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

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), 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 dated 9th 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 ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.] 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.”

84. In CIT v. Western Coalfields Ltd., ITA No. 93/2008, the High Court of Bombay dealt with the insertion of an explanation to section 17(2)(ii) of the Income Tax Act with retrospective effect and held: “11) We see no merit in the above contentions. The Apex Court in Arun Kumar’s case (supra) while upholding the validity of Rule 3 has held that in the absence of any “deeming fiction” in the Act, it is open to the assessee to contend that there is no concession in the matter of accommodation provided by the employer to the employees and the case is not covered by Section 17(2)(ii) of the Act. In other words, even after the substitution of Rule 3 with effect from 1/4/2001, in the absence of any specific provision under the Act, it was open to the assessee not to deduct tax at source relating to the accommodation given to the employees on the ground that no concession in rent has been given to the employees. This contention of the assessee has been in fact upheld by the Apex Court in the case of Arun Kumar (supra). To overcome the above decision, the law has been amended by Finance Act, 2007 with retrospective effect from 1/4/2002. The retrospective amendment merely takes away the above argument, which was available to the assessee. Once the salary is paid by the employer after deducting tax at source as per the law prevailing on the date of paying the salary, then any subsequent amendment in law brought about retrospectively cannot require the employer to deduct tax at source for the past period, because the salary for that period has already been paid. Consequently, the employer cannot be made liable for the consequences set out in Section 201 of the Act on account of the retrospective amendment to Section 17(2) of the Act.”

85. It is thus clear that the “person” mentioned in section 195 of the Income 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. 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)

88. After setting out Article 12 of the India-Japan DTAA, which is in the 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: “Before entering into a discussion on the applicability of the royalty definition, it is appropriate to recapitulate certain basic principles concerning the copyright as a legal concept. We may, in this ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.] connection, refer to some passages from the classic treatise of Copinger and Skone James on Copyright (1999 Edn): “Copyright gives the owner of the copyright in a work of any description the exclusive right to authorize or prohibit the Copyright, Designs and Patents Act, 1988 of UK exploitation of the copyright work by third parties. This includes the right to copy the work itself and also to use the work in other ways protected under the law”.(p. 26) Copyright is often described as a negative right. This idea is conveyed by Copinger in the following words: “Copyright, however, does not essentially mean a right to do something, but rather a right to restrict others from doing certain acts, and, when copyright is referred to as “an exclusive right,” the emphasis is on the word ‘exclusive’. Thus, the 1988 Act, whilst not defining “copyright” otherwise than as a property right, which is transmissible as personal or moveable property, provides that the owner of the copyright in a work has the exclusive right to do the acts restricted by the copyright in a work of that description specified in the 1988 Act. [Copyright, Designs and Patents Act, 1988 of UK.]” (p. 27) The following passage also deserves notice: “It is important to recognize that ownership of copyright in a work is different from the ownership of the physical material in which the copyright work may happen to be embodied. Just as the owner of the physical material on which a copyright work is first recorded is not necessarily the first owner of the copyright, so the transfer of title to the original physical material does not by itself operate to transfer the title to the copyright… Thus, to take an obvious example, the purchaser of a book or video recording becomes the owner of the physical article but he does not thereby become the owner of any part of the copyright in the works reproduced in it. The copyright in the literary work remains with the copyright owner, who enjoys and is entitled to enforce all the exclusive rights of copying, publication, adaptation, sale, rental and so on conferred on him by copyright law. The purchaser does not acquire by his purchase any right, either by way of assignment or licence, to exercise any of those exclusive rights. (p. 217)” Referring to the position of a licensee and an exclusive licensee, the legal position was stated as follows at p. 310: “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 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 ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.] 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, amount to transfer of rights in relation to copyright or conferment of the right of using the copyright. However, where, for example, the owner of copyright over a literary work grants an exclusive license to make out copies and distribute them within a specified territory, the grantee will practically step into the shoes of the owner/grantor and he enjoys the copyright to the extent of its grant to the exclusion of others. As the right attached to copyright is conveyed to such licencee, he has the authority to commercially deal with it. In case of infringement of copyright, he can maintain a suit to prevent it. Different considerations will arise if the grant is non-exclusive, that too confined to the user purely for in- house or internal purpose. The transfer of rights in or over copyright or the conferment of the right of use of copyright implies that the transferee/licencee should acquire rights – either in entirety or partially co-extensive with the owner/transferor who divests himself of the rights he possesses pro tanto. That is what, in our view, follows from the language employed in the definition of ‘royalty’ read with the provisions of Copyright Act, viz., Section 14 and other complementary provisions. We may refer to one more aspect here. In the definition of royalty under the Act, the phrase “including the granting of a licence” is found. That does not mean that even a non- exclusive licence permitting user for in-house purpose would be covered by that expression. Any and every licence is not what is contemplated. It should take colour from the preceding expression “transfer of rights in respect of copyright”. Apparently, grant of ‘licence’ has been referred to in the definition to dispel the possible controversy [that a] licence — whatever be its nature, can be characterized as transfer.” (pages 144-145)

90. The AAR then concluded: “As stated in Copinger’s treatise on Copyright, “the exclusive right to prevent copying or reproduction of a work is the most fundamental and historically oldest right of a copyright owner”. We do not think that such a right has been passed on to the end-user by permitting him to download the computer programme and storing it in the computer for his own use. The copying/reproduction or storage is only incidental to the facility extended to the customer to make use of the copyrighted product for his internal business purpose. As admitted by the Revenue’s representative, that process is necessary to make the programme functional and to have access to it and is qualitatively different from the right contemplated by the said provision because it is only integral to the use of copyrighted product. Apart from such incidental facility, the customer has no right to deal with the product just as the owner would be in a position to do. In so far as the licensed material reproduced or stored is confined to the four corners of its business establishment, that too on a non- exclusive basis, the right referred to in sub-clause (i) of Section 14(a) would be wholly out of place. Otherwise, in respect of even off the shelf software available in the market, it can be very well said that the right of reproduction which is a facet of copyright vested with the owner is passed on to the customer. Such an inference leads to unintended and irrational results. We may in this context refer to ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.] Section 52(aa) of C.R. Act (extracted supra) which makes it clear that “the making of copies or adaptation” of a computer program by the lawful possessor of a copy of such program, from such copy (i) in order to utilize the computer program, for the purpose for which it was supplied or (ii) to make back up copies purely as a temporary protection against loss, destruction, or damage in order to utilize the computer program for the purpose of which it was supplied” will not constitute infringement of copyright. Consequently, customization or adaptation, irrespective of the degree, will not constitute ‘infringement’ as long as it is to ensure the utilization of the computer program for the purpose for which it was supplied. Once there is no infringement, it is not possible to hold that there is transfer or licensing of ‘copyright’ as defined in CR Act and as understood in common law. This is because, as pointed out earlier, copyright is a negative right in the sense that it is a right prohibiting someone else to do an act, without authorization of the same, by the owner. It seems to us that reproduction and adaptation envisaged by Section 14(a)(i) and (vi) can contextually mean only reproduction and adaptation for the purpose of commercial exploitation. Copyright being a negative right (in the sense explained in para 9 supra), it would only be appropriate and proper to test it in terms of infringement. What has been excluded under S. 52(aa) is not commercial exploitation, but only utilizing the copyrighted product for one’s own use. The exclusion should be given due meaning and effect; otherwise, Section 52(aa) will be practically redundant. In fact, as the law now stands, the owner need not necessarily grant licence for mere reproduction or adaptation of work for one’s own use. Even without such licence, the buyer of product cannot be said to have infringed the owner’s copyright. When the infringement is ruled out, it would be difficult to reach the conclusion that the buyer/licensee of product has acquired a copyright therein. The following observations of the Constitution Bench of the Supreme Court in Tata Consultancy Services v. The State of Andhra Pradesh case are quite apposite, though made in a different context: “a software programme may consist of various commands which enable the computer to perform a designated task. The copyright in that programme may remain with the originator of the programme. But the moment copies are made and marketed, [they become] goods, which are susceptible to sales tax.” Viewed from any angle, we have no hesitation in rejecting the contention of the Revenue referred to in para 18 supra.” (pages 147-148)

91. Referring to section 14(b)(ii) of the Copyright Act, the AAR then held: “Next, it has been argued on behalf of the Revenue that the right to sell or offer for sale the applicant’s software product has been conferred on the VAR and therefore such authority given to VAR amounts to conferment of rights in or over the copyright in view of cl. (b)(ii) of Section 14. We are unable to sustain this contention. First of all, this contention of Revenue goes contrary to its stand that the product was licensed but not sold. Be that as it may, even for other reasons, the contention has to be rejected. VAR has not been given an independent right to sell or offer for sale the software products of the applicant to the end-users. What the VAR does in the course of carrying out its marketing function is to canvass for orders, collect the purchase order from the interested customer and forward that offer to the applicant. It is the applicant that accepts or rejects that offer. For this purpose, a non-exclusive and non-transferable license to distribute the product has been given to VAR. The transaction emanating from the order of the end-user followed up by back to back order of VAR is finalized by the applicant and unless the purchase order is accepted by the applicant, the transaction does not materialize. The VAR’s role is only to forward the order to the applicant with the necessary documents. It is upto the applicant to accept it or not to accept it. Once the product is delivered to the end- user, the sale if any by VAR takes place simultaneously and that transaction is a different one. In the absence of an independent right to conclude the sale or offer for sale, sub- clause (ii) of clause (b) of Section 14 cannot be invoked to bring the case within the fold of Art. 12.3 of the Treaty or Section 9(1)(vi) of the Act. It is also noteworthy that VAR is not an exclusive distributor for a territory and he does not pay any consideration to the applicant distinctly for acquiring the distribution rights. He gets the discount for each individual transaction at the agreed rate.” (pages 148-149) ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

92. Consequently, the question posed to itself was answered by the AAR as follows: “The answer to the question framed by the applicant is broadly in the negative. It is ruled that the payment received by the applicant from VARs. (“third party re-sellers”) on account of supplies of software products to the end- customers (from whom the licence fee is collected and appropriated by VAR) does not result in income in the nature of royalty to the applicant and moreover payments received by the applicant cannot be taxed as business profits in India in the absence of permanent establishment as envisaged by Article 7 of the India-Japan Tax Treaty.” (pages 157-158)

93. Close on the heels of this determination, the AAR followed this determination in Geoquest Systems B.V. Gevers Deynootweg, In Re., (2010) 327 ITR 1 (AAR) [“Geoquest (AAR)”] qua an applicant which was a company incorporated in the Netherlands and sold certain software packages to the Oil and Natural Gas Corporation in India. After referring to and relying upon the determination in Dassault (AAR) (supra), the AAR concluded that the amount payable to the applicant did not amount to “royalties” within the meaning of Article 12 of the India- Netherlands DTAA.

