ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PRIVATE LIMITED vs. THE COMMISSIONER OF INCOME TAX

REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NOS. 8733-8734 OF 2018 ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PRIVATE LIMITED …APPELLANT Versus THE COMMISSIONER OF INCOME …RESPONDENTS TAX & ANR. WITH CIVIL APPEAL NOS. 8735-8736 OF 2018 CIVIL APPEAL NOS. 8737-8941 OF 2018 CIVIL APPEAL NOS. 8942-8947 OF 2018 CIVIL APPEAL NOS. 8950-8953 OF 2018 CIVIL APPEAL NOS. 8948-8949 OF 2018 CIVIL APPEAL NO. 4419 OF 2012 CIVIL APPEAL NO. 4420 OF 2012 CIVIL APPEAL NO. 10114 OF 2013 CIVIL APPEAL NO. 10097 OF 2013 CIVIL APPEAL NOS. 10112-10113 OF 2013 Signature Not Verified Digitally signed by Jayant Kumar Arora Date: 2021.03.02 16:50:08 IST Reason: CIVIL APPEAL NO. 10106 OF 2013 CIVIL APPEAL NOS. 8954-8955 OF 2018 1 CIVIL APPEAL NOS. 10115-10117 OF 2013 CIVIL APPEAL NO. 8956 OF 2018 CIVIL APPEAL NO. 8957 OF 2018 CIVIL APPEAL NO. 8990 OF 2018 CIVIL APPEAL NO. 10103 OF 2013 CIVIL APPEAL NO. 10104 OF 2013 CIVIL APPEAL NO. 8960 OF 2018 CIVIL APPEAL NO. 8966 OF 2018 CIVIL APPEAL NO. 8958 OF 2018 CIVIL APPEAL NO. 8959 OF 2018 CIVIL APPEAL NO. 8962 OF 2018 CIVIL APPEAL NO. 8961 OF 2018 CIVIL APPEAL NO. 8963 OF 2018 CIVIL APPEAL NO. 8964 OF 2018 CIVIL APPEAL NO. 8965 OF 2018 CIVIL APPEAL NO. 8969 OF 2018 CIVIL APPEAL NO. 8967 OF 2018 CIVIL APPEAL NO. 8968 OF 2018 CIVIL APPEAL NO. 8972 OF 2018 CIVIL APPEAL NO. 8971 OF 2018 CIVIL APPEAL NO. 8970 OF 2018 2 CIVIL APPEAL NO. 4629 OF 2014 CIVIL APPEAL NO. 8973 OF 2018 CIVIL APPEAL NO. 4631 OF 2014 CIVIL APPEAL NO. 4630 OF 2014 CIVIL APPEAL NOS. 8974-8975 OF 2018 CIVIL APPEAL NOS. 6386-6387 OF 2016 CIVIL APPEAL NO. 10105 OF 2013 CIVIL APPEAL NO. 7852 OF 2012 CIVIL APPEAL NOS. 1416-1418 OF 2013 CIVIL APPEAL NO. 1403 OF 2013 CIVIL APPEAL NO. 1405 OF 2013 CIVIL APPEAL NO. 1410 OF 2013 CIVIL APPEAL NO. 1421 OF 2013 CIVIL APPEAL NO. 1409 OF 2013 CIVIL APPEAL NO. 1415 OF 2013 CIVIL APPEAL NO. 1414 OF 2013 CIVIL APPEAL NO. 1412 OF 2013 CIVIL APPEAL NO. 1413 OF 2013 CIVIL APPEAL NO. 1419 OF 2013 CIVIL APPEAL NO. 1411 OF 2013 CIVIL APPEAL NO. 1420 OF 2013 3 CIVIL APPEAL NO. 1404 OF 2013 CIVIL APPEAL NO. 1406 OF 2013 CIVIL APPEAL NO. 1408 OF 2013 CIVIL APPEAL NO. 1407 OF 2013 CIVIL APPEAL NO. 2304 OF 2013 CIVIL APPEAL NO. 2305 OF 2013 CIVIL APPEAL NO. 2306 OF 2013 CIVIL APPEAL NOS. 10098-10102 OF 2013 CIVIL APPEAL NOS. 2307-2308 OF 2013 CIVIL APPEAL NOS. 4666-4667 OF 2013 CIVIL APPEAL NO. 6764 OF 2013 CIVIL APPEAL NO. 4634 OF 2014 CIVIL APPEAL NO. 8976 OF 2018 CIVIL APPEAL NOS. 8977-8988 OF 2018 CIVIL APPEAL NO.781 OF 2021 (@ SLP(C) NO. 37580 OF 2016) CIVIL APPEAL NO.782 OF 2021 (@ SLP(C) NO. 28867 OF 2016) CIVIL APPEAL NO. 783 OF 2021 (@ SLP(C) NO. 28868 OF 2016) CIVIL APPEAL NO. 10673 OF 2016 CIVIL APPEAL NO. 784 OF 2021 (@ SLP(C) NO. 29571 OF 2016) 4 CIVIL APPEAL NO. 10674 OF 2016 CIVIL APPEAL NO. 785 OF 2021 (@ SLP(C) NO. 36782 OF 2016) CIVIL APPEAL NO. 3402 OF 2017 CIVIL APPEAL NO. 10758 OF 2017 CIVIL APPEAL NO. 9486 OF 2017 CIVIL APPEAL NO. 8711 OF 2018 CIVIL APPEAL NO. 8722 OF 2018 CIVIL APPEAL NO. 8724 OF 2018 CIVIL APPEAL NO. 8725 OF 2018 CIVIL APPEAL NO. 9551 OF 2018 CIVIL APPEAL NO. 786 OF 2021 (@ SLP(C) NO. 450 OF 2019) CIVIL APPEAL NO. 2006 OF 2019 CIVIL APPEAL NO. 790 OF 2021 (@ SLP(C) NO. 6736 OF 2020) J U D G M E N T R.F. Nariman, J. 1. Leave granted. 2. The appeals in these cases are by both the assessees as well as the Department of Revenue, Ministry of Finance [“ Revenue ”]. Whereas the 5 assessees have succeeded in the question that was posed before the 1 High Court of Delhi, the Revenue has succeeded insofar as the same 2 question was posed before the High Court of Karnataka, and in the ruling by the Authority for Advance Rulings [“ AAR ”], impugned in C.A. No. 8990/2018. 1 This includes the judgments impugned in C.A No. 8990/2018, C.A Nos. 6386- 6387/2016, SLP(C) No. 37580/2016, SLP(C) No. 28867/2016, SLP(C) No. 28868/2016, C.A No. 10673/2016, SLP(C) No. 29571/2016, C.A No. 10674/2016, SLP(C) No. 36782/2016, C.A No. 10758/2017, C.A No. 9486/2017, C.A No. 8711/2018, C.A No. 8722/2018, C.A No. 8724/2018, C.A No. 8725/2018, C.A No. 9551/2018, SLP(C) NO. 450/2019, SLP(C) No. 6736/2020.

6 3. One group of appeals arises from a common judgment of the High Court of Karnataka dated 15.10.2011 reported as CIT v. Samsung Electronics Co. Ltd., (2012) 345 ITR 494 , by which the question which was posed before the High Court, was answered stating that the amounts paid by the concerned persons resident in India to non- resident, foreign software suppliers, amounted to royalty and as this was so, the same constituted taxable income deemed to accrue in India under section 9(1)(vi) of the Income Tax Act, 1961 [“ Income Tax Act ”], thereby making it incumbent upon all such persons to deduct tax at source and pay such tax deductible at source [“ TDS ”] under section 195 of the Income Tax Act. This judgment dated 15.10.2011 has been relied upon by the subsequent impugned judgments passed by the High Court of Karnataka to decide the same question in favour of the Revenue. 4. The appeals before us may be grouped into four categories: i) The first category deals with cases in which computer software is purchased directly by an end-user, resident in India, from a foreign, 3 non-resident supplier or manufacturer. 3 This category includes C.A. Nos. 8733-8734/2018, C.A. No. 10114/2013, C.A. Nos. 10112-10113/2013, C.A. No. 10106/2013, C.A. No. 10103/2013, C.A. No. 10104/2013, C.A. Nos. 10098-10102/2013, C.A. Nos. 8735-8736/2018, C.A. Nos. 8948-8949/2018, C.A. No. 8956/2018, C.A. No. 8957/2018, C.A. No. 7852/2012, C.A. Nos. 8974-8975/2018, C.A. No. 2304/2013, C.A. No. 2305/2013, C.A. No. 2306/2013, 7 ii) The second category of cases deals with resident Indian companies that act as distributors or resellers, by purchasing computer software from foreign, non-resident suppliers or manufacturers and then 4 reselling the same to resident Indian end-users. iii) The third category concerns cases wherein the distributor happens to be a foreign, non-resident vendor, who, after purchasing software from a foreign, non-resident seller, resells the same to resident 5 Indian distributors or end-users. iv) The fourth category includes cases wherein computer software is affixed onto hardware and is sold as an integrated unit/equipment C.A. Nos. 2307-2308/2013, C.A. No. 10097/2013, C.A. No. 8976/2018, C.A. No. 3402/2017, SLP(C) No. 450/2019, C.A. No. 2006/2019. 4 This category includes C.A Nos. 8737-8941/2018, C.A No. 8942-8947/2018, C.A No. 4420/2012, C.A No. 8959/2018, C.A No. 8963/2018, C.A No. 8962/2018, C.A No. 8958/2018, C.A No. 8961/2018, C.A No. 8960/2018, C.A Nos. 8950-8953/2018, C.A No. 8966/2018, C.A No. 8973/2018, C.A No. 8965/2018, C.A No. 8972/2018, C.A No. 8969/2018, C.A No. 8971/2018, C.A No. 8970/2018, C.A No. 8964/2018, C.A No. 8967/2018, C.A No. 8968/2018, C.A No. 1403/2013, C.A No. 1414/2013, C.A No. 1412/2013, C.A No. 1413/2013, C.A Nos. 1416-1418/2013, C.A No. 1405/2013, C.A No. 1410/2013, C.A No. 1421/2013, C.A No. 1409/2013, C.A No. 1415/2013, C.A No. 1419/2013, C.A No. 1411/2013, C.A No. 1420/2013, C.A No. 1404/2013, C.A No. 1406/2013, C.A No. 1408/2013, C.A No. 1407/2013, C.A Nos. 4666-4667/2013, C.A No. 6764/2013, C.A No. 4419/2012, C.A Nos. 8977-8988/2018, C.A No. 4629/2014, C.A No. 4631/2014, C.A No. 4630/2014, C.A No. 10105/2013. 5 This category includes C.A. No. 10758/2017, C.A. No. 8990/2018, C.A. No. 9486/2017, C.A. No. 8711/2018, C.A. No. 8722/2018, C.A. No. 8724/2018, C.A. No. 8725/2018, C.A. No. 9551/2018, SLP(C) No. 6736/2020, C.A. No. 4634/2014. 8 by foreign, non-resident suppliers to resident Indian distributors or 6 end-users. 5. These cases have a chequered history. The facts of C.A. Nos. 8733- 8734/2018 shall be taken as a sample, indicative of the points of law that arise from the various appeals before us. In this case, the appellant, Engineering Analysis Centre of Excellence Pvt. Ltd. [“ EAC ”], is a resident Indian end-user of shrink-wrapped computer software, directly imported from the United States of America [“ USA ”]. The assessment years that we are concerned with are 2001-2002 and 2002-2003. 6. The Assessing Officer by an order dated 15.05.2002, after applying Article 12(3) of the Double Taxation Avoidance Agreement [“ DTAA ”], between India and USA, and upon applying section 9(1)(vi) of the Income Tax Act, found that what was in fact transferred in the transaction between the parties was copyright which attracted the payment of royalty and thus, it was required that tax be deducted at source by the Indian importer and end-user, EAC. Since this was not done for both the assessment years, EAC was held liable to pay the 6 This category includes C.A. Nos. 10115-10117/2013, C.A. Nos. 6386-6387/2016, C.A. Nos. 8954-8955/2018, SLP(C) No. 37580/2016, SLP(C) No. 28867/2016, SLP(C) No. 28868/2016, C.A. No. 10673/2016, SLP(C) No. 29571/2016, C.A. No. 10674/2016, SLP(C) No. 36782/2016. 9 amount of Rs. 1,03,54,784 that it had not deducted as TDS, along with interest under section 201(1A) of the Income Tax Act amounting to Rs. 15,76,567. The appeal before the Commissioner of Income Tax [“ CIT ”] was dismissed by an order dated 23.01.2004. However, the appeal before the Income Tax Appellate Tribunal [“ ITAT ”] succeeded vide an order dated 25.11.2005, in which the ITAT followed its previous order dated 18.02.2005, passed in Samsung Electronics Co. Ltd. v. Income Tax Officer, ITA Nos. 264-266/Bang/2002 . 7. An appeal was made from the order of the ITAT to the High Court of Karnataka by the Revenue. The Division Bench of the High Court of Karnataka heard a batch of appeals and framed nine questions, of which question nos. 8 and 9 are important and are set out as follows: “ 8. Whether the Tribunal was correct in holding that since the assessee had purchased only a right to use the copyright i.e. the software and not the entire copyright itself, the payment cannot be treated as Royalty as per the Double Taxation Avoidance Agreement and Treaties, which [are] beneficial to the assessee and consequently section 9 of the Act should not take into consideration. 9. Whether the Tribunal was correct in holding that the payment partakes the character of purchase and sale of goods and therefore cannot be treated as royalty payment liable to Income Tax.” 10 8. In answering these questions, through a judgment dated 24.09.2009, the Division Bench of the High Court of Karnataka relied heavily upon the judgment of this Court in Transmission Corpn. of A.P. Ltd. v. CIT, (1999) 7 SCC 266 [“ AP Transco ”] and held that since no application under section 195(2) of the Income Tax Act had been made, the resident Indian importers became liable to deduct tax at source, without more, under section 195(1) of the Income Tax Act. 9. This view of the High Court was set aside by this Court in GE India Technology Centre (P) Ltd. v. CIT, (2010) 10 SCC 29 [“ GE Technology ”], which ultimately found that the judgment of the High Court dated 24.09.2009 had misread AP Transco (supra). Consequently, this Court remanded the matter to the High Court of Karnataka to decide, on merits, the question of law framed as follows:

11

12

15.10.2011, reported as CIT v. Samsung Electronics Co. Ltd., (2012) 345 ITR 494 , dealt with a whole group of appeals, and was thus faced with the following question so posed by this Court: “The question which the High Court will answer is— “whether, on facts and circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that the amount(s) paid by the appellant(s) to the foreign software suppliers was not “royalty” and that the same did not give rise to any “income” taxable in India and, therefore, the appellant(s) was not liable to deduct any tax at source?”” (page 498) 13 11. After setting out the facts in one of the appeals treated as the lead matter, namely ITA No. 2808/2005 concerning Samsung Electronics Co. Ltd., and the relevant provisions of the Income Tax Act, India’s DTAAs with USA, France and Sweden respectively, the High Court of Karnataka, on an examination of the End-User Licence Agreement [“ EULA ”] involved in the transaction, found that what was sold by way of computer software included a right or interest in copyright, which thus gave rise to the payment of royalty and would be an income deemed to accrue in India under section 9(1)(vi) of the Income Tax Act, requiring the deduction of tax at source. 12. Leading the charge on behalf of the appellants in the appeals against this impugned judgment of the High Court of Karnataka, Shri Arvind Datar, learned Senior Advocate, appearing on behalf of IBM India Ltd. [“ IBM India ”] in C.A. No. 4419/2012, which is a resident Indian distributor of computer software products purchased from IBM Singapore Pte Ltd. [“ IBM Singapore ”], submitted that his client is a non- exclusive distributor, which purchases off-the-shelf copies of shrink- wrapped computer software from a foreign company in Singapore for onward sale to Indian end-users under a Remarketer Agreement. He stressed that IBM India, the distributor, is not party to the EULA between IBM Singapore and the ultimate end-users/customers in India. The 14 Indian end-user pays IBM India, and in turn, IBM India pays this amount to IBM Singapore after deducting a portion of profit. Importantly, under the Remarketer Agreement, IBM India does not own any right, title or interest in copyright and other intellectual property owned by IBM Singapore, and merely markets IBM Singapore’s software products in India. 13. Shri Datar further argued that the computer software that is imported for onward sale from Singapore constitutes “goods” and thus was directly covered by this Court’s judgment in Tata Consultancy Services v. State of A.P., 2005 (1) SCC 308 . He assailed the impugned judgment of the High Court of Karnataka by referring to Article 12 of the Agreement between the Government of the Republic of India and the Government of the Republic of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on 7 Income, [“ India-Singapore DTAA ”], and the definition of “royalties” contained therein. He argued that the definition of “royalties” did not extend to derivative products of the copyright, for example, a book or a music CD or software products. He relied upon the judgment in Union

