements in opposition were filed on behalf of the Revenue and replied to by the applicant. Detailed arguments were addressed.
5. The main question that has to be ruled on is the question whether the payment received by the applicant from Ingram for the software dealt with in the distribution agreement between the parties, is the price for sale of software products or is royalty as defined in Section 9(1)(vi) of the Income-tax Act and/or under Article 12 of the Double Taxation Avoidance Agreement between India and Australia. According to the applicant, section 9(1)(vi) of the Act when it defines ‘royalty,’ inter alia, envisages payment for transfer of all or any right in Intellectual Property, by the owner of such intellectual property, to any other person. Intellectual Property is not defined in the Act to show what are included within the scope of ‘royalty’. A patent, copyright, etc. would be Intellectual Property. The applicant further submits that a computer programme (software) is protected under the Indian Copyright Act, 1957. In the context of that Act, a computer programme cannot be characterized as a patent, invention, model, design, secret formula or process. Taxability of a computer programme has to examined under clause (v) of Explanation 2 to Section 9(1)(vi) of the Act which specifically deals with taxability of transfer of rights in respect of a copyright.
6. Under the Distribution Agreement, the applicant as the owner of the copyright in the software, is offering it for distribution through the Distributor. The distributor is granted license to use the software for its internal purposes. The Distributor is to locate the end-users. No order procured by the Distributor is binding on the applicant. On accepting a subscriber, the software is distributed electronically, direct to the end-user. The right to translate the software vests with the applicant. The software is for operation only with the computer systems specified on software packaging and/or documentation. The applicant retains the right to alter the specified type of computer systems with which the software will operate or function.
7. The warrantees to the end-user are set out in the documentation. The distributor will ensure that the end-users are notified that they will receive the benefits of such warrantees as set forth in the documentation. Documentation means the user documentation with the applicant, or its affiliates, distributors for the applicable product.
8. The Distributor is to pay the purchase price to the applicant as per the price list, less their applicable discount set forth in the letter of Authorisation. The Distributor is obviously to collect what is payable by the end-users. The applicant retained the sole and exclusive right to bring an action for infringement of copyright against third parties. The Distributor is to cooperate in that action.
9. Thus, on the terms of the agreement, the end-user is given the right to use the software over which the applicant has a copyright, for a subscription. That right is conferred directly on the end-user by supplying him with a key to down load the software on to his computer and to use the programme and to use the programme over which the applicant has a copyright. The end-user gets the right to use the software. What is involved in that grant of right, is the question.
10. The term ‘copyright’ has not been defined in the Income-tax Act. The dictionary meaning is that it is the exclusive right given by law for a certain term of years to an author, composer, etc. or his assignee to print, publish and sell copies of his original work. According to the applicant, this dictionary meaning links the term ‘copyright’ to the rights provided by law and in India the rights are governed by the Copyright Act. Therefore, one has to necessarily rely on the terms of the Copyright Act. Section 14 of the Copyright Act defines the term ‘copyright’. According to the applicant, the definition indicates that the term copyright in the case of a literary, dramatic or musical work not being a computer programme, means the exclusive right to do or authorize another to do, the work of reproducing the work in any material form including the storing of it in any medium by electronic means, to issue copies of the work to the public, not being copies already in circulation, to perform the work in public or communicate it to the public, to make any cinematograph film or sound recording in respect of the work, to make any translation of the work, to make any adaptation of the work, to do in relation to translation or adaptation of the work any of the acts specified above. In the case of a computer programme it is to do any of the acts specified above, to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer programme. According to the applicant, copyright clearly vests in the person who has an exclusive right to do all or any of the acts mentioned above to the exclusion of others. He may exercise those exclusive rights by himself or he may authorize others to exercise a particular right or a combination of the rights. Therefore, what has to be seen is whether there is a transfer of the right, the right of commercial exploitation of the intellectual property contained in the product.