94. However, a discordant note was soon struck by the AAR in Citrix Systems Asia Pacific Ptyl. Ltd., In Re., (2012) 343 ITR 1 (AAR) [“Citrix Systems (AAR)”], which ruling is impugned in C.A. No. 8990/2018 before us. In this case, the same question that arose before the AAR in the earlier two cases, namely Dassault (AAR) (supra) and Geoquest (AAR) (supra), arose. The case concerned an applicant incorporated in Australia that had entered into a distribution agreement with an independent Indian company engaged in the business of distribution of computer software and hardware. “Ingram” was appointed as the non-exclusive distributor of the products of the applicant in India. This time, the AAR, after referring to the provisions of the Income Tax Act and the Convention between the Government of the Republic of India and the Government of Australia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income,39 [“India-Australia DTAA”], together with the provisions of 39 Notification No. GSR 60(E), dated 22-1-1992 as amended by Notification No.74/ 2013 [F.No.503/1/2009-FTD-II]/SO 2820(E), dated 20-9-2013. the Copyright Act, arrived at a conclusion diametrically opposite to that contained in the rulings in Dassault (AAR) (supra) and Geoquest (AAR) (supra). The AAR held as follows: “Thus, a reference to the Copyright Act indicates that use of a copyright either by an owner or a licensee, would not be an infringement of a copyright. The transfer of ownership can be by an assignment to another of the copyright either wholly or partially, either generally or with special limitations and either for the whole term of the copyright or any part thereof. Similarly, a license can be granted by the owner of the copyright of any interest in the right. An exclusive right also can be granted excluding even oneself from the right to use the copyright owned. So, a transgression of the limitations of an assignment or of a license would prime facie be an infringement of the copyright and invite the consequences provided for under the Act. Similarly, the act of taking copies or act of adaptation will not be an infringement only if it is done by a lawful possessor of a copy of the computer programme. A lawful possessor can only be an assignee, an exclusive licensee or a licensee of the programme. When he acquires a computer programme, he also gets the right to use that programme to a limited extent. This in our view, is on the basis that in so acquiring the computer programme, he has also got a right, absolute or limited to use the copyright. When a software is created by a person who acquires a copyright for it, he becomes the owner of that copyright. He can transfer or license that right either by himself or through an agent. When he sells or licenses the software for use, he is also selling or licensing the right to use the copyright embedded therein. If a software is used without being lawfully acquired either by purchase or by license, that would amount to an infringement of the copyright obviously because of the copyright embedded in the software. The software is a literary work and clearly the copyright of the creator over the software is an important and commercially valuable right. So, whenever a software is assigned or licensed for use, there is involved an assignment of the right to use the embedded copyright in the software or a license to use the embedded copyright, the Intellectual Property Right in the software. Therefore, it appears to us that it is not possible to divorce the ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.] software from the Intellectual Property Right of the creator of the software embedded therein. The amendment to Section 14(1)(b) of the Copyright Act, by Act 49 of 1999, clarifying that in the case of a computer programme, copyright means the right to sell or give on commercial rental or offer for sale or commercial rental any copy of the computer programme, seems to be significant. This addition would suggest that even the right to sell or give on rental, would amount to a copyright and would be a right to be dealt with as a copyright.” (pages 13-14)

95. The AAR disagreed with the determination in Dassault (AAR) (supra), stating: “In Dassault (AAR 821 of 2009), it was noticed that the core of the transaction in that case was to authorise the end-user to have access to and make use of the licensed software products over which the applicant had exclusive copyright without giving any scope for dealing with them any further. The reasoning or the line of reasoning in Factset on applicability of the Copyright Act, in this context, was followed. It was also noticed that in Tata Consultancy Services (271 ITR 401), the Supreme Court had held that “a software programme may consist of various commands which enable the computer to perform a designated task. The copyright in that programme may remain with the originator of the programme. But, the moment copies are made and marketed it becomes goods which are susceptible to sales-tax.” The Supreme Court was speaking in the context of the Sales-tax Act. The Court had no occasion to consider what was involved in the sale of a software programme. The Court had no occasion to consider what all are the rights that pass on to the grantee when a software programme is transferred or licensed to him. It was concluded in Dassault, that in the absence of an independent right to conclude a sale or offer for sale, section 14 could not be invoked to bring the case within Section 9(1)(vi) of the Act by invoking sub-clause (ii) of Clause (b) of that section. It was concluded that no right to use the copyright as such has been conferred on the licensee. In our view whenever software is transferred or licensed for use, it takes within it the copyright embedded in the software and the one cannot be divorced from the other.” (page 17)

96. The AAR then reasoned that the fact that a licence had been granted would be sufficient to conclude that there was a transfer of copyright, and that there was no justification for the use of the doctrine of noscitur a sociis to confine the transfer by way of a licence to only include a licence which transferred rights in respect of copyright, by referring to explanation 2 to section 9(1)(vi) of the Income Tax Act. It then held: “Considerable arguments are raised on the so-called distinction between a copyright and copyrighted articles. What is a copyrighted article? It is nothing but an article which incorporates the copyright of the owner, the assignee, the exclusive licensee or the licencee. So, when a copyrighted article is permitted or licensed to be used for a fee, the permission involves not only the physical or electronic manifestation of a programme, but also the use of or the right to use the copyright embedded therein. That apart, the Copyright Act or the Income-tax Act or the DTAC does not use the expression ‘copyrighted article’, which could have been used if the intention was as claimed by the applicant. In the circumstances, the distinction sought to be made appears to be illusory.” (page 19)

97. This ruling of the AAR flies in the face of certain principles. When, under a non-exclusive licence, an end-user gets the right to use computer software in the form of a CD, the end-user only receives a right to use the software and nothing more. The end-user does not get any of the rights that the owner continues to retain under section 14(b) of the Copyright Act read with sub-section (a)(i)-(vii) thereof. Thus, the conclusion that when computer software is licensed for use under an EULA, what is also licensed is the right to use the copyright embedded therein, is wholly incorrect. The licence for the use of a product under an EULA cannot be construed as the licence spoken of in section 30 of the Copyright Act, as such EULA only imposes restrictive conditions upon the end-user and does not part with any interest relatable to any rights mentioned in sections 14(a) and 14(b) of the Copyright Act.

98. As a matter of fact, even otherwise, on first principles, the extract from Copinger and Skone James on Copyright (14th Edition) (1999) referred to in Dassault (AAR) (supra) makes it clear that the ownership of copyright in a work is different from the ownership of the ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.] physical material in which the copyrighted work may happen to be embedded. This important passage correctly relied upon by the AAR in the Dassault (AAR) (supra) ruling has been completely missed.

99. Further, it is difficult to understand the reasoning contained in this determination. It is self-contradictory when it says that the DTAA which defines “royalties” must somehow be given a go-bye, as this term must be understood as it is commonly understood. It is also difficult to understand the holding that the AAR need not be constrained by the definition of “copyright” contained in section 14 of the Copyright Act, when construing a DTAA, when we have already seen how section 16 of the Copyright Act makes it clear that no person shall be entitled to copyright otherwise than under the provisions of the Copyright Act or any other law in force.

100. Also, any ruling on the more expansive language contained in the explanations to section 9(1)(vi) of the Income Tax Act would have to be ignored if it is wider and less beneficial to the assessee than the definition contained in the DTAA, as per section 90(2) of the Income Tax Act read with explanation 4 thereof, and Article 3(2) of the DTAA. Further, the expression “copyright” has to be understood in the context of the statute which deals with it, it being accepted that municipal laws which apply in the Contracting States must be applied unless there is any repugnancy to the terms of the DTAA. For all these reasons, the determination of the AAR in Citrix Systems (AAR) (supra) does not state the law correctly and is thus set aside.

101. The High Court of Karnataka, in a judgment impugned in various appeals before us, namely, CIT v. Samsung Electronics Co. Ltd., (2012) 345 ITR 494, also held that what was sold/licensed by way of computer software, included the grant of a right or interest in copyright, and thus gave rise to the payment of royalty, which then required the deduction of TDS. The reasoning of this judgment under appeal is set out as follows: “…Accordingly, we hold that right to make a copy of the software and use it for internal business by making copy of the same and storing the same in the hard disk of the designated computer and taking back up copy would itself amount to copyright work under section 14(1) of the Act and licence is granted to use the software by making copies, which [would], but for the licence granted, have constituted infringement of copyright and the licensee is in possession of the legal copy of the software under the licence. Therefore, the contention of the learned senior counsel appearing for the respondents that there is no transfer of any part of copyright or copyright and transaction only involves sale of copy of the copyright software cannot be accepted. It is also to be noted that what is supplied is the copy of the software of which the respondent-supplier continues to be the owner of the copyright and what is granted under the licence is only right to copy the software as per the terms of the agreement, which, but for the licence would amount to infringement of copyright and in view of the licence granted, the same would not amount to infringement under section 52 of the Copyright Act as referred to above. Therefore, the amount paid to the non-resident supplier towards supply of shrink-wrapped software, or off-the-shelf software is not the price of the C.D. alone nor software alone nor the price of licence granted. This is a combination of all and in substance, unless licence is granted permitting the end user to copy, and download the software, the dumb C.D. containing the software would not in any way be helpful to the end user as software would become operative, only if it is downloaded to the hardware of the designated computer as per the terms and conditions of the agreement and that makes, the difference between the computer software and copyright, in respect of books or prerecorded music [C.D.], as book and prerecorded music C.D. can be used once they are purchased, but so far as software stored in dumb C.D. is concerned, the transfer of dumb C.D. by itself would not confer any, right, upon the end user and the purpose of the C.D. is only to enable the end user to take a copy of the software and to store it in the hard disk of the designated computer if licence is granted in that behalf and in the absence of licence, the same would amount to infringement of copyright, which is exclusively owned by non-resident suppliers, who would continue to be the proprietor of copyright. Therefore, there is no similarity between the transaction of purchase of the book or prerecorded music C.D. or the C.D. containing software and in view of the same, the Legislature in its wisdom, has treated the literary work like books and other articles separately from “computer” software ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.] within the meaning of the “copyright” as referred to above under section 14 of the Copyright Act. It is also clear from the abovesaid analysis of the DTAA, the Income-tax Act, the Copyright Act that the payment would constitute “royalty” within the meaning of article 12(3) of the DTAA and even as per the provisions of section 9(1)(vi) of the Act as the definition of “royalty” under clause 9(1)(vi) of the Act is broader than the definition of “royalty” under the DTAA as the right that is transferred in the present case is the transfer of copyright including the right to make copy of software for internal business, and payment made in that regard would constitute “royalty” for imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill as per clause (iv) of Explanation 2 to section 9(1)(vi) of the Act. In any view of the matter, in view of the provisions of section 90 of the Act, agreements with foreign countries DTAA would override the provisions of the Act. Once it is held that payment made by the respondents to the non-resident companies would amount to “royalty” within the meaning of article 12 of the DTAA with the respective country, it is clear that the payment made by the respondents to the non-resident supplier would amount to royalty. In view of the said finding, it is clear that there is obligation on the part of the respondents to deduct tax at source under section 195 of the Act and consequences would follow as held by the hon’ble Supreme Court while remanding these appeals to this court. Accordingly, we answer the substantial question of law in favour of the Revenue and against the assessee by holding that on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was not justified in holding that the amount(s) paid by the respondents) to the foreign software suppliers was not “royalty” and that the same did not give rise to any “income” taxable in India and wherefore, the respondent(s) were not liable to deduct any tax at source and pass the following order: All the appeals are allowed. The order passed by the Income-tax Appellate Tribunal, Bangalore Bench “A” impugned in these appeals is set aside and the order passed by the Commissioner of Income-tax (Appeals) confirming the order passed by the Assessing Officer (TDS)-I is restored.” (pages 527-528)