15 of India v. Azadi Bachao Andolan, (2004) 10 SCC 1 [“ Azadi Bachao Andolan ”] to argue that by virtue of section 90(2) of the Income Tax Act, the DTAA would prevail over domestic law to the extent it is more beneficial to the deductor of tax under section 195 of the Income Tax Act. According to him, even assuming that under section 9(1)(vi) of the Income Tax Act IBM India’s transaction would entail parting with copyright and attract royalty, upon applying the more beneficial provisions of the India-Singapore DTAA, it would be made clear that the amounts payable were not in the nature of royalty, and no income in the hands of the foreign supplier would be deemed to accrue in India. Thus, no tax had to be deducted by the Indian importer under section 195(1) of the Income Tax Act. Equally, he submitted that the retrospective amendment to section 9(1)(vi) of the Income Tax Act brought in by the Finance Act 2012, which added explanation 4 to the provision and expanded its ambit with effect from 01.06.1976, could also not be applied to the DTAA in question. 14. Pointing to the provisions of the Copyright Act, 1957 [“ Copyright Act ”], Shri Datar argued that there was a difference between a copyright in an original work and a copyrighted article, and that this was recognised in section 14(b) of the Copyright Act, which refers to a “computer program” per se and a “copy of a computer program” as two distinct subject 16 matters. He emphasized that under the Remarketer Agreement, no copyright was given by IBM Singapore and that even the end-user in India only received a limited licence to use the product by itself, with no right to sub-license, lease, make copies etc. The licence to use such shrink-wrapped computer software was thus incidental to and essential to effectuate the use of the product. He strongly relied upon the Commentaries on the Articles of the Model Tax Convention on Income and on Capital [“ OECD Commentary ”] by the Organisation for Economic Co-operation and Development [“ OECD ”] which distinguishes between the sale of a copyrighted article and the sale of copyright itself. He further argued that the doctrine of first sale/principle of exhaustion was cemented in section 14(b)(ii) of the Copyright Act post the amendment brought in vide Act 49 of 1999, with effect from 15.01.2000 [“ 1999 Amendment ”], thereby making it clear that the foreign supplier’s distribution right would not extend to the sale of copies of the work to other persons beyond the first sale. Importantly, he added that the importer, IBM India, being only a distributor, had no right to use the computer software, and merely purchased a sealed, shrink- wrapped product and resold it in the same, sealed condition, and thereby did not pay any consideration for any transfer of or interest in 17 copyright. He cited a number of judgments and other authorities to buttress his submissions. 15. Shri Percy Pardiwala, learned Senior Advocate appearing on behalf of Rational Software Corporation India Ltd. in C.A. No. 8962/2018, supplemented Shri Datar’s submissions, and adverted to the provisions of the India-Singapore DTAA, Income Tax Act and the relevant EULA and Remarketer Agreement. Coming to the Finance Act 2012 which added explanation 4 to section 9(1)(vi) of the Income Tax Act, he argued that the words “any right, property or information used or services utilised” which occur in section 9(1)(vi)(b), make it clear that explanation 4, read both textually and contextually would only apply to section 9(1)(vi)(b), and not expand the scope of the definition of royalty contained in explanation 2 to section 9(1)(vi). Further, he referred to Circular No. 10/2002 dated 09.10.2002 by the Central Board of Direct Taxes [“ CBDT ”] in which “remittance for royalties” and “remittance for supply of articles or…computer software” were addressed as separate and distinct payments, the former attracting the “royalty” provision under Article 12 of the DTAA, and the latter being taxable as business profits under Article 7 of the DTAA, provided that the foreign, non-resident supplier or manufacturer had a permanent establishment [“ PE ”] in India. 18 16. Shri S. Ganesh, learned Senior Advocate appearing on behalf of Sonata Information Technology Ltd. in C.A. Nos. 8737-8941/2018, submitted that to comprehend the nature of a licence, one would have to refer to section 52 of the Indian Easements Act 1882. He stressed the fact that the ruling by the AAR in the case of Dassault Systems, K.K., In Re ., (2010) 322 ITR 125 (AAR) , as followed in Geoquest Systems B.V. Gevers Deynootweg, In Re. , (2010) 327 ITR 1 (AAR) , was not appealed against by the Revenue, and the exhaustive statement of law contained therein is something that he relied upon. According to him, if the position of the Revenue were correct, arbitrary results would ensue, inasmuch as his client, receiving a 2% commission, would, however, after the disallowance of the deduction under section 40(a)(ia) of the Income Tax Act, end up paying tax of a huge amount, way beyond the commission, resulting in extreme financial hardship. Thus, if section 195 of the Income Tax Act could be construed in a manner so as to avoid such a result, this must be done. Further, he relied heavily upon the OECD Commentary and went on to argue that mere nomenclature, such as the use of the term “licence”, was not conclusive as to the character of the transaction. He also relied upon section 52(1)(aa) of the Copyright Act to argue that what is mentioned in the provision is exactly what the transactions in these 19 appeals are concerned with, and therefore, the making of copies only in order to utilise the product to the extent permitted by the EULA, would not constitute an infringement of copyright, as expressly stated in this provision. Going by what the originator or creator holds by way of copyright, which he either passes on or retains, and what is mentioned in section 52(1)(aa) of the Copyright Act, he submitted that what was resold by his client in this case was not copyright, but merely a copyrighted article, which constituted goods in the hands of the end- user, without any right to transfer the same. He also cited several judgments to buttress his submissions. 17. Shri Ajay Vohra, learned Senior Advocate appearing on behalf of Sasken Communications Tech Ltd. in C.A. Nos. 10114/2013 and 8957/2018, relied upon the Convention between the Government of the United States of America and the Government of the Republic of India for the Avoidance of Double Taxation and the Prevention of Fiscal 8 Evasion with respect to Taxes on Income, [“ India-USA DTAA ”] and echoed the submissions of his predecessors. In addition, he argued that the retrospective amendment to section 9(1)(vi) of the Income Tax Act adding explanation 4, could not be applied as the assessment years 8 Notification No. GSR 992(E), dated 20-12-1990. 20 that we are concerned with in all these cases are prior to 2012, and that the law cannot compel one to do the impossible, namely, to deduct tax at source on an expanded definition of royalty which did not exist at the time of the payment/deduction to be made under section 195 of the Income Tax Act. He cited various judgments and relied upon the proposition that where no assessment to tax can be made on a foreign, non-resident supplier, the appellants could not be held to be assessees in default for not deducting tax at source under section 195 of the Income Tax Act. 18. Shri Preetesh Kapur, learned Senior Advocate appearing on behalf of Sunray Computers Pvt. Ltd. in C.A. Nos. 10115-10117/2013, stressed upon the language of section 14(b)(ii) of the Copyright Act, both pre and post the 1999 Amendment, brought in with effect from 15.01.2000, and cited the doctrine of first sale/principle of exhaustion, arguing that the amendment, after deleting the words “regardless of whether such copy has been sold or given on hire on earlier occasions”, was a statutory application of the doctrine of first sale/principle of exhaustion. This, he argued, made it clear that since no distribution right by the original owner extended beyond the first sale of the copyrighted goods, it can be said that only the goods, and not the copyright in the goods, had passed onto the importer. 21 19. Shri Sachit Jolly, learned advocate appearing on behalf of Engineering Analysis Centre of Excellence Pvt. Ltd. in C.A. Nos. 8733-8734/2018, and GE India Technology Centre Pvt. Ltd. in C.A. Nos. 8735- 8736/2018, also echoed these submissions and in particular, relied upon judgments which made it clear that a retrospective amendment to a statute cannot be applied to an assessment year in which, as a matter of fact, the expanded definition of royalty did not exist. 20. Shri Kunal Verma, learned advocate appearing on behalf of Infineon Technologies India Pvt. Ltd. in C.A. No. 2006/2019, argued that in any case, in the facts of his case, the payments made by the assessee were in the nature of reimbursement of costs under a cost-sharing agreement with a German supplier of software, and thus no “sum chargeable under the provisions of [the] Act” had been paid, attracting section 195 of the Income Tax Act. To buttress his submission, he relied in particular upon the judgment in Director of Income Tax v. A.P. Moller Maersk AS, (2017) 5 SCC 651 . 21. Per contra , Shri Balbir Singh, the learned Additional Solicitor General appearing on behalf of the Revenue, took us through the provisions of the Income Tax Act, the Copyright Act, the India-USA DTAA and some of the EULAs between the parties. He argued that explanation 2(v) to section 9(1)(vi) of the Income Tax Act applied to payments to a non- 22 resident by way of royalty for the use of or the right to use any copyright. For this, he relied upon the language of explanation 2(v) and stressed that the words “in respect of” have to be given a wide meaning. He then 9 relied upon CBDT Circular No. 152 dated 27.11.1974, together with the statement of the Finance Minister made before the Lok Sabha on 10 11 07.09.1990, and CBDT Notification No. 21/2012 dated 13.06.2012, to submit that explanation 4 to section 9(1)(vi) of the Income Tax Act is clarificatory of the position in law right from 01.06.1976 when section 9(1)(vi) of the Income Tax Act was first brought into force. He then argued that the provisions for TDS are distinct from and exist apart from provisions for assessment under the Income Tax Act. This being so, it is clear that the India-USA DTAA and other such DTAAs would not apply to the persons spoken of in section 195 of the Income Tax Act who are not assessees, since the provisions of the DTAAs, when read with section 90 of the Income Tax Act, applied only to persons who could be described as assessees. He also relied upon Article 30 of the India-USA DTAA which, for the USA, fixes different dates for the entry into force of 9 Circular No. 152 [F.No. 484/31/74-FTD-II], dated 27.11.1974. 10 As recorded in CBDT Circular No. 588 dated 02.01.1991. 11 Notification No. 21/2012 [F.No.142/10/2012-SO(TPL)] S.O. 1323(E), dated 13.06.2012. 23 the provisions concerning withholding taxes and other taxes, unlike the entry into force provision for India, which makes no such distinction. This, he argued, would make it clear that persons who have to make deductions under section 195 of the Income Tax Act do not fall within the subject matter of the India-USA DTAA and other such DTAAs. He then relied heavily upon AP Transco (supra) and other judgments which make it clear that a “payer” under section 195 and an “assessee” under section 2(7) of the Income Tax Act are distinct. He also relied heavily upon a recent judgment of this Court in PILCOM v. CIT, West Bengal- VII, 2020 SCC Online SC 426 [“ PILCOM ”], which dealt with section 194E of the Income Tax Act, for the proposition that tax has to be deducted at source irrespective of whether tax is otherwise payable by the non-resident assessee. He then relied upon CBDT Circular No. 588 12 dated 02.01.1991, which clarified that tax concessions were not available in relation to payments in respect of software imported separately or independently of computer hardware. 22. Coming to the Copyright Act, the learned Additional Solicitor General relied upon sections 2(a)(v), 19(3), 30A, 52(1)(ad), 58 and 65A of the Copyright Act to buttress the submission that in some of the cases 12 187 ITR (St.) 0063. 24 before us, since adaptation of software could be made, albeit for installation and use on a particular computer, copyright is parted with by the original owner. He added that section 51(b) of the Copyright Act makes it clear that when any person makes for sale or hire, or sells or lets for hire, or distributes, either for the purpose of trade or to such an extent as to affect prejudicially the owner of the copyright, or imports into India, any infringing copies of the work, such importation into India without a licence would amount to infringement of copyright. Further, section 58 of the Copyright Act regards infringing copies of any work as the property of the owner of the copyright, who accordingly may take proceedings for the recovery of possession thereof or in respect of the conversion thereof. From section 52(1)(ad) of the Copyright Act, the learned Additional Solicitor General sought to argue that only the making of copies or the adaptation of a computer programme from a legally obtained copy for non-commercial, personal use would not amount to infringement, and therefore in the appeals before us, where such copies were made for commercial use, the converse would be true. He relied strongly upon the AAR’s ruling in Citrix Systems Asia Pacific Ptyl. Ltd., In Re. , (2012) 343 ITR 1 (AAR) , arguing that it approached the subject correctly and that the findings made therein are different and preferable to the findings made by the AAR in Dassault Systems, K.K., 25 In Re ., (2010) 322 ITR 125 (AAR) and Geoquest Systems B.V. Gevers Deynootweg, In Re. , (2010) 327 ITR 1 (AAR) , and the other judgments of the High Court of Delhi. 23. The learned Additional Solicitor General further pointed out that the Indian Government had expressed its reservations on the OECD Commentary, especially on the parts of the OECD Commentary dealing with the parting of copyright and royalty. He also relied upon on the Report of the High Powered Committee on ‘Electronic Commerce and 13 Taxation’ constituted by the CBDT, [“ HPC Report 2003 ”] and the Report of the Committee on the Taxation of E-Commerce [“ E- Commerce Report 2016 ”], which proposed an equalization levy on specified transactions. He then went on to rely on certain judgments to state that even if the OECD Commentary could be relied upon, it being a rule of international law contrary to domestic law, to the extent it was contrary to explanations 2 and 4 of section 9(1)(vi) of the Income Tax Act, it must give way to domestic law. Referring to the doctrine of first sale/principle of exhaustion, he cited a number of judgments in order to show that under section 14(b)(ii) of the Copyright Act, this doctrine cannot be said to apply insofar as distributors are concerned. He finally 13 F. No 500/ 122/ 99 dated December 16, 1999. 26 concluded his arguments by stating that the judgments which deal with computer software under sales tax law and excise law have no relevance to income tax law, as the laws relating to indirect taxes are fundamentally different from the laws relating to direct taxes, since they must follow the drill of the chargeability under the Income Tax Act, which is different from chargeability under sales tax law or excise law. THE INCOME TAX ACT, 1961 24. Having heard the learned counsels appearing on behalf of various parties, we first set out the relevant provisions of the Income Tax Act that we are directly concerned with: “ 2. Definitions. In this Act, unless the context otherwise requires,— xxx xxx xxx ( 7 ) "assessee" means a person by whom any tax or any other sum of money is payable under this Act, and includes— ( a ) every person in respect of whom any proceeding under this Act has been taken for the assessment of his income or assessment of fringe benefits or of the income of any other person in respect of which he is assessable, or of the loss sustained by him or by such other person, or of the amount of refund due to him or to such other person ; ( b ) every person who is deemed to be an assessee under any provision of this Act ; 27 ( c ) every person who is deemed to be an assessee in default under any provision of this Act ; xxx xxx xxx 14 (37A) “rate or rates in force” or “rates in force”, in relation to an assessment year or financial year, means— xxx xxx xxx (iii) for the purposes of deduction of tax under section 194LBA or section 194LBB or section 194LBC or section 195, the rate or rates of income-tax specified in this behalf in the Finance Act of the relevant year or the rate or rates of income-tax specified in an agreement entered into by the Central Government under section 90, or an agreement notified by the Central Government under section 90A, whichever is applicable by virtue of the provisions of section 90, or section 90A, as the case may be;” “ 4. Charge of income-tax. (1) Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions (including provisions for the levy of additional income-tax) of, this Act in respect of the total income of the previous year of every person: Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other than the previous year, income-tax shall be charged accordingly. (2) In respect of income chargeable under sub-section (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act.” 14 Substituted by the Finance Act 1992 (18 of 1992), sec. 3(c) (w.e.f. 1-6-1992). 28 “ 5. Scope of total income. (1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which—

(a) is received or is deemed to be received in India in such year by or on behalf of such person ; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. Explanation 1.—Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India. Explanation 2.—For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to ” be received by him in India. 29 “ 9. Income deemed to accrue or arise in India. (1) The following incomes shall be deemed to accrue or arise in India:— xxx xxx xxx 15 ( vi ) income by way of royalty payable by—

Explanation 2. —For the purposes of this clause, "royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for— ( i ) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property; ( ii ) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property ; ( iii ) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ; 15 Inserted by the Finance Act 1976 (66 of 1976), sec 4(b) (w.e.f. 1-6-1976). 30 ( iv ) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill ; 16 ( iva ) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB; ( v ) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting; or ( vi ) the rendering of any services in connection with the 17 activities referred to in [sub-clauses ( i ) to ( iv ), ( iva ) and ( v )]. 18 Explanation 3.— For the purposes of this clause, "computer software" means 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. 19 Explanation 4.— For the removal of doubts, it is hereby clarified that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a 16 Inserted by the Finance Act 2001 (14 of 2001), sec. 4(i) (w.e.f. 1-4-2002). 17 Substituted by the Finance Act 2001 (14 of 2001), sec. 4(ii), for “sub-clauses (i) to (v)” (w.e.f. 1-4-2002). 18 Substituted by the Finance Act 2000 (10 of 2000), sec. 4, for Explanation 3 (w.e.f. 1-4-2001). Explanation 3 before substitution, stood as under: “ Explanation 3.- For the purposes of this clause, the expression “computer software” shall have the meaning assigned to it in clause (b) of the Explanation to section 80HHE”. 19 Inserted by the Finance Act 2012 (23 of 2012), sec 4(b) (w.r.e.f 1-6-1976). 31 computer software (including granting of a licence) irrespective of the medium through which such right is transferred. 20 Explanation 5.— For the removal of doubts, it is hereby clarified that the royalty includes and has always included consideration in respect of any right, property or information, whether or not— ( a ) the possession or control of such right, property or information is with the payer; ( b ) such right, property or information is used directly by the payer; ( c ) the location of such right, property or information is in India.” “ 90. Agreement with foreign countries or specified territories. (1) The Central Government may enter into an agreement with the Government of any country outside India or specified territory outside India,— ( a ) for the granting of relief in respect of— ( i ) income on which have been paid both income- tax under this Act and income-tax in that country or specified territory, as the case may be, or ( ii ) income-tax chargeable under this Act and under the corresponding law in force in that country or specified territory, as the case may be, to promote mutual economic relations, trade and investment, or ( b ) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country or specified territory, as the case may be, 20 Inserted by the Finance Act 2012 (23 of 2012), sec 4(b) (w.r.e.f 1-6-1976). 32 without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in the said agreement for the indirect benefit to residents of any other country or territory ), or ( c ) for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that country or specified territory, as the case may be, or investigation of cases of such evasion or avoidance, or ( d ) for recovery of income-tax under this Act and under the corresponding law in force in that country or specified territory, as the case may be, and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement. (2) Where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee. xxx xxx xxx 21 Explanation 4.— For the removal of doubts, it is hereby declared that where any term used in an agreement entered into under sub-section (1) is defined under the said agreement, the said term shall have the same meaning as assigned to it in the agreement; and where the term is not defined in the said agreement, but defined in the Act, it shall 21 Inserted by the Finance Act 2017, sec. 39 (w.e.f. 1-4-2018). 33