11. According to the applicant, in the case on hand, the payment by Ingram is towards purchase of a software product. Ingram gets only the right to re-sell/distribute the software product and does not get any right to reproduce or make copies of the software product. The Copyright Act distinguishes the copyright from the material object, which is the subject of the copyright. Therefore, a transfer of the material object does not necessarily involve the transfer of the copyright. The distribution agreement entered into by the applicant with Ingram concerns the transfer of material object and not the transfer of copyright. There was also a distinction between a copyright and a copyrighted article and where the payment is for obtaining rights limited to enabling effective operation of the software and not for the end-user to commercially exploit the underlying rights in the software, it would be inappropriate to classify the payment as royalty. It is submitted by the applicant that payment received by the applicant from Ingram is for sale of a copyrighted article and the price paid is not royalty under the provisions of the Act.
12. On the question whether the payment received is royalty within the meaning of Article 12 of the DTAC between India and Australia, in addition to reiterating the submissions made relating to the definition in the Income-tax Act, it is contended that the sum received by the applicant is in the nature of sale revenue, the right acquired by the purchaser from the sale is only to use the copyrighted article and not the right to use the copyright embedded in the software. It is pointed out that the OECD commentary also makes a distinction between the transfer of rights in the underlying copyright in the computer programme and the transfer of rights in a copy of computer programme, based on the nature and extent of rights which have been granted.
13. On behalf of the Revenue, it is contended that the Agreement between the applicant and Ingram makes it clear that the applicant owns all right, title and interest in the products and services subject to the agreement. Therefore, what the applicant parts with to the end-user is only a right to reproduce/copy the software to the server of the customer, from the server of the applicant and to use the software for its applications. So, one of the rights embedded in the intellectual property, that is the software product, being a right to copy and use, is transferred by the applicant to the distributor and later on to the end-user for which the applicant is receiving payment. Therefore, what is involved is not the sale of a copyrighted article as contended by the applicant, since no physical product was being delivered, but what was being transferred was a right to use the software which is facilitated by another right to copy the software. The payment is, therefore, in the nature of royalty. The Revenue seeks to take inspiration from Section 115A(IA) of the Income-tax Act and also the Board’s Circular No. 621 dated 19.12.1991. In the case on hand, the applicant was supplying software separately and not along with the hardware. The payment was royalty within the meaning of the Income-tax Act. As regards the concept of royalty under Article 12 of the DTAC, the arguments as above are reiterated.
14. In its additional written submissions, the Revenue has reiterated its position in a more elaborate manner. The interpretation of the term ‘royalty’ is dealt with. The reliance on the Copyright Act, 1957 for adjudicating on the liability to tax under the Income-tax Act is questioned and it is pointed out that the Act contains the definition of ‘royalty’ and the DTAC also contains the definition of ‘royalty’ and we have to test the claim of the applicant in the light of those definitions, uninhibited by what may be contained in the Copyright Act. It is pointed out that Ingram has been given the right to make an offer for sale and the payment, it makes for it, is in the nature of royalty under the provisions of the Copyright Act read with the definition of royalty. It is emphasized that the payment made for the use or the right to use the copyright with reference to the distribution agreement, would amount to royalty. It is pointed out that the right parted with to the end-user and the exercise of the right so granted, also take in within it, the grant of a right to use the intellectual property. If it were not so, the use of the software would be in violation of the copyright, the Intellectual Property embedded in the software.
15. We shall notice some of the provisions of the Copyright Act before we consider the question whether the Revenue is right in its contention that the provisions of the Copyright Act cannot make a dent in the taxability of the particular income in terms of the Income-tax Act. As noticed, the Income-tax Act or DTAC does not define copyright. But Section 14 of the Copyright Act, gives the meaning of the expression ‘copyright’. It says that for the purpose of that Act, copyright means the exclusive right subject to the provisions of that Act to do or authorize doing of any of the acts referred to therein in respect of a work or any substantial part thereof. In the case of a literary, dramatic or musical work other than a computer programme, the right takes in; the right
(i) to produce the work in any material form including the storing of it in any medium by electronic means;
(ii) to issue copies of the work in public not being copies already in circulation;
(iii) to perform the work in public, or communicate it to the public;
(iv) to make any cinematograph film or sound recording in respect of the work;
(v) to make any translation of the work;
(vi) to make any adaptation of the work;
(vii) to do, in relation to a translation or an adaptation of the work, any of the acts specified in relation to the work in sub-clauses (i) to (vi);
16. Clause (b) deals with copyright in the case of a computer programme. It means the exclusive right to do any of the acts specified in clause (a) of sub-section (1); to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer programme, provided that such commercial rental does not apply in respect of computer programmes where the programme itself is not the essential object of the rental. Some of the definitions are also relevant.