102. The reasoning of this judgment also does not commend itself to us. The same error as was made by the AAR in Citrix Systems (AAR) (supra), was made in this judgment, i.e., no distinction was made between computer software that was sold/licensed on a CD/other physical medium and the parting of copyright in respect of any of the rights or interest in any of the rights mentioned in sections 14(a) and 14(b) of the Copyright Act. This being the case, the reasoning of this judgment suffers from the same fundamental defect that the ruling in Citrix Systems (AAR) (supra) suffers from. By no stretch of imagination, can the payment for such computer software amount to royalty within the meaning of Article 12 of the DTAA or section 9(1)(vi) of the Income Tax Act.

103. In another judgment of the High Court of Karnataka, dated 03.08.2020, in CIT v. Synopsis International Old Ltd., ITA Nos. 11-15/2008 [“Synopsis Intl.”],40 the High Court relied upon the expression “in respect of” in section 9(1)(vi) of the Income Tax Act, holding: “27. The words “in respect of” [denote] the intention of the Parliament to give a broader meaning. The words “in respect of” admit of a wide connotation, than the word “in” or “on”. The expression “in respect of” means “attributable to”. If it is given a wider meaning “relating to or with reference to”, it has been used in the sense of being “connected with”. Whether it is a fiscal legislation or any legislation for that matter, the golden rule of interpretation equally applies to all of them, i.e., the words in a statute should be given its literal meaning. In respect of fiscal legislation those words should be strictly construed. If those words are capable of two meanings that meaning which is beneficial to an assessee should be given. However, when the meaning of the words used are clear, unambiguous, merely because it is a fiscal legislation, the meaning cannot be narrowed down and it cannot be interpreted so as to give benefit to the assessee only. Then it would be re-writing the section, under the guise of interpreting a fiscal legislation, which is totally impermissible in law. When the legislature has advisedly used the words “in respect of”, the intention is clear and manifest. The said phrase being capable of 40 This judgment has been relied upon by several judgments of the High Court of Karnataka impugned in the appeals before us. ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.] a broader meaning, the same is used in the section to bring within the tax net all the incomes from the transfer of all or any of the rights in respect of a copyright. In a taxing statute provisions enacted to prevent tax evasion are to be given a liberal construction to effectuate the purpose of suppressing tax evasion, although provisions imposing a charge are construed strictly there being no a priori liability to pay a tax and the purpose of charging section being only to levy a charge on persons and activities brought within its clear terms. Therefore, the specific words used in a taxing statute, charging tax cannot be ignored. It is not the consideration for transfer of all or any of the rights in the copyright. Without transferring a right in the copyright it is possible to receive consideration for the use of the intellectual property for which the owner possesses a copyright. Ultimately, the consideration paid is for the usefulness of the material object in respect of which there exists a copyright. Therefore, the intention was not to exclude the consideration paid for the use of such material object which is popularly called as copyrighted article. Even in respect of a copyrighted article the same is transferred, no doubt the right in the copyright is not transferred, but a right in respect of a copyright contained in the copyrighted article is transferred. Therefore, the Parliament thought it fit to use the phrase “in respect of” as contra distinct from the word “in” copyright. The meaning is clear, intention is clear, there is no ambiguity. Therefore, there is no scope for interpretation of this expressed term inasmuch as in the context in which it is used in the provision. Any other interpretation would lead to the aforesaid provision becoming otiose.”