22 Inserted by the Finance Act 2012 (23 of 2012), sec. 77(a)(ii) (w.r.e.f. 1-4-1962). 34 deemed to have always extended to all persons, resident or non-resident, whether or not the non-resident person has— ( i ) a residence or place of business or business connection in India; or ( ii ) any other presence in any manner whatsoever in India. (2) Where the person responsible for paying any such sum 23 chargeable under this Act (other than salary) to a non- resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application in such form and manner to the Assessing Officer, to determine in such manner, as may be prescribed, the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub- section (1) only on that proportion of the sum which is so chargeable.” “ 201. Consequences of failure to deduct or pay. (1) Where any person, including the principal officer of a company,— ( a ) who is required to deduct any sum in accordance with the provisions of this Act; or ( b ) referred to in sub-section (1A) of section 192, being an employer, does not deduct, or does not pay, or after so deducting fails to pay, the whole or any part of the tax, as required by or under this Act, then, such person, shall, without prejudice to any other consequences which he may incur, be deemed to be an assessee in default in respect of such tax: Provided that any person, including the principal officer of a company, who fails to deduct the whole or any part of the 23 Substituted by the Finance Act 2003 (32 of 2003), sec. 80(b) (w.e.f. 1-6-2003). 35 tax in accordance with the provisions of this Chapter on the sum paid to a payee or on the sum credited to the account of a payee shall not be deemed to be an assessee in default in respect of such tax if such payee— ( i ) has furnished his return of income under section 139; ( ii ) has taken into account such sum for computing income in such return of income; and ( iii ) has paid the tax due on the income declared by him in such return of income, and the person furnishes a certificate to this effect from an accountant in such form as may be prescribed: Provided further that no penalty shall be charged under section 221 from such person, unless the Assessing Officer is satisfied that such person, without good and sufficient reasons, has failed to deduct and pay such tax.” 25. The scheme of the Income Tax Act, insofar as the question raised before us is concerned, is that for income to be taxed under the Income Tax Act, residence in India, as defined by section 6, is necessary in most cases. By section 4(1), income tax shall be charged for any assessment year at any rate or rates, as defined by section 2(37A) of the Income Tax Act, in respect of the total income of the previous year of every person. Under section 4(2), in respect of income chargeable under sub-section (1) thereof, income tax shall be deducted at source or paid in advance, depending upon the provisions of the Income Tax Act. Importantly, under section 5(2) of the Income Tax Act, the total income of a person who is a non-resident, includes all income from 36 whatever source derived, which accrues or arises or is deemed to accrue or arise to such person in India during such year. This, however, is subject to the provisions of the Income Tax Act. Certain income is deemed to arise or accrue in India, under section 9 of the Income Tax Act, notwithstanding the fact that such income may accrue or arise to a non-resident outside India. One such income is income by way of royalty, which, under section 9(1)(vi) of the Income Tax Act, means the transfer of all or any rights, including the granting of a licence, in respect of any copyright in a literary work. 26. That such transaction may be governed by a DTAA is then recognized by section 5(2) read with section 90 of the Income Tax Act, making it clear that the Central Government may enter into any such agreement with the government of another country so as to grant relief in respect of income tax chargeable under the Income Tax Act or under any corresponding law in force in that foreign country, or for the avoidance of double taxation of income under the Income Tax Act and under the corresponding law in force in that country. What is of importance is that once a DTAA applies, the provisions of the Income Tax Act can only apply to the extent that they are more beneficial to the assessee and not otherwise. Further, by explanation 4 to section 90 of the Income Tax 37 Act, it has been clarified by the Parliament that where any term is defined in a DTAA, the definition contained in the DTAA is to be looked at. It is only where there is no such definition that the definition in the Income Tax Act can then be applied. This position has been recognised by this Court in Azadi Bachao Andolan (supra), which held:

38

Act is inextricably linked with the charging provision contained in section 9 read with section 4 of the Income Tax Act, as a result of which, a person resident in India, responsible for paying a sum of money, “chargeable under the provisions of [the] Act”, to a non-resident, shall at the time of credit of such amount to the account of the payee in any mode, deduct tax at source at the rate in force which, under section 2(37A)(iii) of the Income Tax Act, is the rate in force prescribed by the DTAA. Importantly, such deduction is only to be made if the non- resident is liable to pay tax under the charging provision contained in section 9 read with section 4 of the Income Tax Act, read with the DTAA. Thus, it is only when the non-resident is liable to pay income tax in India on income deemed to arise in India and no deduction of TDS is made under section 195(1) of the Income Tax Act, or such person has, after applying section 195(2) of the Income Tax Act, not deducted such proportion of tax as is required, that the consequences of a failure to deduct and pay, reflected in section 201 of the Income Tax Act, follow, by virtue of which the resident-payee is deemed an “assessee in 39 default”, and thus, is made liable to pay tax, interest and penalty thereon. This position is also made amply clear by the referral order in the concerned appeals from the High Court of Karnataka, namely, the judgment of this Court in GE Technology (supra).

40

41

31. It will be seen that section 194E of the Income Tax Act belongs to a set of various provisions which deal with TDS, without any reference to chargeability of tax under the Income Tax Act by the concerned non- resident assessee. This section is similar to sections 193 and 194 of the Income Tax Act by which deductions have to be made without any reference to the chargeability of a sum received by a non-resident assessee under the Income Tax Act. On the other hand, as has been noted in GE Technology (supra), at the heart of section 195 of the Income Tax Act is the fact that deductions can only be made if the non- resident assessee is liable to pay tax under the provisions of the Income Tax Act in the first place. 32. Thus, the judgment of this Court in PILCOM (supra), dealing with a completely different provision in a completely different setting, has no application to the facts of this case. THE COPYRIGHT ACT, 1957 33. The relevant provisions of the Copyright Act are as follows: “ 2. Interpretation. —In this Act, unless the context otherwise requires,— (a) “adaptation” means,- xxx xxx xxx 42 (v) in relation to any work, any use of such work involving its rearrangement or alteration; xxx xxx xxx (d) “author” means,— 24 (vi) in relation to any literary, dramatic, musical or artistic work which is computer-generated, the person who causes the work to be created; xxx xxx xxx 25 (fa) “commercial rental” does not include the rental, lease or lending of a lawfully acquired copy of a computer programme, sound recording, visual recording or cinematographic film for non-profit purposes by a non-profit library or non-profit educational institution; xxx xxx xxx (ffb) “computer” includes any electronic or similar device having information processing capabilities (ffc) “computer programme” means a set of instructions expressed in words, codes, schemes or in any other form, including a machine readable medium, capable of causing a computer to perform a particular task or achieve a particular result; xxx xxx xxx 24 Substituted by Act 38 of 1994, sec. 2 (w.e.f. 10-5-1995). 25 Inserted by Act 27 of 2012, sec. 2(ii) (w.e.f. 21-6-2012). 43

xxx xxx xxx

26 Substituted by Act 38 of 1994, sec. 2 (w.e.f. 10-5-1995). 44

27 Substituted by Act 49 of 1999, sec. 3 (w.e.f. 15-1-2000). 45

28 Inserted by Act 27 of 2012, sec. 8 (w.e.f. 21-6-2012). 46

47

29 Inserted by Act 38 of 1994, s. 10 (w.e.f. 10-5-1995). 48

obtained copy for non-commercial personal use;” “ 58. Rights of owner against persons possessing or dealing with infringing copies.— All infringing copies of any work in which copyright subsists, and all plates used or 30 Inserted by Act 38 of 1994, sec. 17 (w.e.f. 10-5-1995). 49

Under section 2(o) of the Copyright Act, a literary work includes a computer programme and a computer programme has been defined under section 2(ffc) of the Copyright Act to mean a set of instructions expressed in words, codes, schemes or in any other form capable of causing a computer to perform a particular task or achieve a particular result. 35. Though the expression “copyright” has not been defined separately in the “definitions” section of the Copyright Act, yet, section 14 makes it clear that “copyright” means the “exclusive right”, subject to the 50 provisions of the Act, to do or authorise the doing of certain acts “in respect of a work”. When an “author” in relation to a “literary work” which includes a “computer programme”, creates such work, such author has the exclusive right, subject to the provisions of the Copyright Act, to do or authorise the doing of several acts in respect of such work or any substantial part thereof. In the case of a computer programme, section 14(b) specifically speaks of two sets of acts – the seven acts enumerated in sub-clause (a) and the eighth act of selling or giving on commercial rental or offering for sale or for commercial rental any copy of the computer programme. Insofar as the seven acts that are set out in sub-clause (a) are concerned, they all delineate how the exclusive right that is with the owner of the copyright may be parted with, i.e., if there is any parting with the right to reproduce the work in any material form; the right to issue copies of the work to the public, not being copies already in circulation; the right to perform the work in public or communicate it to the public; the right to make any cinematograph film or sound recording in respect of the work; the right to make any translation of the work; the right to make any adaptation of the work; or the right to do any of the specified acts in relation to a translation or an adaptation. 51 36. In essence, such right is referred to as copyright, and includes the right to reproduce the work in any material form, issue copies of the work to the public, perform the work in public, or make translations or adaptations of the work. This is made even clearer by the definition of an “infringing copy” contained in section 2(m) of the Copyright Act, which in relation to a computer programme, i.e., a literary work, means reproduction of the said work. Thus, the right to reproduce a computer programme and exploit the reproduction by way of sale, transfer, license etc. is at the heart of the said exclusive right. 37. Section 14(b)(ii) of the Copyright Act was amended twice, first in 1994 and then again in 1999, with effect from 15.01.2000. Prior to the 1999 Amendment, section 14(b)(ii) of the Copyright Act read as follows:

What is conspicuous by its absence is the phrase “regardless of whether such copy has been sold or given on hire on earlier occasions”. 38. Importantly, no copyright exists in India outside the provisions of the Copyright Act or any other special law for the time being in force, vide section 16 of the Copyright Act. When the owner of copyright in a literary work assigns wholly or in part, all or any of the rights contained in 52 section 14(a) and (b) of the Copyright Act, in the said work for a consideration, the assignee of such right becomes entitled to all such rights comprised in the copyright that is assigned, and shall be treated as the owner of the copyright of what is assigned to him ( see section 18(2) read with section 19(3) of the Copyright Act). Also, under section 30 of the Copyright Act, the owner of the copyright in any literary work may grant any interest in any right mentioned in section 14(a) of the Copyright Act by licence in writing by him to the licensee, under which, for parting with such interest, royalty may become payable ( see section 30A of the Copyright Act). When such licence is granted, copyright is infringed when any use, relatable to the said interest/right that is licensed, is contrary to the conditions of the licence so granted. Infringement of copyright takes place when a person “makes for sale or hire or sells or lets for hire” or “offers for sale or hire” or “distributes…so as to affect prejudicially the owner of the copyright”, vide section 51(b) of the Copyright Act. Importantly, the making of copies or adaptation of a computer programme in order to utilise the said computer programme for the purpose for which it was supplied, or to make up back-up copies as a temporary protection against loss, destruction or damage so as to be able to utilise the computer programme for the purpose for which it was supplied, does not constitute an act of infringement of copyright 53 under section 52(1)(aa) of the Copyright Act. In short, what is referred to in section 52(1)(aa) of the Copyright Act would not amount to reproduction so as to amount to an infringement of copyright. 39. Section 52(1)(ad) is independent of section 52(1)(aa) of the Copyright Act, and states that the making of copies of a computer programme from a personally legally obtained copy for non-commercial personal use would not amount to an infringement of copyright. However, it is not possible to deduce from this what is sought to be deduced by the learned Additional Solicitor General, namely, that if personally legally obtained copies of a computer programme are to be exploited for commercial use, it would necessarily amount to an infringement of copyright. Section 52(1)(ad) of the Copyright Act cannot be read to negate the effect of section 52(1)(aa), since it deals with a subject matter that is separate and distinct from that contained in section 52(1)(aa) of the Copyright Act. DOUBLE TAXATION AVOIDANCE AGREEMENTS 40. These appeals concern the DTAAs between India and the following countries/parties: 1. Commonwealth of Australia 2. Canada 54 3. People’s Republic of China 4. Republic of Cyprus 5. Republic of Finland 6. Republic of France 7. Federal Republic of Germany 8. Hong Kong Special Administrative Region of the People's Republic of China 9. Republic of Ireland 10. Republic of Italy 11. Japan 12. Republic of Korea 13. Kingdom of Netherlands 14. Republic of Singapore 15. Kingdom of Sweden 16. India-Taipei Association in Taipei (Taiwan) 17. United States of America 18. United Kingdom of Great Britain and Northern Ireland 41. Insofar as is material, each of these DTAAs is based on the OECD Model Tax Convention on Income and on Capital, and are therefore substantially similar, if not identical, in respect of the provisions concerning “business profits” and “royalties”. The provisions of one of these DTAAs, namely the India-Singapore DTAA, are set out as follows: 55 “ARTICLE 2 - TAXES COVERED 1. The taxes to which this Agreement shall apply are: (a) in India: income-tax including any surcharge thereon (hereinafter referred to as "Indian tax"); (b) in Singapore: the income tax (hereinafter referred to as "Singapore tax"). 2. The Agreement shall also apply to any identical or substantially similar taxes which are imposed by either Contracting State after the date of signature of the present Agreement in addition to, or in place of, the taxes referred to in paragraph 1. The competent authorities of the Contracting States shall notify each other of any substantial changes which are made in their respective taxation laws.” “ ARTICLE 3 - GENERAL DEFINITIONS xxx xxx xxx 2. As regards the application of the Agreement by a Contracting State, any term not defined therein shall, unless the context otherwise requires, have the meaning which it has under the law of that State concerning the taxes to which the Agreement applies.” “ ARTICLE 7 - BUSINESS PROFITS 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is 56 directly or indirectly attributable to that permanent establishment.” “ ARTICLE 12 - ROYALTIES AND FEES FOR TECHNICAL SERVICES 1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the recipient is the beneficial owner of the royalties or fees for technical services, the tax so charged shall not exceed: (a) in the case of royalties referred to in paragraph 3(a) and fees for technical services as defined in this Article (other than services described in subparagraph (b) of this paragraph), 15% of the gross amount of the royalties and fees; (b) in the case of royalties referred to in paragraph 3(b) and fees for technical services as defined in this Article that are ancillary and subsidiary to the enjoyment of property for which royalties under paragraph 3(b) are received, 10% of the gross amount of the royalties and fees. 3. The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use: (a) any copyright of a literary, artistic or scientific work, including cinematograph films or films or tapes used for radio or television broadcasting, any patent, trade mark, 57 design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right, property or information; (b) any industrial, commercial or scientific equipment, other than payments derived by an enterprise from activities described in paragraph 4(b) or 4(c) of Article 8.” “ ARTICLE 30 - ENTRY INTO FORCE 1. Each of the Contracting States shall notify the other of the completion of the procedures required by its law for the bringing into force of this Agreement. This Agreement shall enter into force on the date of the later of these notifications and shall thereupon have effect: (a) in India: in respect of income arising in any fiscal year beginning on or after the first day of April 1994; (b) in Singapore: in respect of income arising in any fiscal year beginning on or after the first day of January 1994. 2. The Agreement between the Government of the Republic of India and the Government of the Republic of Singapore for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income signed in Singapore on 20th April, 1981 shall terminate and cease to be effective from the date on which this Agreement comes into effect.” 42. The subject matter of each of the DTAAs with which we are concerned is income tax payable in India and a foreign country. Importantly, as is now reflected by explanation 4 to section 90 of the Income Tax Act and 58 under Article 3(2) of the DTAA, the definition of the term “royalties” shall have the meaning assigned to it by the DTAA, meaning thereby that the expression “royalty”, when occurring in section 9 of the Income Tax Act, has to be construed with reference to Article 12 of the DTAA. This 31 position is also clarified by CBDT Circular No. 333 dated 02.04.1982, which states as follows: “Circular : No. 333 dated 2-4-1982. Specific provisions made in double taxation avoidance agreement - Whether it would prevail over general provisions contained in Income-tax Act 1. It has come to the notice of the Board that sometimes effect to the provisions of double taxation avoidance agreement is not given by the Assessing Officers when they find that the provisions of the agreement are not in conformity with the provisions of the Income-tax Act, 1961. 2. The correct legal position is that where a specific provision is made in the double taxation avoidance agreement, that provisions will prevail over the general provisions contained in the Income-tax Act. In fact that the double taxation avoidance agreements which have been entered into by the Central Government under section 90 of the Income-tax Act, also provide that the laws in force in either country will continue to govern the assessment and taxation of income except in the respective countries where provisions to the contrary have been made in the agreement. 31 F. No. 506/42/81-FTD. 59 3. Thus, where a double taxation avoidance agreement provides for a particular mode of computation of income, the same should be followed, irrespective of the provisions in the Income-tax Act. Where there is no specific provision in the agreement, it is basic law, i.e. , the Income-tax Act, that will govern the taxation of income. ” 43. Thus, by virtue of Article 12(3) of the DTAA, royalties are payments of any kind received as consideration for “the use of, or the right to use, any copyright” of a literary work, which includes a computer programme or software. END-USER LICENCE AGREEMENTS AND DISTRIBUTION AGREEMENTS 44. Certain sample clauses of the EULAs that are illustrative of the transactions with which we are concerned in each category (outlined in paragraph 4 of this judgment), are set out hereinbelow: 44. i) Category 1: The EULA between Samsung Electronics Co. and the end-user (updated on 16.11.2016) contains, inter alia , the following terms: “This End User Licence Agreement ("EULA") is a legal agreement between you (either an individual or a single entity) and Samsung Electronics Co., Ltd. ("Samsung") for software, whether pre-installed or downloaded, owned by Samsung and its affiliated companies and its third party suppliers and licensors, that accompanies this EULA, which 60

61

62

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

63

64

65

(emphasis supplied) 44. ii) b. The EULA dated 01.07.2019, involved in C.A. No. 4419/2012, granting resident Indian end-users the licence to use the software remarketed or distributed in India through IBM India, contains the following terms:

66 4) related licensed materials (such as keys and documentation).” “ 2. License Grant The Program is owned by IBM or an IBM supplier, and is copyrighted and licensed, not sold. Licensee receives a license to the Programs from Assimil8 Limited through a sublicensing agreement between IBM and Assimil8 Limited. Assimil8 Limited grants Licensee a nonexclusive license to 1) use the Program up to the Authorized Use specified in the PoE 2) make and install copies to support such Authorized Use, and 3) make a backup copy, all provided that a. Licensee has lawfully obtained the Program and complies with the terms of the Agreement; b. The backup copy does not execute unless the backed-up Program cannot execute c. Licensee reproduces all copyright notices and other legends of ownership on each copy, or partial copy of the Program d. … e. Licensee does not: 1) use, copy, modify, or distribute the Program except as expressly permitted in this agreement; 2) reverse assemble, reverse compile, otherwise translate, or reverse engineer the program, except as expressly permitted by law without the possibility of contractual waiver; 3) use any of the Program’s components, files, modules, audio-visual content, or 67

The standard-form EULA accompanying Microsoft software products sold to resident Indian end-users by Microsoft Corporation, a non- resident, foreign vendor includes the following terms: “ 1. GRANT OF LICENSE : This EULA grants you the following rights: a. Systems Software - You may install and use one copy of the SOFTWARE PRODUCT on a single computer, including a workstation, terminal, or other digital electronic device (“COMPUTER”). You may permit a maximum of five (5) COMPUTERS to connect to the single COMPUTER running the SOFTWARE PRODUCT solely to access the Internet using the Internet Connection Sharing feature of the SOFTWARE PRODUCT. You may not allow these connected COMPUTERS to use any other components of the SOFTWARE PRODUCT, nor to invoke application sharing as described below. The five (5) connection maximum includes any indirect connections made through software or hardware that pools or aggregates connections. b. Storage/Network Use - You may also store or install a copy of the SOFTWARE PRODUCT on a storage device, such as a network server, used on to install or run the SOFTWARE PRODUCT on your other COMPUTERS over an internal network: however, you must acquire and run a licence for each separate COMPUTER on or from which the SOFTWARE PRODUCT 68 is installed, used, accessed, displayed, or forgoing any number of COMPUTERS may access or otherwise utilize the file and print services and peer web services of the SOFTWARE PRODUCT. In addition, you may use the “Multiple Display” feature of the SOFTWARE PRODUCT to expand your desktop as described in the online Help file without obtaining a license for each display.” “ 2. DESCRIPTION OF OTHER RIGHTS AND LIMITATIONS xxx xxx xxx Limitations on Reverse Engineering, Decompilation, and Disassembly - You may not reverse engineer, decompile, or disassemble the SOFTWARE PRODUCT, except and only to the extent that such activity is expressly permitted by applicable law nothwithstanding this limitation.” “ 4. COPYRIGHT - All title and intellectual property rights in and to the SOFTWARE PRODUCT (including but not limited to any images, photographs, animations, video, audio, music, text, and “applets” incorporated into the SOFTWARE PRODUCT), the accompanying printed materials, and any copies of the SOFTWARE PRODUCT are owned by Microsoft or its suppliers. All title and intellectual property rights in and to the content that is not contained in the Software Product, but may be accessed through use of the Software Product, is the property of the respective content owners and may be protected by applicable copyright or other intellectual property laws and treaties. This EULA grants you no rights to use such content. All rights not expressly granted are reserved by Microsoft.” 69 “ 6. BACKUP COPY- After installation of one copy of the SOFTWARE PRODUCT pursuant to this EULA, you may keep the original media on which the SOFTWARE PRODUCT was provided by Microsoft solely for backup or archival purposes. If the original media is required to use the SOFTWARE PRODUCT on the COMPUTER, you may make one copy of the SOFTWARE PRODUCT solely for backup or archival purposes. Except as expressly provided in this EULA, you may not otherwise make copies of the SOFTWARE PRODUCT or the printed materials accompanying the SOFTWARE PRODUCT” (emphasis supplied) 44. iv) Category 4 The Supply Contract (undated) between a resident Indian company, JT Mobiles Ltd., and a Swedish supplier, Ericsson Radio Systems A.B. concerning the supply of a Mobile Telephone System in C.A. Nos. 6386- 6387/2016, states the following in respect of the software licence granted: “ 20.LICENSE