Section 2(y) defines ‘work’ as meaning:
(i) literary, dramatic or musical work;
(ii) A cinematograph film;
(iii) A sound recording.
Section 2(ffb) defines ‘computer’ as including any electronic or similar device having information processing capabilities. Section 2(ffc) defines ‘computer programme’ as meaning, a set of instructions expressed in words, codes, schemes or in any other form, including a machine readable medium, capable of causing a computer to perform a particular task or achieve a particular result. Section 2(o) defines ‘literary work’ as including computer programmes, tables and compilations including computer databases. Section 2 does not define a license but it defines an ‘exclusive license’ as meaning a license which confers on the licensee to the exclusion of all others, including the owner of the copyright , any right comprised in a copyright in a work. Section 17 specifies who is the first owner of the copyright. Section 18 recognises the assignment of a copyright. Section 19 prescribes the mode of assignment of a copyright. Section 30 then speaks of licenses by owners of copyright. It is to be noticed that section 30 does not speak of an exclusive license, which is a defined expression in the Act. It confers a right in the owner of the copyright to grant any interest in the right by license in writing signed by him.
Regarding the mode of transfer, the provisions of Section 19 are made applicable by Section 30A of the Act. Section 51 lays down that a copyright in a work shall be deemed to be infringed, if some one does anything, the exclusive right to do which is by the Act conferred upon the owner of the copyright without a license from the owner. When a person makes for sale or hire or sells or lets for hire or distributes any work without license, it will be an infringement. Section 52 indicates what would not be an infringement of a copy right. The making of copies or adaptation of a computer programme by a lawful prossessor of a copy of such computer programme from such copy, in order to utilize the computer programme for the purpose for which it was supplied or make backup copies purely as an temporary protection against loss destruction or damage in order only to utilize the computer programme for the purpose for which it was supplied, is not an infringement. Making of copies or adaptation of the computer programme from a personally legally obtained copy for non-commercial personal use will not be an infringement. Chapter XII of the Act deals with civil remedies of the owner of a copyright. Section 54 provides that for the purpose of that Chapter, unless the context otherwise required, owner of a copyright included an exclusive licensee. An exclusive licensee as per definition, can even exclude the owner. A licensee, who is not an exclusive licensee, will not be an owner.
17. The definition of Copyright says that for the purposes of that Act, copyright means the exclusive right to do or authorize the doing of the acts referred to in that section. This has nothing to do with the consequence of the Copyright holder passing on his rights otherwise than absolutely, either by assignment under section 18 of the Act or otherwise. The owner can also grant an exclusive license to another to exploit the Copyright. In terms of Section 30 of the Act, he can also grant a mere licence limited in point of right, limited in point of user, limited in point of duration. The farming out of that right under Section 30 of the Act is neither an assignment nor need it be exclusive license. It can be a mere license.
18. Thus, a reference to the Copyright Act indicates that use of a copyright either by an owner or a licensee, would not be an infringement of a copyright. The transfer of ownership can be by an assignment to another of the copyright either wholly or partially, either generally or with special limitations and either for the whole term of the copyright or any part thereof. Similarly, a license can be granted by the owner of the copyright of any interest in the right. An exclusive right also can be granted excluding even oneself from the right to use the copyright owned. So, a transgression of the limitations of an assignment or of a license would prime facie be an infringement of the copyright and invite the consequences provided for under the Act. Similarly, the act of taking copies or act of adaptation will not be an infringement only if it is done by a lawful possessor of a copy of the computer programme. A lawful possessor can only be an assignee, an exclusive licensee or a licensee of the programme. When he acquires a computer programme, he also gets the right to use that programme to a limited extent. This in our view, is on the basis that in so acquiring the computer programme, he has also got a right, absolute or limited to use the copyright.