104. After so holding, the High Court of Karnataka went on to state: “32. … Therefore, the expression ‘copyright’ used in the Act cannot be the same as used in the Income-tax Act, when the legislature advisedly used the word ‘in respect of a copyright’ it cannot be construed as a right in the copyright and assign the meaning assigned in the Copyright Act to the second explanation. The language in Explanation (2) explicitly makes it clear for the purpose of clause (vi) of sub-section (1) of section 9 royalty means consideration for transfer of all or any rights including the granting of a licence in respect of any copyright, literary, artistic or scientific work. Therefore, the word exclusive right used in section 14 of the Act do not fit into the meaning of the word ‘royalty’ in Explanation 2 because royalty means the consideration for the transfer of all or any rights including the granting of a licence which is certainly not an exclusive right or transfer of all rights in the copyright or literary work. Payments made for the acquisition of partial rights in the copyright without the transfer fully alienating the copyright rights will represent a royalty where the consideration is for granting of lights to use the program[m]e in a manner that would, without such license, constitute an infringement of copyright. In these circumstances, the payments are for the right to use the copyright in the program i.e., to exploit the rights that would otherwise be the sole prerogative of the copyright holder. Therefore, to constitute royalty under the Income-tax Act it is not necessary that there should be transfer of exclusive right in copyright, it is sufficient if there is transfer of any interest in the right and also a licence and consideration paid for grant of a licence constitutes royalty for the purpose of the said clause in the Income- tax Act. It is in this background, the discussion whether the payment is for a copyright or for a copyright article would be totally irrelevant. The crux of the issue is whether any consideration is paid for any right, or for granting of licence in respect of a copyright. The word ‘in respect of’ gives a broader meaning. It has been used in the sense of being connected with. When the legislature has advisedly used the words ‘in respect of’, the intention is clear and manifest. The said phrase being capable of a broader meaning, the same is used in the section to bring within the tax net all the incomes from the transfer of all or any of the rights in respect of the copyright. xxx xxx xxx 35. The copyright subsists in a computer program. It is not only unauthorised reproduction but also the storage of a program in a computer constitutes copyright infringement. Copying a literary work (such as a computer program) includes storing the work in any medium by electronic means. Copying includes the making of copies which are transient or some other use of the work. xxx xxx xxx ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.] 39. It is no doubt true the provisions of the DTAA overrides the provisions of the Income-tax Act. In the DTAA the term ‘royalty’ means payments of any kind received as a consideration for the use or the right to use any copyright of literary, artistic or scientific work whereas in the Income-tax Act, royalty means consideration for the transfer of all or any rights including the granting of a licence. Therefore, under the DTAA to constitute royalty there need not be any transfer of or any rights in respect of any copyright. It is sufficient if consideration is received for use of or the right to use any copyright. Therefore, if the definition of royalty in the DTAA is taken into consideration it is not necessary there should be a transfer of any exclusive right. A mere right to use or the use of a copyright falls within the mischief of Explanation (2) to clause (v) of sub-section (1) of section 9 and is liable to tax. Therefore, we do not see any substance in the said contention. xxx xxx xxx 43. A licence is a permission to do something that would otherwise be unlawful. The question arises, therefore, as to what legal permission is granted by a software licence. The answer is, briefly, that in some cases the licence will be a permission to use confidential information, and in virtually […] all cases it will be a permission to copy a copyright work. If the software has been kept secret by the producer, or only supplied on conditions of confidentiality and has not been published too widely, then the software licence will be akin to a licence of confidential information or know-how. The owner or licensor of a copyright, has a right to grant permission to use the software or a computer programme, in respect of which they have a copyright, without transferring the right in copyright. It is one of the right[s] of a copyright owner or licensor. Without such right being transferred, the end-user has no right to use the software or computer programme. If he uses it, it amounts to infringement of copyright. For transfer of such right if consideration is paid, it is not a consideration for transfer of a copyright but for use of intellectual property embedded in the copyright, and therefore it is for transfer of one of those rights of the owner of the copyright. It is not a right in copyright but it is in respect of a copyright. When a copyrighted article is sold also, the end-user gets the right to use the intellectual property embedded in the copyright and not a right in the copyright as such. Therefore the mode adopted or the terminology given is not decisive to decide the nature of transfer. Ultimately, it is the substance which has to be looked into.” 105. The reasoning of the High Court of Karnataka in Synopsis Intl. (supra) does not commend itself to us. First and foremost, as held in State of Madras v. Swastik Tobacco Factory, (1966) 3 SCR 79, the expression “in respect of”, when used in a taxation statute, is only synonymous with the words “on” or “attributable to”. Such 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, and would not in any manner make the expression otiose, as has wrongly been held by the High Court of Karnataka. 106. Secondly, section 16 of the Copyright Act, which states that “no person shall be entitled to copyright…otherwise than under and in accordance with the provisions of this Act or of any other law for the time being in force” has been completely missed, thus making it clear that the expression “copyright” has to be understood only as is stated in section 14 of the Copyright Act and not otherwise. 107. Thirdly, when it comes to computer programmes, the High Court in Synopsis Intl. (supra) was wholly incorrect in stating that the storage of a computer programme per se would constitute infringement of copyright. This, again, would directly be contrary to the terms of section 52(1)(aa) of the Copyright Act. 108. Fourthly, the High Court is not correct in referring to section 9(1)(vi) of the Income Tax Act after considering it in the manner that it has and then applying it to interpret the provisions under the Convention between the Government of the Republic of India and the Government of Ireland for the Avoidance of Double Taxation and for the Prevention of Fiscal Evasion with respect to Taxes on Income And Capital Gains,41 [“India-Ireland DTAA”]. Article 12 of the aforesaid treaty defining “royalties” would alone be relevant to determine taxability under the DTAA, as it is more beneficial to the assessee as compared to section 9(1)(vi) of the Income Tax Act, as construed by the High Court. Here again, section 90(2) of the Income Tax Act, read with explanation 4 thereof, has not been properly appreciated. 41 Notification : No. GSR 105(E) [45/2002 (F. No. 503/6/99-FTD)], dated 20-2-2002. ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.] 109. Fifthly, the finding that when a copyrighted article is sold, the end-user gets the right to use the intellectual property rights embodied in the copyright which would therefore amount to transfer of an exclusive right of the copyright owner in the work, is also wholly incorrect. For all these reasons, therefore, the judgment of the High Court of Karnataka in Synopsis Intl. (supra) also does not state the law correctly. 110. A series of judgments by the High Court of Delhi have dealt with the same question that now lies before us. In Director of Income Tax v. Ericsson A.B., (2012) 343 ITR 470 [“Ericsson A.B.”], which happens to be impugned in C.A. Nos. 6386-6387/2016 before us, the assessee was a company incorporated in Sweden which entered into an agreement with Indian cellular operators, pursuant to which the assessee supplied various equipment (hardware) embedded with software to the said cellular operators. The High Court in this case, found: “Once we proceed on the basis of aforesaid factual findings, it is difficult to hold that payment made to the assessee was in the nature of royalty either under the Income-Tax Act or under the DTAA. We have to keep in mind what was sold by the assessee to the Indian customers was a GSM which consisted both of the hardware as well as the software, therefore, the Tribunal is right in holding that it was not permissible for the Revenue to assess the same under two different articles. The software that was loaded on the hardware did not have any independent existence. The software supply is an integral part of the GSM mobile telephone system and is used by the cellular operator for providing the cellular services to its customers. There could not be any independent use of such software. The software is embodied in the system and the revenue accepts that it could not be used independently. This software merely facilitates the functioning of the equipment and is an integral part thereof. On these facts, it would be useful to refer to the judgment of the Supreme Court in TATA Consultancy Services v. State of Andhra Pradesh, 271 ITR 401, wherein the Apex Court held that software which is incorporated on a media would be goods and, therefore, liable to sales tax. Following discussion in this behalf is required to be noted:- “In our view, the term “goods” as used in Article 366(12) of the Constitution of India and as defined under the said Act are very wide and include all types of movable properties, whether those properties be tangible or intangible. We are in complete agreement with the observations made by this Court in Associated Cement Companies Ltd. (supra). A software programme may consist of various commands which enable the computer to perform a designated task. The copyright in that programme may remain with the originator of the programme. But the moment copies are made and marketed, it becomes goods, which are susceptible to sales tax. Even intellectual property, once it is put on to a media, whether it be in the form of books or canvas (In case of painting) or computer discs or cassettes, and marketed would become “goods”. We see no difference between a sale of a software programme on a CD/floppy disc from a sale of music on a cassette/CD or a sale of a film on a video cassette/CD. In all such cases, the intellectual property has been incorporated on a media for purposes of transfer. Sale is not just of the media which by itself has very little value. The software and the media cannot be split up. What the buyer purchases and pays for is not the disc or the CD. As in the case of paintings or books or music or films the buyer is purchasing the intellectual property and not the media i.e. the paper or cassette or disc or CD. Thus a transaction sale of computer software is clearly a sale of “goods” within the meaning of the term as defined in the said Act. The term “all materials, articles and commodities” includes both tangible and intangible/incorporeal property which is capable of abstraction, consumption and use and which can be transmitted, transferred, delivered, stored, possessed etc. The software programmes have all these attributes.” In Advent Systems Ltd. v. Unisys Corpn, 925 F. 2d 670 (3rd Cir. 1991), relied on by Mr. Sorabjee, the court was concerned with interpretation of uniform civil code which “applied to transactions in goods”. The goods therein were defined as “all things (including specially manufactured goods) which are moveable at the time of the identification for sale”. It was held: “Computer programs are the product of an intellectual process, but once implanted in a medium are widely distributed to ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.] computer owners. An analogy can be drawn to a compact disc recording of an orchestral rendition. The music is produced by the artistry of musicians and in itself is not a “good”, but when transferred to a laser- readable disc becomes a readily merchantable commodity. Similarly, when a professor delivers a lecture, it is not a good, but, when transcribed as a book, it becomes a good. That a computer program may be copyrightable as intellectual property does not alter the fact that once in the form of a floppy disc or other medium, the program is tangible, moveable and available in the marketplace. The fact that some programs may be tailored for specific purposes need not alter their status as “goods” because the Code definition includes “specially manufactured goods.” A fortiorari when the assessee supplies the software which is incorporated on a CD, it has supplied tangible property and the payment made by the cellular operator for acquiring such property cannot be regarded as a payment by way of royalty. (pages 499-500) “Be that as it may, in order to qualify as royalty payment, within the meaning of Section 9(1)(vi) and particularly clause (v) of Explanation-II thereto, it is necessary to establish that there is transfer of all or any rights (including the granting of any license) in respect of copyright of a literary, artistic or scientific work. Section 2(o) of the Copyright Act makes it clear that a computer programme is to be regarded as a ‘literary work’. Thus, in order to treat the consideration paid by the cellular operator as royalty, it is to be established that the cellular operator, by making such payment, obtains all or any of the copyright rights of such literary work. In the presence case, this has not been established. It is not even the case of the Revenue that any right contemplated under Section 14 of the Copyright Act, 1957 stood vested in this cellular operator as a consequence of Article 20 of the Supply Contract. Distinction has to be made between the acquisition of a “copyright right” and a “copyrighted article”. Mr. Dastur is right in this submission which is based on the commentary on the OECD Model Convention. Such a distinction has been accepted in a recent ruling of the Authority for Advance Ruling (AAR) in Dassault Systems KK 229 CTR 125. We also find force in the submission of Mr. Dastur that even assuming the payment made by the cellular operator is regarded as a payment by way of royalty as defined in Explanation 2 below Section 9(1)(vi), nevertheless, it can never be regarded as royalty within the meaning of the said term in article 13, para 3 of the DTAA. This is so because the definition in the DTAA is narrower than the definition in the Act. Article 13(3) brings within the ambit of the definition of royalty a payment made for the use of or the right to use a copyright of a literary work. Therefore, what is contemplated is a payment that is dependent upon user of the copyright and not a lump sum payment as is the position in the present case. We thus hold that payment received by the assessee was towards the title and GSM system of which software was an inseparable parts incapable of independent use and it was a contract for supply of goods. Therefore, no part of the payment therefore can be classified as payment towards royalty.” (pages 501-502) 111. This judgment was followed in Director of Income Tax v. Nokia Networks OY, (2013) 358 ITR 259 [“Nokia Networks OY”],42 with the High Court of Delhi, adverting, this time, to the further expanded definition of “royalty” that is contained in the retrospective amendment that inserted explanation 4 to section 9(1)(vi) of the Income Tax Act. In this case, the High Court was concerned with the Agreement between the Republic of India and the Republic of Finland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income,43 [“India-Finland DTAA”]. After setting out the rationale for the clarificatory amendment made vide the Finance Act 2012, the High Court held : “He, thus submitted that the question of “copyrighted article” or actual copyright does not arise in the context of software both in the DTAA and in the Income Tax Act since the right to use simpliciter of a software program itself is a part of the copyright 42 This judgment has been relied upon by various judgments of the High Court of Delhi impugned in the appeals before us. 43 Notification No. 36/2010 [F. No. 501/13/1980-FTD-I], dated 20-5-2010. ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.] in the software irrespective of whether or not a further right to make copies is granted. The decision of the Delhi Bench of the ITAT has dealt with this aspect in its judgment in Gracemac Co. v. ADIT 134 TTJ (Delhi) 257 pointing out that even software bought off the shelf, does not constitute a “copyrighted article” as sought to be made out by the Special Bench of the ITAT in the present case. However, the above argument misses the vital point namely the assessee has opted to be governed by the treaty and the language of the said treaty differs from the amended Section 9 of the Act. It is categorically held in CIT v. Siemens Aktiongesellschaft, 310 ITR 320 (Bom) that the amendments cannot be read into the treaty. On the wording of the treaty, we have already held in Ericsson (supra) that a copyrighted article does not fall within the purview of Royalty. Therefore, we decide question of law no. 1 & 2 in favour of the assessee and against the Revenue.” (page 281) The High Court then followed its own judgment in Ericsson A.B. (supra), deciding the case in favour of the assessee. 112. In Director of Income Tax v. Infrasoft Ltd., (2014) 264 CTR 329 [“Infrasoft”],44 a Division Bench of the High Court of Delhi, by an exhaustive analysis of the provisions contained the India-USA DTAA, the Income Tax Act and the Copyright Act, dealt with a situation in which the assessee who was primarily into the business of developing and manufacturing civil engineering software, licensed the said software to persons engaged in civil engineering work in India. The High Court referred to a decision of the Special Bench of the ITAT (New Delhi) in Motorola Inc. v. Deputy CIT, dated 22.06.2005 [“Motorola (ITAT)”] as follows: “65. The issue whether consideration for software was royalty came up for consideration before the Special Bench of the Tribunal in Delhi in the case of Motorola Inc v. Deputy Cit And Deputy Cit V. Nokia (2005) 147 TAXMAN 39 (DELHI). The Tribunal has held as under: 155. It appears to us from a close examination of the manner in which the case has proceeded before the Income-tax 44 This judgment has been relied upon by various judgments of the High Court of Delhi impugned in the appeals before us. authorities and the arguments addressed before us that the crux of the issue is whether the payment is for a copyright or for a copyrighted article. If it is for copyright, it should be classified as royalty both under the Income-tax Act and under the DTAA and it would be taxable in the hands of the Assessee on that basis. If the payment is really for a copyrighted article, then it only represents the purchase price of the article and, therefore, cannot be considered as royalty either under the Act or under the DTAA. This issue really is the key to the entire controversy and we may now proceed to address this issue. 156. We must look into the meaning of the word “copyright” as given in the Copyright Act, 1957. Section 14 of this Act defines “Copyright” as “the exclusive right subject to the provisions of this Act, to do or authorize the doing of any of the following acts in respect of a work or any substantial part thereof [ … ] It is clear from the above definition that a computer programme mentioned in Clause (b) of the section has all the rights mentioned in Clause (a) and in addition also the right to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer programme. This additional right was substituted w.e.f. 15.1.2000. The difference between the earlier provision and the present one is not of any relevance. What is to be noted is that the right mentioned in Sub-clause (ii) of Clause (b) of Section 14 is available only to the owner of the computer programme. It follows that if any of the cellular operators does not have any of the rights mentioned in Clauses (a) and (b) of Section 14, it would mean that it does not have any right in a copyright. In that case, the payment made by the cellular operator cannot be characterized as royalty either under the Income-tax Act or under the DTAA. The question, therefore, to be answered is whether any of the operators can exercise any of the rights mentioned in the above provisions with reference to the software supplied by the Assessee. 157. We may first look at the supply contract itself to find out what JTM, one of the cellular operators, can rightfully do with reference to the software. We may remind ourselves that JTM ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.] is taken as a representative of all the cellular operators and that it was common ground before us that all the contracts with the cellular operators are substantially the same. Clause 20.1 of the Agreement, under the title “License”, says that JTM is granted a non-exclusive restricted license to use the software and documentation but only for its own operation and maintenance of the system and not otherwise. This clause appears to militate against the position, if it were a copyright, that the holder of the copyright can do anything with respect to the same in the public domain. What JTM is permitted to do is only to use the software for the purpose of its own operation and maintenance of the system. There is a clear bar on the software being used by JTM in the public domain or for the purpose of commercial exploitation. 158. Secondly, under the definition of “copyright” in Section 14 of the Copyright Act, the emphasis is that it is an exclusive right granted to the holder thereof. This condition is not satisfied in the case of JTM because the license granted to it by the Assessee is expressly stated in Clause 20.1 as a “non exclusive restricted license”. This means that the supplier of the software, namely, the Assessee, can supply similar software to any number of cellular operators to which JTM can have no objection and further all the cellular operators can use the software only for the purpose of their own operation and maintenance of the system and not for any other purpose. The user of the software by the cellular operators in the public domain is totally prohibited, which is evident from the use of the words in Article 20.1 of the agreement, “restricted” and “not otherwise”. Thus JTM has a very limited right so far as the use of software is concerned. It needs no repetition to clarify that JTM has not been given any of the seven rights mentioned in Clause (a) of Section 14 or the additional right mentioned in Sub-clause (ii) of Clause (b) of the section which relates to a computer programme and, therefore, what JTM or any other cellular operator has acquired under the agreement is not a copyright but is only a copyrighted article.”” (pages 362-364) 113. Further, the Court noted that the same argument that found favour with the AAR in Citrix Systems (AAR) (supra) was pressed into service by the learned senior counsel who appeared for the Revenue in the case of Motorola (ITAT) (supra), and this was correctly turned down as follows: “163. We may now briefly deal with the objections of Mr. G.C. Sharma, the learned senior counsel for the Department. He contended that if a person owns a copyrighted article then he automatically has a right over the copyright also. With respect, this objection does not appear to us to be correct. Mr. Dastur filed an extract from Iyengar’s Copyright Act (3rd Edition) edited by R.G. Chaturvedi. The following observations of the author are on the point: “(h) Copyright is distinct from the material object, copyrighted: It is an intangible incorporeal right in the nature of a privilege, quite independent of any material substance, such as a manuscript. The copyright owner may dispose of it on such terms as he may see fit. He has an individual right of exclusive enjoyment. The transfer of the manuscript does not, of itself, serve to transfer the copyright therein. The transfer of the ownership of a physical thing in which copyright exists gives to the purchaser the right to do with it (the physical thing) whatever he pleases, except the right to make copies and issue them to the public” (underline is ours).” The above observations of the author show that one cannot have the copyright right without the copyrighted article but at the same time just because one has the copyrighted article, it does not follow that one has also the copyright in it. Mr. Sharma’s objection cannot be accepted.” (pages 365-366) 114. Referring to the High Court’s earlier judgments in Ericsson A.B. (supra) and Nokia Networks OY (supra) and the determinations of the AAR in Dassault (AAR) (supra) and Geoquest (AAR) (supra), the High Court concluded: “87. In order to qualify as royalty payment, it is necessary to establish that there is transfer of all or any rights (including the granting of any licence) in respect of copyright of a literary, artistic or scientific work. In order to treat the consideration paid by the Licensee as royalty, it is to be established that the licensee, by ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.] making such payment, obtains all or any of the copyright rights of such literary work. Distinction has to be made between the acquisition of a “copyright right” and a “copyrighted article”. Copyright is distinct from the material object, copyrighted. Copyright is an intangible incorporeal right in the nature of a privilege, quite independent of any material substance, such as a manuscript. Just because one has the copyrighted article, it does not follow that one has also the copyright in it. It does not amount to transfer of all or any right including licence in respect of copyright. Copyright or even right to use copyright is distinguishable from sale consideration paid for “copyrighted” article. This sale consideration is for purchase of goods and is not royalty. 88. The license granted by the Assessee is limited to those necessary to enable the licensee to operate the program. The rights transferred are specific to the nature of computer programs. Copying the program onto the computer’s hard drive or random access memory or making an archival copy is an essential step in utilizing the program. Therefore, rights in relation to these acts of copying, where they do no more than enable the effective operation of the program by the user, should be disregarded in analyzing the character of the transaction for tax purposes. Payments in these types of transactions would be dealt with as business income in accordance with Article 7. 89. There is a clear distinction between royalty paid on transfer of copyright rights and consideration for transfer of copyrighted articles. Right to use a copyrighted article or product with the owner retaining his 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 invoke 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 Article 12 of DTAA. Where the purpose of the licence or the transaction is only to restrict use of the copyrighted product for internal business purpose, it would not be legally correct to state that the copyright itself or right to use copyright has been transferred to any extent. The parting of intellectual property rights inherent in and attached to the software product in favour of the licensee/customer is what is contemplated by the Treaty. 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, amount to transfer of rights in relation to copyright or conferment of the right of using the copyright. The transfer of rights in or over copyright or the conferment of the right of use of copyright implies that the transferee/licensee should acquire rights either in entirety or partially co-extensive with the owner/transferor who divests himself of the rights he possesses pro tanto.” (pages 385-386) 115. The High Court of Delhi also expressed its disagreement with the impugned judgment of the High Court of Karnataka dated 15.10.2011, in CIT v. Samsung Electronics Co. Ltd., (2012) 345 ITR 494, as follows: “96. The amount received by the Assessee under the licence agreement for allowing the use of the software is not royalty under the DTAA. 97. What is transferred is neither the copyright in the software nor the use of the copyright in the software, but what is transferred is the right to use the copyrighted material or article which is clearly distinct from the rights in a copyright. The right that is transferred is not a right to use the copyright but is only limited to the right to use the copyrighted material and the same does not give rise to any royalty income and would be business income. 