70

20.4 In pursuance of the foregoing JT MOBILES shall:

71

(emphasis supplied) 45. A reading of the aforesaid distribution agreement would show that what is granted to the distributor is only a non-exclusive, non-transferable licence to resell computer software, it being expressly stipulated that no copyright in the computer programme is transferred either to the distributor or to the ultimate end-user. This is further amplified by stating that apart from a right to use the computer programme by the end-user himself, there is no further right to sub-license or transfer, nor is there any right to reverse-engineer, modify, reproduce in any manner otherwise than permitted by the licence to the end-user. What is paid by way of consideration, therefore, by the distributor in India to the foreign, non-resident manufacturer or supplier, is the price of the 72 computer programme as goods, either in a medium which stores the software or in a medium by which software is embedded in hardware, which may be then further resold by the distributor to the end-user in India, the distributor making a profit on such resale. Importantly, the distributor does not get the right to use the product at all. 46. When it comes to an end-user who is directly sold the computer programme, such end-user can only use it by installing it in the computer hardware owned by the end-user and cannot in any manner reproduce the same for sale or transfer, contrary to the terms imposed by the EULA. 47. In all these cases, the “licence” that is granted vide the EULA, is not a licence in terms of section 30 of the Copyright Act, which transfers an interest in all or any of the rights contained in sections 14(a) and 14(b) of the Copyright Act, but is a “licence” which imposes restrictions or conditions for the use of computer software. Thus, it cannot be said that any of the EULAs that we are concerned with are referable to section 30 of the Copyright Act, inasmuch as section 30 of the Copyright Act speaks of granting an interest in any of the rights mentioned in sections 14(a) and 14(b) of the Copyright Act. The EULAs in all the appeals before us do not grant any such right or interest, least of all, a right or 73 interest to reproduce the computer software. In point of fact, such reproduction is expressly interdicted, and it is also expressly stated that no vestige of copyright is at all transferred, either to the distributor or to the end-user. A simple illustration to explain the aforesaid position will suffice. If an English publisher sells 2000 copies of a particular book to an Indian distributor, who then resells the same at a profit, no copyright in the aforesaid book is transferred to the Indian distributor, either by way of licence or otherwise, inasmuch as the Indian distributor only makes a profit on the sale of each book. Importantly, there is no right in the Indian distributor to reproduce the aforesaid book and then sell copies of the same. On the other hand, if an English publisher were to sell the same book to an Indian publisher, this time with the right to reproduce and make copies of the aforesaid book with the permission of the author, it can be said that copyright in the book has been transferred by way of licence or otherwise, and what the Indian publisher will pay for, is the right to reproduce the book, which can then be characterised as royalty for the exclusive right to reproduce the book in the territory mentioned by the licence. 48. An instructive judgment of this Court in this respect is to be found in State Bank of India v. Collector of Customs, (2000) 1 SCC 727 . In this case, the State Bank of India imported a consignment of computer 74 software and manuals from Kindle Software Ltd., Dublin, Ireland, and cleared the goods for home consumption, and filed an application before the Additional Collector of Customs, claiming a refund of customs duty. After setting out section 14 of the Customs Act 1962 and rule 9(1)(c) of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988, the Court stated: “ 9. Now, if we refer to the interpretative note relating to Rule 9(1)( c ) it says that royalties and licence fees may include, among other things, payments in respect to patents, trademarks and copyrights. There is, however, an exception which says that the charges for the right to reproduce the imported goods in the country of importation shall not be added to the price actually paid or payable for the imported goods in determining the customs value. Further payments made by the buyer for the right to distribute or resell the imported goods shall not be added to the price actually paid or payable for the imported goods if such payments are not a condition of the sale for the exports to the country of importation of the imported goods. xxx xxx xxx 11. What we have now to see is if under the agreement SBI has the right to reproduce the imported software and for that purpose SBI has paid “royalties and licence fee” which have been added to the price actually paid for the imported software for use at the principal place called the Support Centre. If that is so under the press note no customs duty is leviable on the royalty so paid. This takes us to the relevant terms of the agreement which would indicate as to whether 75 or not the royalty/licence fees needed to be included in the value of the imported goods." 49. The contention of the State Bank of India that the countrywide licence fee paid by it by way of royalty was for the reproduction of the said software and was thus exempt from customs duty, was turned down by this Court as follows: “ 17. The question that arises for consideration is if licence fee charged towards countrywide use of software in the second invoice could be the charges for the right to reproduction and were these added to the price actually paid or payable for the imported goods. If we refer to the agreement, software is not sold to SBI as such but it was to remain the property of Kindle. There is no other value of the software indicated in the agreement except the licence fee. Price is payable only for allowing SBI to use the software in a limited way at its own centres for a limited period and that is why the amount charged is called the licence fee. After five years SBI is required to pay only recurring licence fee. Countrywide use of the software and reproduction of software are two different things and licence fee for countrywide use cannot be considered as the charges for the right to reproduce the imported goods. Under the agreement copying, storage, removal, etc. are under the strict control of Kindle and all copies are the property of Kindle. SBI can use the software for its internal requirements only. Licence has been given to SBI to use the property of Kindle at its branches and not for reproduction of the software as claimed by SBI. The words in the agreement are specific that “SBI shall pay the licensor the initial licence fee and the recurring licence fees for use under the provisions of this agreement”.” 76 50. The Court then made an important observation, stating:

77 Though this judgment has been delivered under the Customs Act 1962, yet the important differentiation made between the right to reproduce and the right to use computer software has been recognized by this judgment. Whereas the former would amount to a parting of copyright by the owner thereof, the latter would not. 51. An argument was advanced by the learned Additional Solicitor General that in some of the aforestated EULAs, it was clearly stated that what was licensed to the distributor/end-user by the non-resident, foreign supplier would not amount to a sale, thereby making it clear that what was transferred was not goods. This argument has no legs to stand on. It is settled law that in all such cases, the real nature of the transaction must be looked at upon reading the agreement as a whole. Thus, in Sundaram Finance Ltd. v. State of Kerala, (1966) 2 SCR 828 , one of the questions that was raised before this Court was as to the execution of a “sale letter” acknowledging the sale of a vehicle. This “sale letter” was dealt with by the Court as follows: “The appellants are financiers and their business is to advance loans on favourable terms on the security of vehicles. This is effected by obtaining a promissory-note for repayment of the amount advanced, and a hire-purchase agreement which provides a mechanism for recovery of the amount. It is true that a “sale letter” is obtained from the customer, but the consideration for the sale letter is only the 78

79

80

81

appeals before us. What is “licensed” by the foreign, non-resident supplier to the distributor and resold to the resident end-user, or directly supplied to the resident end-user, is in fact the sale of a physical object which contains an embedded computer programme, and is therefore, a sale of goods, which, as has been correctly pointed out by the learned counsel for the assessees, is the law declared by this Court in the context of a sales tax statute in Tata Consultancy Services v. State of A.P., 2005 (1) SCC 308 ( see paragraph 27). APPLICABILITY OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT’S PROVISIONS 53. The learned Additional Solicitor General sought to reopen a contention made by the Revenue in the earlier round of litigation in GE Technology (supra) which led to this Court framing the question of law and sending it back to the High Court to decide “on merits”. He sought to argue, based in particular on Article 30 of the India-USA DTAA, that the DTAA’s provisions in these cases would not apply at all, inasmuch as provisions relatable to deduction of TDS under section 195 of the Income Tax Act do not refer to tax at all, but are deductions that are to be made before assessments to tax are made. He argued that these 82 deductions do not partake the character of tax at all, section 195 of the Income Tax Act speaking of “any person responsible to pay”, as opposed to an “assessee”. He therefore differentiated between the language used in section 9 and section 195 of the Income Tax Act and argued that the deductions made under section 195, not being in the nature of tax at all and at a stage prior to the person responsible for paying defaulting, and being declared an assessee in default (under section 201 of the Income Tax Act), the DTAA provisions would not apply at all. 54. There is no doubt that section 9 of the Income Tax Act refers to persons who are non-residents and taxes their income as income which is deemed to accrue or arise in India, thus, making such persons assessees under the Income Tax Act, who are liable to pay tax. There is also no doubt that the “person responsible for paying” spoken of in section 195 of the Income Tax Act is not a non-resident assessee, but a person resident in India, who is liable to make deductions under section 195 of the Income Tax Act when payments are made by it to the non-resident assessee. The submission of the learned Additional Solicitor General is answered by the judgment of this Court in GE 83 Technology (supra). This judgment, after setting out section 195 of the Income Tax Act, held:

84

85

86

87

88

fact that the “person” spoken of in section 195(1) of the Income Tax Act is liable to make the necessary deductions only if the non-resident is liable to pay tax as an assessee under the Income Tax Act, and not otherwise. This judgment also clarifies, after referring to CBDT Circular 89 No. 728 dated 30.10.1995, that the tax deductor must take into consideration the effect of the DTAA provisions. The crucial link, therefore, is that a deduction is to be made only if tax is payable by the non-resident assessee, which is underscored by this judgment, stating that the charging and machinery provisions contained in sections 9 and 195 of the Income Tax Act are interlinked. 56. This conclusion is also echoed in Vodafone International Holdings BV v. Union of India, (2012) 6 SCC 613 , wherein the following observations were made on the scope and applicability of section 195 of the Income Tax Act:

90

deduction/payment, would not then get any excess payment made by way of refund when regular assessment takes place, as the non- resident assessee alone would be entitled to such refund, is also pointed out in paragraph 18 of the judgment in GE Technology (supra). It was after keeping all this in view that this Court then set aside the judgment of the High Court of Karnataka dated 24.09.2009 and remanded the case to the High Court for a decision of the question “on merits”, i.e., on the sole question as to whether the ITAT was justified in holding that the amounts paid by the appellants to the foreign 91 software suppliers did not amount to royalty, as a result of which, no liability to deduct TDS arose. 58. Even otherwise, a look at Article 12(2) of the India-Singapore DTAA would demonstrate the fallacy of the aforesaid submission of the learned Additional Solicitor General. Under Article 12(2) of the India- Singapore DTAA, royalties may be taxed in the Contracting State in which they arise (India) and according to the laws of that Contracting State (Indian laws), if the recipient is a beneficial owner of the royalties, and the tax so charged is capped at the rate of 10% or 15%. If the learned Additional Solicitor General is correct in his submission, as the DTAA would then not apply, royalty would be liable to be taxed in India at the rate mentioned in the Income Tax Act which can be much higher than the DTAA rate, as a result of which, the deduction made under section 195 of the Income Tax Act by the “person responsible” would have to be a proportion of a much higher sum than the tax that is ultimately payable by the non-resident assessee. This equally absurd result cannot be countenanced given the fact that the person liable to deduct tax is only liable to deduct tax first and foremost if the non- resident person is liable to pay tax, and second , that if so liable, is then liable to deduct tax depending on the rate mentioned in the DTAA. 92 59. Further, tearing an article of a specific DTAA, namely Article 30 of the India-USA DTAA, out of context in order to buttress his submission, in a manner far removed from the actual rationale behind that provision, does not commend itself to us. 59. i) Article 30 of the India-USA DTAA, relied upon by the learned Additional Solicitor General, reads: “1. Each Contracting State shall notify the other Contracting State in writing, through diplomatic channels, upon the completion of their respective legal procedures to bring this Convention into force. 2. The Convention shall enter into force on the date of the latter of such notifications and its provisions shall have effect: (a) in the United States (i) in respect of taxes withheld at source, for amounts paid or credited on or after the first day of January next following the date on which the Convention enters into force; (ii) in respect of other taxes, for taxable periods beginning on or after the first day of January next following the date on which the Convention enters into force; and (b) in India, in respect of income arising in any taxable year beginning on or after the first day of April next following the calendar year in which the Convention enters into force.” 93 59. ii) By way of contrast, under the Convention between the Republic of India and the Kingdom of Netherlands for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes 32 on Income and on Capital, [“ India-Netherlands DTAA ”], Article 29 reads: “1. Each of the States shall notify to the other the completion of the procedures required by its law for the bringing into force of this Convention. This Convention shall enter into force on the thirtieth day after the latter of the dates on which the respective Governments have notified each other in writing that the formalities constitutionally required in their respective States have been complied with, and its provisions shall have effect: (a) in the Netherlands for taxable years and periods beginning on or after the first day of January next following the calendar year in which the latter of the notifications is given ; (b) in India in respect of income arising in any fiscal year beginning on or after the first day of April next following the calendar year in which the latter of the notifications is given. 2. Notwithstanding the provisions of paragraph 1, the provisions of Article 8 shall have effect: 32 Notification No. GSR 382(E), dated 27-3-1989, as amended by Notification No. S.O. 693(E), dated 30-8-1999. 94 (a) in the Netherlands for taxable years and periods beginning on or after the first day of January, 1987 ; (b) in India in respect of income arising in any fiscal year beginning on or after the first day of April, 1987.” 59. iii) Under the Convention between the Government of Japan and the Government of the Republic of India for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes 33 on Income, [“ India-Japan DTAA ”] Article 28 is set out in the following terms: “ 1. This Convention shall be ratified and the instruments of ratification shall be exchanged at Tokyo as soon as possible. 2. This Convention shall enter into force on the thirtieth day after the date of the exchange of instruments of ratification and shall have effect : (a) In Japan : as regards income for any taxable year beginning on or after the first day of January of the calendar year next following that in which this Convention enters into force ; and (b) in India : as regards income for any 'previous year' beginning on or after the first day of April of the calendar year next following that in which this Convention enters into force. 33 Notification : No. GSR 101(E), dated 1-3-1990, as amended by Notification Nos. SO 753(E), dated 16-8-2000 (w.r.e.f. 1-10-1999), SO 1136(E), dated 19-7-2006, w.r.e.f. 28- 6-2006 and SO 2528(E), dated 8-10-2008, w.e.f. 1-10-2008. 95 3. The Agreement between Japan and India for the Avoidance of Double Taxation in respect of Taxes on Income signed at New Delhi on January 5, 1960 shall terminate and cease to have effect in respect of income to which this Convention applies under the provisions of paragraph 2.” 59. iv) Under the Convention between the Government of the Republic of India and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and 34 Capital Gains, [“ India-UK DTAA ”] Article 30 reads as follows: (1) Each of the Contracting States shall notify to the other the completion of the procedures required by its law for the bringing into force of this Convention. This Convention shall enter into force on the date of the later of these notifications and shall thereupon have effect: (a) in the United Kingdom: (i) in respect of income tax and capital gains tax, for any year of assessment beginning on or after 6th April in the calendar year next following that in which the later of the notifications is given; (ii) in respect of corporation tax, for any financial year beginning on or after 1st April in the calendar year next following that in which the later of the notifications is given;