19. When a software is created by a person who acquires a copyright for it, he becomes the owner of that copyright. He can transfer or license that right either by himself or through an agent. When he sells or licenses the software for use, he is also selling or licensing the right to use the copyright embedded therein. If a software is used without being lawfully acquired either by purchase or by license, that would amount to an infringement of the copyright obviously because of the copyright embedded in the software. The software is a literary work and clearly the copyright of the creator over the software is an important and commercially valuable right. So, whenever a software is assigned or licensed for use, there is involved an assignment of the right to use the embedded copyright in the software or a license to use the embedded copyright, the Intellectual Property Right in the software. Therefore, it appears to us that it is not possible to divorce the software from the Intellectual Property Right of the creator of the software embedded therein. The amendment to Section 14(1)(b) of the Copyright Act, by Act 49 of 1999, clarifying that in the case of a computer programme, copyright means the right to sell or give on commercial rental or offer for sale or commercial rental any copy of the computer programme, seems to be significant. This addition would suggest that even the right to sell or give on rental, would amount to a copyright and would be a right to be dealt with as a copyright.
20. The Copyright Act, more or less equates an exclusive licensee to an owner of a copyright. It also recognizes a non-exclusive license. Nobody has a case that a copyright cannot be granted on license otherwise than by way of an exclusive license. In fact, Section 30 provides for grant of any interest on license. A licensee has the right to use the license subject to the limitations in the grant in his favour, to the extent it is granted to him.
21. Moreover, under section 14, copyright in respect of a computer programme also means the right to sell or give on commercial rental any copy of the computer programme. A computer programme as defined only means a set of instructions expressed in words, codes, schemes or in any other form including a machine readable medium capable of causing a computer to perform a particular task or achieve a particular result. A software is nothing but a programme and other operating information used by a computer. Is not a software a set of instructions in machine readable medium capable of causing a computer to perform a particular task or achieve a particular result? So, sale or licensing of a software for use passes to the grantee a copyright as defined in section 14 of the Copyright Act.
22. The definition of ‘royalty; in the Income-tax Act is, consideration for the transfer of all or any rights (including the granting of a license) in respect of a patent, innovation, model, design, secret formula or process or trade-mark or similar property. Consideration for grant of the use of any of the above is also royalty. It also takes in the consideration for the transfer of all or any rights (including the granting of a license) in respect of any copyright, literary, artistic or scientific work. It is to be noted that license is not confined to an exclusive license. According to the applicant, this definition, among other things, envisages payment for transfer of all or any rights in intellectual property by the owner of such intellectual property to any other person. When a software, over which a copyright is acquired and thus owned, is licensed for use to another or sold to another for his own use, what are the rights that pass on to the licensee or the buyer? When software is acquired either on license or on purchase, the licensee or the purchaser gets the right to use the software without being held guilty of infringement of the copyright. But a user of the software without a license or a purchase would obviously make the user of the software liable for infringement of the copyright embedded in the software. More often than not, software for such special applications like Citrix XenApp, is also patented. When the use of software, without anything more, would render the user liable for infringement of the copyright embedded in the software, can it not be said that the sale or the licensing of the software involves the grant of a right to use the copyright in the software? Will it not be the grant of a right to use the intellectual property embedded in the software? We think that it does. It is, therefore, difficult to accept the argument that the licensing of a software for use by the end-use customer, is the mere sale of a copyrighted article and does not involve the grant of a right to use the copyright in the software.