98. We are not in agreement with the decision of the [Karnataka] High Court in the case of SAMSUNG ELECTRONICS CO. LTD (SUPRA) that right to make a copy of the software and storing the same in the hard disk of the designated computer and taking backup copy would amount to copyright work under section 14(1) of the Copyright Act and the payment made for the grant of the licence for the said purpose would constitute royalty. The license granted to the licensee permitting him to download the computer programme and storing it in the computer for his own use was only incidental to the facility extended to the licensee to make use of the copyrighted product for his internal business purpose. The said process was necessary to make the programme functional and to have access to it and is qualitatively different from the ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.] right contemplated by the said provision because it is only integral to the use of copyrighted product. The right to make a backup copy purely as a temporary protection against loss, destruction or damage has been held by the Delhi High Court in DIT v. Nokia Networks OY (Supra) as not amounting to acquiring a copyright in the software.” (page 388) 116. Likewise, in CIT v. ZTE Corporation, (2017) 392 ITR 80 [“ZTE”],45 a Division Bench of the High Court of Delhi dealt with the India-China DTAA and after referring to its earlier judgments, held as follows: “The misconception that the revenue harbors stems from its flawed appreciation of a copyright license. True, “copyright” is not defined; yet what works are capable of copyright protection is spelt out in the Copyright Act. Sections 13 and 14 of the Copyright Act flesh out the essential ingredients that make copyright a property right.” (page 93) “Thus, Section 14 categorically provides that copyright “means the exclusive right to do or authorizing the doing of any of the acts mentioned in Section 14 (a) to (e) or any “substantial part thereof”. The content of copyright in respect of computer programmes is spelt out in Section 14 (b). A joint reading of the controlling provisions of the earlier part of Section 14 with clause (b) implies that in the case of computer programs, copyright would mean the doing or authorizing the doing-in respect of work (i.e. the programme) or any substantial part thereof — (b) In the case of a computer programme,- (i) to do any of the acts specified in clause (a) (ii) to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer programme: Provided that such commercial rental does not apply in respect of computer programmes where the programme itself is not the essential object of the rental. 45 This judgment has been relied upon by various judgments of the High Court of Delhi impugned in the appeals before us. The reference to clause (a) and (b) means that all the rights which are in literary works i.e.”(i) to reproduce the work in any material form including the storing of it in any medium by electronic means; (ii) to issue copies of the work to the public not being copies already in circulation; (iii) to perform the work in public, or communicate it to the public; (iv) to make any cinematograph film or sound recording in respect of the work; (v) to make any translation of the work; (vi) to make any adaptation of the work; (vii) to do, in relation to a translation or an adaptation of the work, any of the acts specified in relation to the work in sub clauses (i) to (vi)” inhere in the owner of copyright of a computer programme. Therefore, the copyright owner’s rights are spelt out comprehensively by this provision. In the context of the facts of this case, the assessee is the copyright proprietor; it made available, through one time license fee, the software to its customers; this software without the hardware which was sold, is useless. Conversely the hardware sold by the assessee to its customers is also valueless and cannot be used without such software. This analysis is to show that what was conveyed to its customers by the assessee bears a close resemblance to goods-significantly enough, Section 14(1) talks of sale or rental of a “copy”. The question of conveying or parting with copyright in the software itself would mean that the copyright proprietor has to assign it, divesting itself of the title implying that it has divested itself of all the rights under Section 14. This would mean an outright sale of the copyright or assignment, under Section 18 of the Act. Section 16 of the Copyright Act enacts that there cannot be any other kind of right termed as “copyright”. In the present case, the facts are closely similar to Ericsson. The supplies made (of the software) enabled the use of the hardware sold. It was not disputed that without the software, hardware use was not possible. The mere fact that separate invoicing was done for purchase and other transactions did not imply that it was royalty payment. In such cases, the nomenclature (of license or some other fee) is indeterminate of the true nature. Nor is the circumstance that updates of the software are routinely given to the assessee’s customers. These facts do not detract from the nature of the transaction, which was supply of software, in the nature of articles or goods. This court is also not persuaded with ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.] the submission that the payments, if not royalty, amounted to payments for the use of machinery or equipment. Such a submission was never advanced before any of the lower tax authorities; moreover, even in Ericsson (supra), a similar provision existed in the DTAA between India and Sweden.” (pages 95-96) 117. The conclusions that can be derived on a reading of the aforesaid judgments are as follows: i) Copyright is an exclusive right, which is negative in nature, being a right to restrict others from doing certain acts. ii) Copyright is an intangible, incorporeal right, in the nature of a privilege, which is quite independent of any material substance. Ownership of copyright in a work is different from the ownership of the physical material in which the copyrighted work may happen to be embodied. An obvious example is the purchaser of a book or a CD/DVD, who becomes the owner of the physical article, but does not become the owner of the copyright inherent in the work, such copyright remaining exclusively with the owner. iii) Parting with copyright entails parting with the right to do any of the acts mentioned in section 14 of the Copyright Act. The transfer of the material substance does not, of itself, serve to transfer the copyright therein. The transfer of the ownership of the physical substance, in which copyright subsists, gives the purchaser the right to do with it whatever he pleases, except the right to reproduce the same and issue it to the public, unless such copies are already in circulation, and the other acts mentioned in section 14 of the Copyright Act. iv) A licence from a copyright owner, conferring no proprietary interest on the licensee, does not entail parting with any copyright, and is different from a licence issued under section 30 of the Copyright Act, which is a licence which grants the licensee an interest in the rights mentioned in section 14(a) and 14(b) of the Copyright Act. Where the core of a transaction is to authorize the end-user to have access to and make use of the “licensed” computer software product over which the licensee has no exclusive rights, no copyright is parted with and consequently, no infringement takes place, as is recognized by section 52(1)(aa) of the Copyright Act. It makes no difference whether the end-user is enabled to use computer software that is customised to its specifications or otherwise. v) A non-exclusive, non-transferable licence, merely enabling the use of a copyrighted product, is in the nature of restrictive conditions which are ancillary to such use, and cannot be construed as a licence to enjoy all or any of the enumerated rights mentioned in section 14 of the Copyright Act, or create any interest in any such rights so as to attract section 30 of the Copyright Act. vi) The right to reproduce and the right to use computer software are distinct and separate rights, as has been recognized in SBI v. Collector of Customs, 2000 (1) SCC 727 (see paragraph 21), the former amounting to parting with copyright and the latter, in the context of non-exclusive EULAs, not being so. 118. Consequently, the view contained in the determinations of the AAR in Dassault (AAR) (supra) and Geoquest (AAR) (supra) and the judgments of the High Court of Delhi in Ericsson A.B. (supra), Nokia Networks OY (supra), Infrasoft (supra), ZTE (supra), state the law correctly and have our express approval. We may add that the view expressed in the aforesaid judgments and determinations also accords with the OECD Commentary on which most of India’s DTAAs are based. DOCTRINE OF FIRST SALE/PRINCIPLE OF EXHAUSTION 119. The learned Additional Solicitor General argued that on the facts of these cases, the doctrine of first sale/principle of exhaustion would have no application inasmuch as this doctrine is not statutorily recognised in section 14(b)(ii) of the Copyright Act. This being so, since the distributors of copyrighted software “license” or sell such computer software to end-users, there would be a parting of a right or interest in copyright inasmuch as such “license” or sale would then be hit by section 14(b)(ii) of the Copyright Act. ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.] 120. As has been mentioned hereinabove, section 14(b)(ii) of the Copyright Act was amended twice, first in 1994 and then again in 1999, with effect from 15.01.2000. Prior to the 1999 Amendment, section 14(b)(ii) of the Copyright Act read as follows: “(ii) to sell or give on hire, or offer for sale or hire any copy of the computer programme, regardless of whether such copy has been sold or given on hire on earlier occasions;” (emphasis supplied) After the 1999 Amendment, what is conspicuous by its absence is the phrase “regardless of whether such copy has been sold or given on hire on earlier occasions”. This is a statutory recognition of the doctrine of first sale/principle of exhaustion. 121. The doctrine of first sale/principle of exhaustion is explained by the locus classicus on this subject, Copinger and Skone James on Copyright (14th Edition) (1999), as follows: “The distribution right: general. One of the acts restricted by the copyright in all work is the issue of the original or copies of the work to the public, often called the “distribution right”. This right is provided for in section 18 of the 1988 Act. Infringement of the distribution right is a primary infringement under UK law, and so there is no need to prove knowledge or reason to believe that the copy in question is infringing. Thus it is a powerful weapon against those at the top of a chain of distribution. In accordance with general principles, section 18 must be interpreted so far as possible in such a way as to conform with relevant EU Directives, in this instance, the Software Directive and the Information Society Directive. Recent case law of the CJEU has made a conforming interpretation more difficult. An important aspect of the distribution right is that it is exhausted in relation to a particular article by the first sale (and, in the case of the Information Society Directive, the first transfer of ownership) of that article in the Community by the rightholder or with his consent. For the purposes of the Software Directive, certain forms of distribution of electronic copies are considered to exhaust the distribution right in respect of such copies.” (pages 613-614) “Exhaustion of the distribution right: tangible objects. Exhaustion applies to the tangible object into which a protected work or its copy is incorporated if it has been placed on the market with the copyright holder’s consent. In the case of artistic works, the consent of the copyright holder does not cover the distribution of an object incorporating his work if that object has been altered after its initial marketing in such a way that it constitutes a new reproduction of the work; in such an event, the distribution right is exhausted only upon the first sale or transfer of ownership of that new object with the consent of the rightholder. Accordingly, where a defendant (without the licence of the rightholder) transferred an image of a work of a famous painter from a poster onto canvas by physically lifting the ink from the poster, producing a result closer to the original and leaving a blank piece of paper behind, and this amounted to copying, the rightholder’s distribution right had not been exhausted. Exhaustion: computer programs. Similar considerations apply in relation to tangible copies of computer programs as to other works: the first sale of a copy of a program by the rightholder or with his consent exhausts the distribution right with the exception of the right to control further rental of the program or a copy thereof. As to copies made available in intangible form (e.g. by downloading from a website), for these purposes the word “sale” is to be given an autonomous Community interpretation. Where a seller makes a program available for download under a licence for an unlimited period in return for a licence fee, the intention is to make the copy usable by the customer, permanently, in return for payment of a fee designed to enable the copyright owner to obtain a remuneration corresponding to the economic value of the copy of the work. Accordingly, that amounts to a transfer of the right of ownership of the copy in question and thus a sale for the purposes of the exhaustion of the distribution right. The same applies if the copy is made available by means of a material medium such as a CD- ROM or DVD and if the download is free but the licence is granted and paid for separately. It does not matter if the software is the subject of a maintenance agreement: the exhaustion applies to the copy as corrected and updated pursuant to the agreement. Any other interpretation would undermine the effectiveness of article 4(2) of the Directive since ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.] suppliers would merely have to call a contract a licence rather than a sale in order to circumvent the rule of exhaustion and divest it of all scope. The result is that a purchaser from the original licensee and any subsequent acquirer are lawful acquirers of the software for the purposes of article 5(1) of the Software Directive and benefit from the right of reproduction provided for in that provision.” (pages 621-622) 122. In Warner Bros. Entertainment Inc. v. Santosh V.G., CS (OS) No. 1682/2006 [“Warner Bros.”] reported in 2009 SCC OnLine Del 835, a Single Judge of the High Court of Delhi dealt with copyright in a cinematograph film, as a result of which, section 14(d)(ii) of the Copyright Act, before it was amended in 2012,46 came up for consideration. The said section, prior to being amended in 2012, read as follows: “14. Meaning of Copyright.