96 (iii) in respect of petroleum revenue tax, for any chargeable period beginning on or after 1st January in the calendar year next following that in which the later of the notifications is given; (b) in India, in respect of income arising in any fiscal year beginning on or after the first day of April next following the calendar year in which the later of the notifications is given. (2) Subject to the provisions of paragraph (3) of this Article, the Convention between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of India for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains signed in New Delhi on 16th April 1981 (hereinafter referred to as "the 1981 Convention") shall terminate and cease to be effective from the date upon which this Convention has effect in respect of the taxes to which this Convention applies in accordance with the provisions of paragraph (1) of this Article. (3) Where any provisions of the 1981 Convention would have afforded any greater relief from tax than is due under this Convention, any such provision as aforesaid shall continue to have effect: (a) in the United Kingdom, for any year of assessment or financial year; and (b) in India, for any fiscal year; beginning, in either case, before the entry into force of this Convention.” 59. v) Article 28 of the Agreement between the Government of the Republic of India and the Government of the People's Republic of China for the Elimination of Double Taxation with respect to Taxes 97 35 on Income and the Prevention of Tax Evasion and Avoidance, [“ India-China DTAA ”], is again worded differently, as follows:

reasons connected with USA’s municipal taxation laws, and has nothing to do with Indian municipal law governing the liability of persons to deduct tax at source under section 195 of the Income Tax Act. This is reinforced by the fact that the OECD Commentary on Articles 30 and 31 acknowledges the fact that the “entry into force” provisions, unlike 35 Notification No. GSR 331(E), dated 5-4-1995, as amended by Notification No. S.O. 2562(E) [No.54/2019/F.No. 503/02/2008-FTD-II], dated 17-7-2019. 98 the rest of the provisions in the OECD Model Tax Convention on Income and on Capital, depend on the domestic laws of Contracting States, as follows:

General to have a second bite at the same cherry, albeit through the 99 ingenious argument made by him based on Article 30 of the India-USA DTAA. DEFINITION OF ROYALTY IN THE DTAAs VIS-À-VIS THE INCOME TAX ACT 62. In order to ascertain whether the question which was posed by this Court in GE Technology (supra) was correctly answered by the High 36 Court of Karnataka vide the impugned judgment dated 15.10.2011, the first expression that has to be considered by us is the expression “royalty”. 63. Firstly , it will be seen that when Article 12 of the India-Singapore DTAA defines the term “royalties” in sub-article (3) thereof, it does so stating that such definition is exhaustive – it uses the expression “means”. Secondly , the term “royalties” refers to payments of any kind that are received as a consideration for the use of or the right to use any copyright in a literary work. As opposed to this, the definition contained explanation in 2 to section 9(1)(vi) of the Income Tax Act, is wider in at least three respects: 36 CIT v. Samsung Electronics Co. Ltd., (2012) 345 ITR 494. 100 i. It speaks of “consideration”, but also includes a lump-sum consideration which would not amount to income of the recipient chargeable under the head “capital gains”; ii. When it speaks of the transfer of “all or any rights”, it expressly includes the granting of a licence in respect thereof; and iii. It states that such transfer must be “in respect of” any copyright of any literary work. 64. However, even where such transfer is “in respect of” copyright, the transfer of all or any rights in relation to copyright is a sine qua non under explanation 2 to section 9(1)(vi) of the Income Tax Act. In short, there must be transfer by way of licence or otherwise, of all or any of the rights mentioned in section 14(b) read with section 14(a) of the Copyright Act. 65. In State of Madras v. Swastik Tobacco Factory, (1966) 3 SCR 79 , this Court construed the words “in respect of” used in rule 5(1)(i) of the Madras General Sales Tax (Turnover and Assessment) Rules 1939, as follows: “The House of Lords in Inland Revenue Commissioners v. Coutts & Co. [(1963) 2 All ER 722, 732], in the context of payment of estate duty, construed the words “in respect of” in Section 5(2) of the Finance Act, 1894 (57 & 58 Vict, c. 30) 101

102 under the Central Act, read with the Schedule, the expression “in respect of” in the context can only mean excise duty paid on goods. In our view, the expression “in respect of the goods” in Rule 5(1)( i ) of the Rules means only “on the goods”. Even if the word “attributable” is substituted for the words “in respect of”, the result will not be different, for the duty paid shall be attributable to the goods. If it was paid on the raw material it can be attributable only to raw material and not to the goods. We, therefore, hold that only excise duty paid on the goods sold by the assessee is deductible from the gross turnover under Rule 5(1)( i ) of the Rules.” (pages 82-83) (emphasis supplied) 66. The aforesaid meaning accords with the meaning to be given to the expression “in respect of” contained in explanation 2(v) to section 9(1)(vi) of the Income Tax Act. ROYALTY UNDER THE INCOME TAX ACT 67. The insertion of sub-sections (v), (vi) and (vii) in section 9(1) of the Income Tax Act, by way of an amendment through the Finance Act 37 1976, was to introduce source-based taxation for income in the hands of a non-resident by way of interest, royalty and fees for technical services. In Carborandum & Co. v. CIT, (1977) 2 SCC 862 , this Court, applying residence-based rules of taxation, held that the technical 37 Act 66 of 1976, (w.e.f 1-6-1976). 103 service fees received by the non-resident assessee (relatable to the assessment year 1957-1958) could only be deemed to accrue in India if such income could be attributed to a business connection in India. In the facts of that case, since no part of the foreign assessee’s operations were carried on in India, the technical services being rendered wholly in foreign territory, it was held that no part of the technical service fees received by the foreign assessee accrued in India. 68. This position of law was altered by the Finance Act 1976, which introduced a “source-rule” to tax income by way of royalty in the hands of a non-resident, noted in the Memorandum explaining the provisions of the Finance Bill 1976, as follows: 38. “Source rule” regarding place of accrual of income by way of interest, royalty and fees for technical services. - A non-resident taxpayer is chargeable to tax in India in respect of income from whatever source derived which is received or is deemed to be received in India or which accrues or arises or is deemed to accrue or arise to him in India. The existing provisions in the Income-tax Act which provide that certain incomes will be deemed to accrue or arise in India are couched in general language. The absence of a clear- cut source rule sometimes creates uncertainty about the chargeability of certain types of incomes in the case of non- residents. In order to avoid any doubt or dispute in regard to the accrual of income by way of interest, royalty and fees for technical services in the case of non-residents, it is proposed to make certain provisions in the Income-tax Act 104 clearly specifying the circumstances in which such income shall be deemed to accrue or arise in India. xxx xxx xxx 40. Income by way of royalty payable by the Government will be deemed to accrue or arise in India. Royalty payable by a person who is resident in India will also be deemed to accrue or arise in India, except in cases where the royalty is payable for the transfer of any right or the use of any property or information or for utilising the services of the recipient for the purposes of a business or profession carried on outside India or for the purposes of making or earning any income from a source outside India. Royalty payable by a non-resident will be deemed to accrue or arise in India only in cases where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by the non- resident in India or for the purposes of making or earning any income from any source in India.” 69. Consequently, section 9(1)(vi) of the Income Tax Act was brought into force. The definition of royalty contained in explanation 2(v) of section 9(1)(vi) of the Income Tax Act includes the transfer of all or any rights (including the granting of a licence) “in respect of any copyright, literary, artistic or scientific work”. 70. The comma after the word “copyright” does not fit as copyright is obviously spoken of as existing in a literary, artistic or scientific work. As a matter of fact, this drafting error was rectified in the Draft Taxes Code 105 38 2010, under Chapter XIX in Part H thereof, which set out the definition of “royalty” as follows: “ PART H - CHAPTER XIX INTERPRETATIONS AND CONSTRUCTIONS xxx xxx xxx (314)( 220 ) “royalty” means consideration (including any lump-sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head “Capital gains”) for— xxx xxx xxx (g) the transfer of all or any rights (including the granting of a licence) in respect of — (i) any copyright of literary, artistic or scientific work; (ii) cinematographic films or work on films, tapes or any other means of reproduction; or (iii) live coverage of any event” (emphasis supplied) 71. The transfer of “all or any rights (including the granting of a licence) in respect of any copyright”, in the context of computer software, is referable to sections 14(a), 14(b) and 30 of the Copyright Act. As has been held hereinabove, the expression “in respect of” is equivalent to “in” or “attributable to”. Thus, explanation 2(v) to section 9(1)(vi) of the Income Tax Act, when it speaks of “all of any rights…in respect of 38 This Code has, however, remained in draft form and was never enacted. 106 copyright” is certainly more expansive than the DTAA provision, which speaks of the “use of, or the right to use” any copyright. This has been recognised by the High Court of Delhi in CIT v. DCM Limited, ITA Nos. 87-89/1992 in its judgment dated 10.03.2011, as follows: “ 9. A bare perusal of Article XIII(3) would show that the expression “payments of any kind” is circumscribed by the latter part of the definition which speaks of consideration received (including in the form of rentals) for "use of" or "right to use" intellectual properties. The Tribunal, in our view, rightly observed that the CIT(A) had erred in coming to the conclusion that the expression “payments of any kind” was broad enough to include even an outright sale. To drive home this point the Tribunal, once again, has correctly drawn a distinction between the definition of royalty as appearing in the DTAA and that which finds mention in explanation 2 to section 9(1)(vi) of the I.T. Act. A perusal of the provisions of the said explanation would show that it brings within the ambit of royalty a wider range of transactions which would include payments made for "transfer of all" or "any right" in patents, inventions, model, design, etc. apart from payments based for use of such right, patent, innovation, model, design, secret formula or process or trade mark or similar property. As a matter of fact, a perusal of clause (i) of explanation 2 of section 9(1)(vi) of the I.T. Act would show that "transfer of all" or "any right" could take place by execution of licences as well, which was the methodology adopted by Tate and the assessee in the present case…” 72. However, when it comes to the expression “use of, or the right to use”, the same position would obtain under explanation 2(v) of section 9(1)(vi) 107 of the Income Tax Act, inasmuch as, there must, under the licence granted or sale made, be a transfer of any of the rights contained in sections 14(a) or 14(b) of the Copyright Act, for explanation 2(v) to apply. To this extent, there will be no difference in the position between the definition of “royalties” in the DTAAs and the definition of “royalty” in explanation 2(v) of section 9(1)(vi) of the Income Tax Act. 73. Even if we were to consider the ambit of “royalty” only under the Income Tax Act on the footing that none of the DTAAs apply to the facts of these cases, the definition of royalty that is contained in explanation 2 to section 9(1)(vi) of the Income Tax Act would make it clear that there has to be a transfer of “all or any rights'' which includes the grant of a licence in respect of any copyright in a literary work. The expression “including the granting of a licence” in clause (v) of explanation 2 to section 9(1)(vi) of the Income Tax Act, would necessarily mean a licence in which transfer is made of an interest in rights “in respect of” copyright, namely, that there is a parting with an interest in any of the rights mentioned in section 14(b) read with section 14(a) of the Copyright Act. To this extent, there will be no difference between the position under the DTAA and explanation 2 to section 9(1)(vi) of the Income Tax Act. 108 74. However, the learned Additional Solicitor General presses the application of the amendment made vide the Finance Act 2012 with retrospective effect from 01.06.1976, which added explanation 4 to section 9(1)(vi) of the Income Tax Act. 75. The Memorandum explaining the provisions in the Finance Bill 2012 states:

109 mentioned in Explanation 2, includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred. (ii) To amend section 9(1)(vi) to clarify that royalty includes and has always included consideration in respect of any right, property or information, whether or not (a) The possession or control of such right, property or information is with the payer; (b) Such right, property or information is used directly by the payer; (c) The location of such right, property or information is in India (iii) To amend section 9(1)(vi) to clarify that the term “process” includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret. These amendments will take effect retrospectively from 1st June, 1976 and will accordingly apply in relation to the assessment year 1977-78 and subsequent assessment years.” explanation 76. Shri Pardiwala argued that 4, that was inserted with retrospective effect, uses the language that is contained in section 9(1)(vi)(b) of the Income Tax Act, namely, that the expression “any right, property or information” occurring in section 9(1)(vi)(b) alone is the 110 subject matter of explanation 4, explanation 4 not expanding the scope of the definition of royalty contained in explanation 2, which does not contain the aforesaid expression. A reference to the Memorandum explaining the provisions in the Finance Bill 2012 set out hereinabove, would make it clear that the expression “as mentioned in Explanation 2” in sub-para (i) of the aforesaid Memorandum shows that explanation 4 was inserted retrospectively to expand the scope of explanation 2(v). In any case, explanation 2(v) contains the expression, “the transfer of all or any rights” which is an expression that would subsume “any right, property or information” and is wider than the expression “any right, property or information”. It is therefore difficult to accept Shri Pardiwala’s argument that explanation 4 does not expand the scope of the expression “royalty” as contained in explanation 2 to section 9(1)(vi) of the Income Tax Act. 77. It is equally difficult to accept the learned Additional Solicitor General’s explanation submission that 4 to section 9(1)(vi)of the Income Tax Act is clarificatory of the position as it always stood, since 01.06.1976, for which he strongly relied upon CBDT Circular No. 152 dated 27.11.1974. Quite obviously, such a circular cannot apply as it would then be explanatory of a position that existed even before section 9(1)(vi) was 111 actually inserted in the Income Tax Act vide the Finance Act 1976. Secondly, insofar as section 9(1)(vi) of the Income Tax Act relates to computer software, explanation 3 thereof, refers to “computer software” for the first time with effect from 01.04.1991, when it was introduced, which was then amended vide the Finance Act 2000. Quite clearly, explanation 4 cannot apply to any right for the use of or the right to use computer software even before the term “computer software” was inserted in the statute. Likewise, even qua section 2(o) of the Copyright Act, the term “computer software” was introduced for the first time in the definition of a literary work, and defined under section 2(ffc) only in 1994 (vide Act 38 of 1994). 78. Furthermore, it is equally ludicrous for the aforesaid amendment which also inserted explanation 6 to section 9(1)(vi) of the Income Tax Act, to apply with effect from 01.06.1976, when technology relating to transmission by a satellite, optic fibre or other similar technology, was only regulated by the Parliament for the first time through the Cable Television Networks (Regulation) Act, 1995, much after 1976. For all these reasons, it is clear that explanation 4 to section 9(1)(vi) of the Income Tax Act is not clarificatory of the position as of 01.06.1976, but 112 in fact, expands that position to include what is stated therein, vide the Finance Act 2012. 79. The learned Additional Solicitor General then relied upon the Finance Minister’s statement made before the Lok Sabha on 07.09.1990, which allowed lump sum payments to be made without the deduction of tax at source under section 195(1) of the Income Tax Act and did away with the dual levy, both by way of customs duty and income tax, on royalty payments for the licensing of software. This statement, again, in no manner furthers the case of the Revenue that explanation 4 is merely clarificatory of the legal position as it always stood. Likewise, Notification No. 21/2012 dated 13.06.2012, which deals with section 194J of the Income Tax Act, does no more than providing that a transferee is exempt from deducting TDS under section 194J when TDS has already been deducted under section 195 on the payment made in the previous transfer of the same software which the transferee acquires without any modification. In any case, this notification being issued on 13.06.2012, i.e., after explanation 4 was inserted vide the Finance Act 2012, it would not assist the Revenue in asserting that explanation 4 clarifies the legal position as it always stood. 113 80. The learned Additional Solicitor General then argued that being covered by explanation 4 of section 9(1)(vi) of the Income Tax Act, the persons liable to deduct TDS under section 195 of the Income Tax Act ought to have deducted tax at source on the footing that explanation 4 existed on the statute book with effect from 1976. We have, therefore, to examine as to whether persons liable to deduct TDS under section 195 of the Income Tax Act can be held liable to deduct such sums at a time when explanation 4 was factually not on the statute book, all deductions liable to be made and the assessment years in question being prior to the year 2012. 81. This question is answered by two latin maxims, lex non cogit ad impossibilia, i.e., the law does not demand the impossible and impotentia excusat legem, i.e., when there is a disability that makes it impossible to obey the law, the alleged disobedience of the law is excused. Recently, in the judgment in Arjun Panditrao Khotkar v. Kailash Kushanrao Gorantyal, (2020) 7 SCC 1 delivered by this Court, this Court applied the said maxims in the context of the requirement of a certificate to produce evidence by way of electronic record under section 65B of the Evidence Act, 1872 and held that having taken all possible steps to obtain the certificate and yet being 114 unable to obtain it for reasons beyond his control, the respondent in the facts of the case, was relieved of the mandatory obligation to furnish a certificate. In so holding, this Court referred to previous judgments dealing with the doctrine of impossibility and concluded as follows:

115

116

117

118

119

120 the court was wrong and without jurisdiction, but no arbitrator could be compelled to disobey the order of the court and if in compliance or obedience with court of doubtful jurisdiction, he could not take back the award from the custody of the court to take any further steps for its registration then it cannot be said that he has failed to get the award registered as the law required. The aforesaid two legal maxims — the law does not compel a man to do that which he cannot possibly perform and an act of the court shall prejudice no man would, apply with full vigour in the facts of this case and if that is the position then the award as we have noted before was presented before the Sub-Registrar, Arambagh on 25-11-1983 the very next one day of getting possession of the award from the court. The Sub-Registrar pursuant to the order of the High Court on 24-6-1985 found that the award was presented within time as the period during which the judicial proceedings were pending that is to say, from 28-1-1978 to 24-11-1983 should be excluded in view of the principle laid down in Section 15 of the Limitation Act, 1963. The High Court [ Tarapada Dey v. District Registrar, Hooghly , 1986 SCC OnLine Cal 101 : AIR 1987 Cal 107] , therefore, in our opinion, was wrong in holding that the only period which should be excluded was from 26-7-1978 till 20-12-1982. We are unable to accept this position. 26-7-1978 was the date of the order of the learned Munsif directing maintenance of status quo and 20-12-1982 was the date when the interim injunction was vacated, but still the award was in the custody of the court and there is ample evidence as it would appear from the narration of events hereinbefore made that the arbitrators had 121

82. As a matter of fact, even under the Income Tax Act, the High Court of Bombay has taken a view, applying the aforestated maxims in the context of the provisions of the relevant DTAAs, to hold that persons are not obligated to do the impossible, i.e., to apply a provision of a statute when it was not actually and factually on the statute book. 83. In CIT v. NGC Networks (India) Pvt. Ltd., ITA No. 397/2015 , a question arose as to the applicability of explanation 6 to Section 9(1)(vi), 122 in the context of section 194J of the Income Tax Act, which explanation was inserted with retrospective effect. The High Court of Bombay, applying the aforesaid maxim, held: “ (d) We find that [the] view taken by the impugned order th dated 9 July, 2014 of the Tribunal that a party cannot be called upon to perform an impossible act i.e. to comply with a provision not in force at the relevant time but introduced later by retrospective amendment. This is in accord with the view taken by this Court in CIT v/s. Cello Plast (2012) 209 Taxmann 617 – wherein this Court has applied the legal maxim lex non cogit ad impossibilia (law does not compel a man to do what he cannot possibly perform). (e) In the present facts, the amendment by introduction of Explanation-6 to Section 9(1)(vi) of the Act took place in the year 2012 with retrospective effect from 1976. This could not have been contemplated by the Respondent when he made the payment which was subject to tax deduction at source under Section 194C of the Act during the subject Assessment Year, would require deduction under Section 194J of the Act due to some future amendment with retrospective effect.”

123

Tax Act cannot be expected to do the impossible, namely, to apply the expanded definition of “royalty” inserted by explanation 4 to section 9(1)(vi) of the Income Tax Act, for the assessment years in question, at a time when such explanation was not actually and factually in the statute. 124 RULINGS OF THE AAR AND JUDGMENTS OF HIGH COURTS 86. The question of law posed before us in these appeals has been answered in several rulings – some by the AAR, some by the High Court of Karnataka, and some by the High Court of Delhi. These authorities will now be dealt with sequentially. 87. The first and most comprehensive authority dealing with the question raised in these appeals is by the AAR in its ruling in Dassault Systems, K.K., In Re ., (2010) 322 ITR 125 (AAR) [“ Dassault (AAR) ”]. In that case, the applicant was a company incorporated under the laws of Japan, which marketed licensed computer software products, through a distribution channel comprising value added resellers [“ VAR ”], who were independent third-party resellers in the business of selling software to end-users. The question posed by the AAR to itself was as follows: “Whether on the facts and circumstances of the case and in law the payment received by Dassault Systems K.K. (hereinafter referred to as the “the applicant”) from sale of software products to independent third party resellers will be taxable as business profits under Article 7 of the India-Japan Double Taxation Avoidance Agreement (“India-Japan DTAA” or “Treaty”) and will not constitute ‘royalties and fee for technical services’ as defined in Article 12 of India-Japan DTAA?” (pages 129-130) 125

same terms as Article 12 of the India-Singapore DTAA and the other DTAAs that we are concerned with, and after adverting to the definition of “royalty” that is contained in explanation 2 to section 9(1)(vi) of the Income Tax Act, the AAR then set out, from the locus classicus on copyright law, the following passage:

126

127 “A mere licence from the copyright owner confers no proprietary interest on the licensee enabling him, for example, to bring proceedings in his own name, unless coupled with the grant of some other interest, for example, the right to take property away. Statute apart, even an exclusive licence, which is merely the leave to do a thing coupled with a promise not to do, or give anyone else permission to do that thing, gives the licensee no right to sue in his own name for infringement nor any other proprietary interest. In copyright law this general rule is altered by statute in the case of exclusive licences which comply with prescribed formalities. The 1988 Act confers on such a licensee a procedural status which enables him to bring proceedings but otherwise the rule is unchanged: an exclusive licensee has no proprietary interest in the copyright.”” (pages 132-134) 89. After setting out various provisions of the Copyright Act, the terms of the Distribution Agreement between the applicant and the VAR, as well as the provisions of the EULA, the AAR then held: “In the instant case, the end-user is not given the authority to do any of the acts contemplated in sub-clauses (i) to (vii) of clause (a) of Section 14, not to speak of the exclusive right to do the said acts. In fact, the restrictions placed on the end- user and the VAR which have been referred to earlier coupled with a declaration that the intellectual property rights in the licensed programmes will remain exclusively with the applicant (or its licensors) and the non-exclusive and non- transferable character of licence are all meant to ensure that 128 none of the rights vesting in the applicant as copyright- holder can be claimed or enjoyed by the licensee and that they will remain intact and are preserved. The entire tenor of the Agreement and the various stipulations contained therein make it clear that no rights in derogation of the applicant's exclusive rights in relation to the copyright have been conferred on the licensee i.e., the end-user or VAR. The core of the transaction is to authorize the end-user to have access to and make use of the licensed software products over which the applicant has exclusive copyright, without giving any scope for dealing with them any further. Passing on a right to use and facilitating the use of a product for which the owner has a copyright is not the same thing as transferring or assigning rights in relation to the copyright. The enjoyment of some or all the rights which the copyright owner has, is necessary to trigger the royalty definition. Viewed from this angle, a non-exclusive and non- transferable licence enabling the use of a copyrighted product cannot be construed as an authority to enjoy any or all of the enumerated rights ingrained in a copyright. Where the purpose of the licence or the transaction is only to establish access to the copyrighted product for internal business purpose, it would not be legally correct to state that the copyright itself has been transferred to any extent. It does not make any difference even if the computer programme passed on to the user is a highly specialized one. The parting of intellectual property rights inherent in and attached to the software product in favour of the licencee/customer is what is contemplated by the definition clause in the Act as well as the Treaty. As observed earlier, those rights are incorporated in Section 14. Merely authorizing or enabling a customer to have the benefit of data or instructions contained therein without any further right to deal with them independently does not, in our view, 129

130