23. It is pointed out that consideration paid for such a licensing or sale of software is not royalty, has been held by this Authority and there is no reason to go behind the ratio of those rulings. The ruling of this Authority in Factset Research Systems Inc. In re  182 Taxman 268 (AAR – New Delhi) is referred to. In that case, it was held that subscription fee collected for access to data base located outside, was not royalty and in the absence of a permanent establishment, the payee of such a fee was not liable to be taxed on the income as royalty. After elaborating the terms of the agreement involved in that case, it was held that the subscription fee received by the applicant therein from the licensee, the user of the data base, did not fall within the scope of clause (v) of Explanation 2 to Section 9(1)(vi) of the Act. It was reasoned that the computer data base fell within the definition of literary work in the Copyright Act. It was also held that the data base was the intellectual property of the applicant in that case and a copyright was attached to it and the question was posed whether in making the centralized data available to a licensee for a consideration, any of the rights which the applicant had as the owner of copyright in the data base, was being passed on in favour of the customer. It was stated that no proprietary right and no exclusive right which the applicant had, was made over to the customer. The copyright or the proprietary right remained, in tact, with the applicant notwithstanding the fact that the right to view and make use of the data for internal purposes of the customer was conferred on the licensee.
24. It was emphasized that the licensee had not been given the exclusive right to reproduce or adapt the work or to distribute the contents of the data base to others. The grant of license was only to authorize the licensee to have access to the copyrighted data base rather than granting any right in or over the copyright as such. We may notice with respect, that the definition of royalty in the Income-tax Act speaks only of transfer of all or any rights, including the granting of a license, in respect of the copyright. It does not speak of the grant of any exclusive right. In fact, if one were to go by Section 18 of the Copyright Act, the transfer of a copyright itself may be, whole or partial, general or subject to limitations or for the whole term of the copyright or any part thereof. Therefore, even a partial right or confined right granted to the assignee would attract the definition of royalty as found in the Income-tax Act. Similarly, license recognized by Section 30 of the Copyright Act, contemplates the grant of any interest in the copyright by license. That interest can also be a limited interest or a comprehensive interest. The concept of conveying of exclusive right either by way of assignment or by way of license does not appear to be the sine qua non for coming within the definition of royalty in respect of the consideration paid for the transfer or licensing of a copyright. The fact that in Section 14 of the Copyright Act, copyright is said to mean the exclusive right to do or authorize the doing of any of the acts referred to therein, or that an exclusive licensee is equated to the owner, does not mean that the copyright holder has to convey exclusive rights either by assignment or by way of a license for attracting the definition of royalty in respect of the consideration he receives for the grant or licensing of that right.
25. In Dassault Systems K.K., In re  188 Taxman 223 (AAR – New Delhi), it was noticed that the core of the transaction in that case was to authorise the end-user to have access to and make use of the licensed software products over which the applicant had exclusive copyright without giving any scope for dealing with them any further. The reasoning or the line of reasoning in Factset on applicability of the Copyright Act, in this context, was followed. It was also noticed that in Tata Consultancy Services v. State of Andhra Pradesh  271 ITR 401/ 141 Taxman 132 , the Supreme Court had held that “a software programme may consist of various commands which enable the computer to perform a designated the task. The copyright in that programme may remain with the originator of the programme. But, the moment copies are made and marketed it becomes goods which are susceptible to sales-tax.” The Supreme Court was speaking in the context of the Sales-tax Act. The Court had no occasion to consider what was involved in the sale of a software programme. The Court had no occasion to consider what all are the rights that pass on to the grantee when a software programme is transferred or licensed to him. It was concluded in Dassault, that in the absence of an independent right to conclude a sale or offer for sale, section 14 could not be invoked to bring the case within Section 9(1)(vi) of the Act by invoking sub-clause (ii) of Clause (b) of that section. It was concluded that no right to use the copyright as such has been conferred on the licensee. In our view whenever software is transferred or licensed for use, it takes within it the copyright embedded in the software and the one cannot be divorced from the other.