— For the purposes of this Act, “copyright” means the exclusive right subject to the provisions of this Act, to do or authorise the doing of any of the following acts in respect of a work or any substantial part thereof, namely xxx xxx xxx (d) in the case of a cinematograph film,— xxx xxx xxx (ii) to sell or give on hire or offer for sale or hire, any copy of the film, regardless of whether such copy has been sold or given on hire on earlier occasion” 123. The learned Single Judge of the High Court of Delhi explained the principle of exhaustion as follows: “57. The doctrine of exhaustion of copyright enables free trade in material objects on which copies of protected works have been fixed and put into circulation with the right holder’s consent. The “exhaustion” principle in a sense arbitrates the conflict between the right to own a copy of a work and the author’s right to control the distribution of copies. Exhaustion is decisive with respect to the priority of ownership and the freedom to trade in material carriers on the condition that a copy has been legally brought into 46 By Act 27 of 2012, s. 5(ii)(b) (w.e.f. 21.06.2012). trading. Transfer of ownership of a carrier with a copy of a work fixed on it makes it impossible for the owner to derive further benefits from the exploitation of a copy that was traded with his consent. The exhaustion principle is thus termed legitimate by reason of the profits earned for the ownership transfer, which should be satisfactory to the author if the work is not being exploited in a different exploitation field. 58. Exhaustion of rights is linked to the distribution right. The right to distribute objects (making them available to the public) means that such objects (or the medium on which a work is fixed) are released by or with the consent of the owner as a result of the transfer of ownership. In this way, the owner is in control of the distribution of copies since he decides the time and the form in which copies are released to the public. Content-wise the distribution right are to be understood as an opportunity to provide the public with copies of a work and put them into circulation, as well as to control the way the copies are used. The exhaustion of rights principle thus limits the distribution right, by excluding control over the use of copies after they have been put into circulation for the first time.” (emphasis in original) 124. The learned Single Judge then arrived at the following conclusion: “62. … The court is of opinion therefore that the existence or applicability of the “exhaustion” principle cannot be inferred automatically; it would have to depend on the situation, and the structure of the legislation in question.” 125. Coming to section 14(a)(ii) of the Copyright Act, the learned Single Judge then held: “63. The defendant in this case, accepts that the renting/hiring of films carried on by it is without the plaintiffs’ license. The Plaintiffs urge that since the importation, for the purpose of renting of these cinematographic films has not been authorized by them in India, the copies are infringing copies. Hence their import would be barred under Section 51(b)(iv). The defendant’s argument, however, is that the copies were legitimately purchased in the course of trade; they are rental copies, and can be used for purpose of renting, in ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.] India. He says that the device of zoning, whereby the plaintiffs restrict the licensee owner to use it in territories other than what is indicated by them, is artificial, and unenforceable. Such “long arm” conditions are inapplicable. Particular reference is made to the explanation to Section 14, which describes the content of copyright; it clarifies that “For the purposes of this section, a copy which has been sold once shall be deemed to be a copy already in circulation.” Though attractive, this contention is unfeasible for more than one reason. The reference to copies in circulation is in the context of copyright in literary, artistic, dramatic or musical work, — not computer programme — (Section 14(a); the statute enables the copyright owner to “issue copies of the work to the public not being copies already in circulation”. But for the explanation, it could arguably be said that the copyright owner lost his domain, or right to control the manner of further dealing in copies which were in circulation. Yet, a careful reading of Section 14 would reveal that the content of copyrights in respect of each nature of work (literary, dramatic, or musical work, on the one hand, computer programme, artistic work, cinematograph film, etc on the other) are distinct — evident from the listing out of such rights, separately, in clauses (a) to (f) of the section. The reference to “copies in circulation” has to be therefore, in the context; the phrase is used to limit the copyright owner’s right to dictate further use of a literary, musical and dramatic work (Section 14(a)(ii)). None of the owners of other classes of work are subject to that limitation. The restriction of one class of copyright owner, structured in the statute serves a dual purpose- it limits the owner of that class of copyright; and at the same time leaves it open to the copyright owner of other kinds of work, to place such restrictions.” (emphasis in original) 126. Contrasting the aforesaid with section 14(d)(ii) of the Copyright Act, as it stood prior to the amendment in 2012, the learned Single Judge then went on to hold: “64. The second reason is that Section 14(1)(d) provides that the copyright owner has, in case of cinematographic films, the exclusive right to sell or give on hire or offer for sale or hire, any copy of the film, regardless of whether such copy has been sold or given on hire on earlier occasion. The copyright owner, therefore continues to be entitled to exercise rights in a particular copy of the film regardless of whether it has been sold previously- in express contrast to literary works, which are “already in circulation”. This is reinforced by Section 51(b)(i), which unambiguously provides that copyright in a work shall be infringed if a person does anything the exclusive right do which is by the Act, conferred upon the owner of the copyright; it is also emphasized by Section 51(b)(i) which makes for sale or hire, or sells or lets for hire, or by way of trade displays or offers for sale or hire, any infringing copies of the work. The proviso, crucially, exempts from the definition importation of a single infringing copy for “the private and domestic use of the importer”. As noted earlier, importation of a copy into India, in contravention of the Act — for instance, without the license, or authorization of the copyright owner, is an infringement; such copy is an infringing copy under Section 2(m).” (emphasis in original) 127. Thus, the Single Judge concluded: “67. The express indication in Section 14(a)(ii) that a copyright owner of literary works cannot exercise domain over copies in circulation, shows that exhaustion, if one may term it, applies only in relation to the class of copyrights in Section 14(a) and to the extent specified in clause (ii). Thus, the copyright owner of a literary work, cannot dictate how and under what conditions a copy can be re-sold, once it is “circulated”. This limited “exhaustion” negates the applicability of the principle in regard to other classes of copyrights. Thus, Parliament having intervened in one category of copyrights to grant a limited kind of “exhaustion” and consciously chosen not to extend it to others, sleight of judicial reasoning cannot extend its application…” 128. However, the learned Additional Solicitor General relied upon the judgment of another learned Single Judge of the High Court of Delhi who had occasion to consider the aforesaid doctrine in John Wiley & Sons Inc. v. Prabhat Chander Kumar Jain, IA No. 11331/2008 in CS(OS) No. 1960/2008 reported in 2010 SCC OnLine Del 2000. The case involved the sale of low-priced editions of books meant for the Indian market in foreign territories, contrary to the terms prescribed by ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.] the copyright licence. After referring to a number of authorities, the learned Single Judge held: “68. The legal propositions which emanate from this discussion are as under: a) That the court will measure the infringement of the copyright from the rights of the owner of the copyright when the owner is before the court for violation of its rights. b) That the rights of the owner may be broader than the limited rights of the exclusive licencee, although the exclusive licencee has the independent right to sue for infringement of the copyright. c) The rights of the owner and exclusive licencee may not be the same and the rights of the exclusive licensee shall also be subject to the fetters imposed by the agreement between the licensor and licencee. 69. Applying these principles to the present case, it can be seen that the plaintiff no. 1, 3 and 5 are the worldwide owners of the books and their copyright as mentioned and averred in the plaint. The plaintiff nos. 2, 4 and 6 are the exclusive licensees licensed to publish the said books in India and other territories. The plaintiffs’ grievance is that Defendant no. 3 Technischer Overseas Pvt. Ltd. which is a bookseller in Delhi is purchasing the said Low Price Editions of the books meant for the Indian market and the territories defined from the plaintiffs no. 2, 4, 6 and is offering the said low prize books from the websites www.alibris.com, www.biblio.com to territories outside the prescribed ones on the book is infringing the copyright of the plaintiffs. 70. The said acts of the defendants of purchase of the books from the exclusive licensees/licensees are legitimate in nature and do not hinder or take away anyone’s rights including the rights of exclusive licensees/licensee. But once the said defendant no. 3 offers for sale the books or publications (which are fettered by territorial restrictions purchased from exclusive licensees) and puts them into circulation by selling or offering for sale or by taking orders for sale to the territories beyond the ones for which permission has been granted by the owners of the copyright, the said acts are prima facie tantamount to putting into circulation or issuance of copies not being in circulation in other territories where the right to do so is of the owner to exercise and violates the rights of the owner of the copyright under Section 14 read with Section 51 of the Act, if not the rights of the exclusive licensee. In other words, the said acts of selling the books from India or offering for sale from India through website and thereafter accepting the money and couriering the books to an unauthorized territory will violate the right of the owners of the copyright which are plaintiff no. 1, 3, 5 to issue the copies to the public not already in circulation (not of exclusive licensees) and thus will, prima facie, infringe their copyright. xxx xxx xxx 79. The said position of the licensee is equally applicable in cases of computer software and is seen in normal course when anyone purchases the software. Computer software are mostly licensed and are sold and distributed with their own conditions and limitations. The purchasers of the said computer software either from the owner or from the licensee is aware of the arrangement or license agreement that the said computer software for instance is meant for single user or multiple usage. The said purchaser is within notice while making purchase of the said software and is thus bound by the said conditions of the license. Once the said purchaser violates the condition of the said license, he/she becomes liable for infringement of copyright of the owner. 80. Likewise is the case with the books in the present matter. Once the defendants purchase the Low Price Editions books of the plaintiffs from their exclusive licensee, they are conscious of the fact that the said editions are subject to territorial restrictions which are meant to be sold within the limited territories only. The notice on the book itself gives knowledge to the purchaser about the said territorial restriction. The said knowledge is also evident when the defendant themselves offer the same books to the customers outside the territories while representing that “it is an international edition in paperback. The contents are identical to the American Edition, word for word. The ISBN differs from the American Edition and the book is in black and white but the contents are completely same as the American Edition at a great price.”” ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.] 129. The learned Single Judge then embarked upon a discussion of the doctrine of first sale/principle of exhaustion, finding the absence of an express provision in the Copyright Act recognising international exhaustion, and summed up its impact in the context of the facts before him as follows: “100. a) At the outset, again, I would like to reiterate the three propositions a) the meaning of copyright has been defined under Section 14 of the Copyright Act as is clear from the opening words of the Section; b) The rights of the owner have to be looked into as per Section 51 of the Act while measuring infringement; c) The rights of the owner may be broader than that of the licensee. In the present case, the first sale has been effected by the exclusive licensees plaintiff nos. 2, 4, 6 and their rights are limited and are subject to the conditions and limitations imposed by the agreement. That being so, the applicability of the first sale doctrine qua the sales effected by the exclusive licensee to the defendants will at best exhaust the rights of the exclusive licensees to complain and not the rights of the owner. The right of the owner to complain for remaining infringement in unauthorised territories for violation of the permission granted and violation of the rights will remain intact. Thus, the applicability of first sale doctrine will partially exhaust the rights of the licencee and not of the owner of the copyright i.e. plaintiff nos. 1, 3 and 5. xxx xxx xxx 104. The discussion makes it apparent that the learned single judge has doubted the mode of the applicability of the first sales doctrine in India as per the existing law. The same may lead to partial or regional exhaustion or international exhaustion. As per my opinion, as the express provision for international exhaustion is absent in our Indian law, it would be appropriate to confine the applicability of the same to regional exhaustion. Be that as it may, in the present case, the circumstances do not even otherwise warrant this discussion as the rights if at all are exhausted are to the extent to which they are available with the licensees as the books are purchased from the exclusive licensees who have limited rights and not from the owner. In these circumstances, the question of exhaustion of rights of owner in the copyright does not arise at all.” 130. Thus, since copies of the low-priced editions could not be said to be “copies already in circulation” in the foreign territories that they were resold in, the learned Single Judge concluded that the principle of exhaustion would not apply. On the other hand, in the facts of the appeals before us, the distributors resell shrink-wrapped copies of the computer programmes that are already put in circulation by foreign, non- resident suppliers/manufacturers, since they have been sold and imported into India via distribution agreements, and are thus not hit by section 14(a)(ii) of the Copyright Act. This is made clear by the explanation to section 14 of the Copyright Act, which states as follows: “Explanation.