26. In the Income-tax Act, royalty is defined as consideration for the transfer of all or any rights (including the grant of license) in respect of any Copyright. Computer software is also defined as meaning of any computer programme recorded on any disc, tape, perforated media or other information storage device and includes any such programme or any customized electronic data. The expression computer software is not used in the body of the section or in Explanation 2 to clause (vi) of Section 9(1) of the Act. It is pointed out that this Authority in the Ruling in Geo Quest Systems BV and Dassault Systems KK has understood the explanation thus:-
“In the definition of royalty under the Act, the phrase ‘including the granting of a licence’ is found. That does not mean that even a non exclusive license permitting user for in-house purpose would be covered by that expression. Any and every license is not what is contemplated. It should take colour from the preceding expression ‘transfer of rights in respect of a Copyright’.”
27. With respect, the words within brackets, ‘including the granting of a license’ indicates an expansive definition. It is a devise to bring in something which might not otherwise be included in the words used. Clearly, the legislature must be taken to be aware of the possibilities ushered in by Section 30 of the Copyright Act. When words of expansion are used, is it justified to fall back upon the rule of ejusdem generis or Noscitur a sociis? Will not the application of that principle nullify the legislative intention of expanding the definition of transfer to include the grant of a license as well? With respect, we think that such a reading of the relevant provision would tend to defeat the legislative intent. In Craies on Statute Law, Seventh Edition, at page 213, it is stated “where the word defined is declared to include so and so, the definition is extensive”.
28. A license is a mere permission or authority to do a particular thing. It is not transfer. One mode of enjoyment of a Copyright by its owner or an exclusive licensee (who is equated to an owner by section 54 of the Copyright Act) is by licensing it for use. Section 30 of the Copyright Act recognizes that any interest may be granted on license. ‘Interest’ means advantage or participation. So, grant of any advantage by the owner is roped in. Obviously, the Income-tax Act wanted to bring within the scope of royalty what is payable as consideration for obtaining such a license. Hence, in addition to the words, transfer of any rights, it brought in by way of inclusion, the words “including the granting of a license.” How can we then read with justification that a license must also be akin to a transfer?
29. An inclusive definition is a definition of expansion. The Supreme Court has held that the words used in an inclusive definition denote extension and they cannot be treated as restricted in any sense. When inclusive definition is dealt with, it would be inappropriate to put a restrictive interpretation upon terms of wider denomination. The word ‘includes’ is an inclusive definition and expands the meaning. [See for instance, Corporation of the City of Nagpur v. Its employees AIR 1960 SC 675, Vasudev Ramchandra Shelat v. Pranlal Jayanand Thakar AIR 1974 SC 1728 and Doypack Systems (P.) Ltd. v. Union of India AIR 1988 SC 782. With great respect, we therefore feel, that a license cannot be restricted to transfer of a right dealt with earlier by the provision and should be understood as taking in, the grant of a license simpliciter. We cannot also forget that the Copyright Act has separately dealt with a computer programme different from copyrights covered by Section 14(1) of that Act. We are therefore unable to agree with this line of argument.
30. Article 12 of the India-Australia DTAC defines royalties to mean payment made as consideration for the use of or the right to use any copyright, patent, design or model, plan, secret formula or process, trademark or other like property or right. In Union of India v. Azadi Bachao Andolan  263 ITR 706 / 132 Taxman 373 the Supreme Court has spoken as to how a treaty is to be interpreted. It is a contract between sovereign States and varying considerations go into making it. It is a matter of bargain between the two countries involving adjustments and compromises. According to Bennion on Staturoy Interpretation ‘the words in a treaty has to be given meaning not strictly according to rules of interpretation of Statutes, but the meaning of the diplomat rather than a lawyer’. (See page Azadi Bachao Andolan (supra). So, when the convention speaks of royalty, and defines it, it must be understood as it is commonly understood. There is much to be said for the argument on behalf of the Revenue, that we should not feel ourselves constrained by the definition of Copyright in Section 14 of the Copyright Act, a definition that explicitly states that it is for the purposes of that Act, especially when construing the tax convention.
31. The article speaks of the use of or the right to use of any copyright. Use of a copyright takes place, when the copyright is used. This is distinct from the right to use a copyright. The two expressions are used disjunctively and the expression used is ‘or’. The context does not warrant the reading of ‘or’ as ‘and’. If so, the consideration received for permitting another to use a copyright is also royalty.
32. Considerable arguments are raised on the so-called distinction between a copyright and copyrighted articles. What is a copyrighted article? It is nothing but an article which incorporates the copyright of the owner, the assignee, the exclusive licensee or the licencee. So, when a copyrighted article is permitted or licensed to be used for a fee, the permission involves not only the physical or electronic manifestation of a programme, but also the use of or the right to use the copyright embedded therein. That apart, the Copyright Act or the Income-tax Act or the DTAC does not use the expression ‘copyrighted article’, which could have been used if the intention was as claimed by the applicant. In the circumstances, the distinction sought to be made appears to be illusory.
33. We also find that in P.No.30 of 1999 In re  238 ITR 296 (AAR) on a finding that the Indian Company is allowed to use the software developed and protected by the foreign company, the applicant before the Authority, it was held that the consideration payable by the Indian Company for this privilege was royalty. Various aspects were considered in detail. This Authority noticed that the practice in Canada, the USA and other developed countries, allowing the use of protected software for a consideration by way of a contract was to treat the income as royalty. Commentary by Klaus Vogel was also quoted in support. The reasoning appeals to us. We see no compelling reason why we should depart from this position adopted by other countries while interpreting Article 12.3 of the DTAC and even Section 9(1)(vi) of the Act.
34. In IMT Labs (India) (P.) Ltd., In re  287 ITR 450 / 157 Taxman 213 (AAR – New Delhi), this Authority held that payments made by a resident to use the software developed by the non-resident on its server platform, was royalty.
35. In Airports Authority of India, In re  ( 304 ITR 216 / 172 Taxman 284 (AAR – New Delhi), this Authority holding that the ratio of the decision in Tata Consultancy Services (supra) cannot conclude the question, proceeded to observe that the OECD views are not binding, India being not a signatory to the convention and that there is no unanimity even among the member countries of OECD. This Authority held that income relatable to supply of documents and software under the contract there in question, was royalty as the documents and software were copyrights which had been given to the applicant therein for use. This Authority even went to the extent of stating that the provisions of the Income-tax Act and the DTAA were clear on the point and no reference to the Copyright Act appears to be necessary.
36. In Millennium IT Software Ltd., In re  202 Taxman 501/ 14 taxmann.com 17 (AAR – N. Delhi) (AAR No.835 of 2009), we have held that the payment made under the contract involved therein was royalty, based on the reasons contained therein supplementing the reasons we have given here.
37. Thus, it could be stated that there is no clear unanimity of view on the question even in this Authority.
38. A ruling by this Authority is based on the facts involved in the application leading to that ruling. It appears to be difficult to postulate the application of the doctrine of precedent to a Ruling under section 245R(4) of the Act. The Act has itself made it clear that the ruling is binding on the applicant in the application and the Revenue, in respect of that application and the transaction involved therein.
39. Even then, there is the aspect of judicial discipline and consistency involved. We have already noticed what we consider to be the divergence in views in this Authority. We are inclined to take the view that the sale or licensing for use of a copyrighted software amounts to or amounts also to the grant of a right to use a copyright. Differing views by this Authority can be got resolved and the matter set at rest only by a decision of the Supreme Court, laying down the law finally, to be followed by all the Courts and Tribunals including this Authority. Only an authoritative pronouncement by the Supreme Court can settle this controversy.
40. We find from the decision of the Karnataka High Court in CIT v. Samsung Electronics Co. Ltd.  185 Taxman 313 and connected cases that that High Court has held that in that case, the argument that it would be only a sale of copy of the copyright software could not be accepted. It was a payment towards the price of CD, the software and the license to use granted. The payment was royalty as defined in the Income-tax Act and the DTAC involved therein.
41. Some decisions of Income-tax Appellate Tribunals and the decision of the High Court of Delhi in DIT v. Ericssion AB  204 Taxman 192 / 16 taxmann.com 371 (Delhi) are also brought to our notice where the view has been taken that the payment would not be royalty. The decision of a Delhi Tribunal, taking a contrary view has also been brought to our notice. We are not persuaded to adopt the reasoning of the Bombay Tribunal and that of the High Court of Delhi in the light of our discussion above and that in the Ruling in Millennium.
42. In the light of our discussion above, on question no.1, it has to be ruled that the payments received by the applicant from the distributor for sale of the software product is in the nature of royalty within the meaning of Section 9(1)(vi) of the Income-tax Act.
43. Question no. 2 is whether the payments concerned would be royalty as defined in Article 12 of the DTAA between India and Australia. On the basis of the reasoning leading to our ruling on question no. 1, the payment would be royalty. That apart, Article 12.3 of the DTAA defines royalties as payments, whether periodical or not and however described or computed, as consideration for “the use of, or the right to use any copyright, patent, design or model, plan, secret formula or process, trade mark or other like property or right.” The definition is seen to be wider than the one contained in the Income-tax Act. It also ropes in payment of consideration for the use of a copyright in addition to the consideration paid for the right to use a copyright, covered by the definition in the Income-tax Act. Consideration paid for use of a copyrighted software, as we have reasoned earlier, is also payment for use of the copyright embedded in the software. The observations in the ruling in P.No. 30 of 1999 (supra) (AAR) that countries like the USA consider the payment as royalty and the passages from Klaus Vogel quoted therein support this position. There cannot be a use of software, over which exists a copyright, without a use of the copyright therein. The payment for such use can only be royalty. We may notice here with respect, that in our view, in M/s. Dassault ruling, the scope of the expression ‘use of a copyright’ used in Article 12 has not been specifically considered. For these reasons and the reasons given, leading to the ruling on question no.1, we rule on this question, that the payment received by the applicant is royalty within the meaning of Article 12 of the DTAC between India and Australia.
44. Question no. 3 concerns the character of the payment received by the applicant for grant of the right to down-load/receive version updates for software products of the applicant. We have ruled above that the payment received from the distributor for making available the software product of the applicant to the end-user is royalty within the meaning of the Income-tax Act and the DTAC between India and Australia. Citrix Subscription Advantage Programme is the updating of the software product already granted or licensed for use by the end-user. Consistent with our view expressed above, the payment received by way of Subscription for the updates would also be payment received for grant of a right to use the copyright embedded in the Subscription Advantage Programme and it will be royalty.
45. In the light of our answer to question no. 3 holding that the payment is royalty, it is not necessary for us to rule on the question whether the payment for Subscription Advantage Programme would be in the nature of fees for technical services within the meaning of the Income-tax Act. We decline to rule on question no.4.
46. The ruling on question no.5 has again to be that the payment received is royalty within the meaning of Article 12 of the DTAA between India and Australia. We have already reasoned that the subscription for the programme update would be a payment for the use of and the right to use the copyright embedded in the programme. In this view, we rule that the payment would be royalty. In view of the fact that the payment would be royalty in terms of clause (a) of Article 12.3 of the DTAC, it is not necessary to consider the question whether it will fall under clause (g) of Article 12.3 of the DTAC. We decline to rule on that aspect of the question.
47. While raising question no. 6, the applicant has taken up the position that it does not have a permanent establishment in India. Even if we accept that position adopted, in our view that the payment received is royalty, the amount is liable to be taxed in India under Article 12.2 of the DTAC. Therefore, the ruling on this question is that the consideration received by the applicant in respect of the original software and the Subscription Advantage Programme are both taxable as royalty in India.
48. In view of our answers above, ruling on question no. 7 is that the distributor Ingram is required to withhold taxes in India at the time of making payments to the applicant in terms of Section 195 of the Income-tax Act at the rate of 10% of the gross amount of royalty, as provided under Article 12.2 of the DTAC.
[Citation : 343 ITR 1]