—For the purposes of this section, a copy which has been sold once shall be deemed to be a copy already in circulation.” 131. In UsedSoft GmbH v. Oracle International Corp. (Case C-128/11) [“UsedSoft v. Oracle (ECJ)”], the European Court of Justice [“ECJ”] was concerned with Article 4 of Directive 2001/29/EC of the European Parliament and of the Council of 22 May 2001 on the harmonisation of certain aspects of copyright and related rights in the information society [“EC Directive 2001/29”], which provides as follows: “Article 4 Distribution right 1. Member States shall provide for authors, in respect of the original of their works or of copies thereof, the exclusive right to authorise or prohibit any form of distribution to the public by sale or otherwise. 2. The distribution right shall not be exhausted within the Community in respect of the original or copies of the work, except where the first sale or other transfer of ownership in the Community of that object is made by the rightholder or with his consent.” 132. Coming to Article 4(2) of EC Directive 2001/29, the ECJ posed a question, thus: “35. By its second question, which should be addressed first, the referring court essentially seeks to know whether and under what conditions the downloading from the internet of a copy of a computer program, authorised by the copyright holder, can give rise to exhaustion of the right of distribution of that copy in the European Union within the meaning of Article 4(2) of Directive 2009/24. ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.] 36. It should be recalled that under Article 4(2) of Directive 2009/ 24 the first sale in the European Union of a copy of a computer program by the rightholder or with his consent exhausts the distribution right within the European Union of that copy. 37. According to the order for reference, the copyright holder itself, in this case Oracle, makes available to its customers in the European Union who wish to use its computer program a copy of that program which can be downloaded from its website. 38. To determine whether, in a situation such as that at issue in the main proceedings, the copyright holder’s distribution right is exhausted, it must be ascertained, first, whether the contractual relationship between the rightholder and its customer, within which the downloading of a copy of the program in question has taken place, may be regarded as a ‘first sale … of a copy of a program’ within the meaning of Article 4(2) of Directive 2009/24.” 133. Concluding that the transfer of a copy of a computer programme, accompanied by the conclusion of an EULA constituted a “first sale… of a copy of a program” within the meaning of Article 4(2) of EC Directive 2001/29 (see paragraph 48), the ECJ then went on to describe the principle of exhaustion as follows: “70. An original acquirer who resells a tangible or intangible copy of a computer program for which the copyright holder’s right of distribution is exhausted in accordance with Article 4(2) of Directive 2009/24 must, in order to avoid infringing the exclusive right of reproduction of a computer program which belongs to its author, laid down in Article 4(1)(a) of Directive 2009/24, make his own copy unusable at the time of its resale. In a situation such as that mentioned in the preceding paragraph, the customer of the copyright holder will continue to use the copy of the program installed on his server and will not thus make it unusable. 71. Moreover, even if an acquirer of additional user rights for the computer program concerned did not carry out a new installation — and hence a new reproduction — of the program on a server belonging to him, the effect of the exhaustion of the distribution right under Article 4(2) of Directive 2009/24 would in any event not extend to such user rights. In such a case the acquisition of additional user rights does not relate to the copy for which the distribution right was exhausted at the time of that transaction. On the contrary, it is intended solely to make it possible to extend the number of users of the copy which the acquirer of additional rights has himself already installed on his server. 72. On the basis of all the foregoing, the answer to Question 2 is that Article 4(2) of Directive 2009/24 must be interpreted as meaning that the right of distribution of a copy of a computer program is exhausted if the copyright holder who has authorised, even free of charge, the downloading of that copy from the internet onto a data carrier has also conferred, in return for payment of a fee intended to enable him to obtain a remuneration corresponding to the economic value of the copy of the work of which he is the proprietor, a right to use that copy for an unlimited period.” 134. The ECJ concluded that the copyright owner exhausts his distribution right in copies of a computer programme upon making the first sale, provided that the copy is made unusable by the first acquirer, as follows: “78. Admittedly, as stated in paragraph 70 above, the original acquirer of a tangible or intangible copy of a computer program for which the copyright holder’s distribution right is exhausted in accordance with Article 4(2) of Directive 2009/24 who resells that copy must, in order to avoid infringing that rightholder’s exclusive right of reproduction of his computer program under Article 4(1)(a) of Directive 2009/24, make the copy downloaded onto his computer unusable at the time of its resale. 79. As Oracle rightly observes, ascertaining whether such a copy has been made unusable may prove difficult. However, a copyright holder who distributes copies of a computer program on a material medium such as a CD ROM or DVD is faced with the same problem, since it is only with great difficulty that he can make sure that the original acquirer has not made copies of the program which he will continue to use after selling his material medium. To solve that problem, it is permissible for the distributor — whether ‘classic’ or ‘digital’ — to make use of technical protective measures such as product keys. 80. Since the copyright holder cannot object to the resale of a copy of a computer program for which that rightholder’s distribution ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.] right is exhausted under Article 4(2) of Directive 2009/24, it must be concluded that a second acquirer of that copy and any subsequent acquirer are ‘lawful acquirers’ of it within the meaning of Article 5(1) of Directive 2009/24. 81. Consequently, in the event of a resale of the copy of the computer program by the first acquirer, the new acquirer will be able, in accordance with Article 5(1) of Directive 2009/24, to download onto his computer the copy sold to him by the first acquirer. Such a download must be regarded as a reproduction of a computer program that is necessary to enable the new acquirer to use the program in accordance with its intended purpose.” 135. The learned Additional Solicitor General, however, strongly relied upon the decision of the United States Court of Appeals for the Ninth Circuit in Vernor v. Autodesk, Inc., 621 F.3d 1102 (9th Cir. 2010), wherein it dealt with the doctrine of first sale/principle of exhaustion. The facts of the case were set out as follows: “A. Autodesk’s Release 14 software and licensing practices The material facts are not in dispute. Autodesk makes computer- aided design software used by architects, engineers, and manufacturers. It has more than nine million customers. It first released its Auto CAD software in 1982. It holds registered copyrights in all versions of the software including the discontinued Release 14 version, which is at issue in this case. It provided Release 14 to customers on CD-ROMs. Since at least 1986, Autodesk has offered Auto CAD to customers pursuant to an accompanying software license agreement (“SLA”), which customers must accept before installing the software. A customer who does not accept the SLA can return the software for a full refund. Autodesk offers SLAs with different terms for commercial, educational institution[s], and student users. The commercial license, which is the most expensive, imposes the fewest restrictions on users and allows them software upgrades at discounted prices. The SLA for Release 14 first recites that Autodesk retains title to all copies. Second, it states that the customer has a nonexclusive and nontransferable license to use Release 14. Third, it imposes transfer restrictions, prohibiting customers from renting, leasing, or transferring the software without Autodesk’s prior consent and from electronically or physically transferring the software out of the Western Hemisphere. Fourth, it imposes significant use restrictions: YOU MAY NOT: (1) modify, translate, reverse engineer, decompile, or disassemble the Software … (3) remove any proprietary notices, labels, or marks from the Software or Documentation; (4) use the Software outside of the Western Hemisphere; (5) utilize any computer software or hardware designed to defeat any hardware copy-protection device, should the software you have licensed be equipped with such protection; or (6) use the Software for commercial or other revenue- generating purposes if the Software has been licensed or labeled for educational use only. Fifth, the SLA provides for license termination if the user copies the software without authorization or does not comply with the SLA’s restrictions. Finally, the SLA provides that if the software is an upgrade of a previous version: [Y]ou must destroy the software previously licensed to you, including any copies resident on your hard disk drive $ within sixty (60) days of the purchase of the license to use the upgrade or update$ Autodesk reserves the right to require you to show satisfactory proof that previous copies of the software have been destroyed. Autodesk takes measures to enforce these license requirements. It assigns a serial number to each copy of AutoCAD and tracks registered licensees. It requires customers to input “activation codes” within one month after installation to continue using the software.1 The customer obtains the code by providing the product’s serial number to Autodesk. Autodesk issues the activation code after confirming that the serial number is authentic, the copy is not registered to a different customer, and the product has not been upgraded. Once a customer has an activation code, he or she may use it to activate the software on additional computers without notifying Autodesk.”’ (pages 1104-1105) ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.] 136. The Court noted that the application of the doctrine turned on the following question: “This case requires us to decide whether Autodesk sold Release 14 copies to its customers or licensed the copies to its customers. If CTA owned its copies of Release 14, then both its sales to Vernor and Vernor’s subsequent sales were non-infringing under the first sale doctrine. However, if Autodesk only licensed CTA to use copies of Release 14, then CTA’s and Vernor’s sales of those copies are not protected by the first sale doctrine and would therefore infringe Autodesk’s exclusive distribution right.” (page 1107) (emphasis supplied) 137. On these facts, the doctrine of first sale/principle of exhaustion, as applicable in USA, was set out as follows: “A. The first sale doctrine The Supreme Court articulated the first sale doctrine in 1908, holding that a copyright owner’s exclusive distribution right is exhausted after the owner’s first sale of a particular copy of the copyrighted work. See Bobbs-Merrill Co. v. Straus, 210 U.S. 339, 350-51 (1908). In Bobbs-Merrill, the plaintiff-copyright owner sold its book with a printed notice announcing that any retailer who sold the book for less than one dollar was responsible for copyright infringement. (Id. at 341). Plaintiff sought injunctive relief against defendants- booksellers who failed to comply with the price restriction. (Id. at 341-42). The Supreme Court rejected the plaintiff’s claim, holding that its exclusive distribution right applied only to first sales of copies of the work. (Id. at 350-51). The distribution right did not permit [the] plaintiff to dictate that subsequent sales of the work below a particular price were infringing. Id. The Court noted that its decision solely applied to the rights of a copyright owner that distributed its work without a license agreement. (Id. at 350) (“There is no claim in this case of contract limitation, nor license agreement controlling the subsequent sales of the book.”). Congress codified the first sale doctrine the following year. See 17 U.S.C. § 41 (1909). In its current form, it allows the “owner of a particular copy” of a copyrighted work to sell or dispose of his copy without the copyright owner’s authorization. (Id. § 109(a) (enacted 1976)). The first sale doctrine does not apply to a person who possesses a copy of the copyrighted work without owning it, such as a licensee. See id. § 109(d); cf. Quality King Distribs., Inc. v. L’Anza Research Int’l Inc., 523 U.S. 135, 146-47 (1998) (“[T]he first sale doctrine would not provide a defense to $ any non-owner such as a bailee, a licensee, a consignee, or one whose possession of the copy was unlawful.”).” (pages 1107-1108) 138. Given the restrictions specifically imposed by the software licence agreement in the facts of the case, the Court held that the copyright owner retained the title to the copies of the software, and thus the resale of such copies violated the distribution right of the copyright owner, as follows: “B. Analysis We hold today that a software user is a licensee rather than an owner of a copy where the copyright owner (1) specifies that the user is granted a license; (2) significantly restricts the user’s ability to transfer the software; and (3) imposes notable use restrictions.12 Applying our holding to Autodesk’s SLA, we conclude that CTA was a licensee rather than an owner of copies of Release 14 and thus was not entitled to invoke the first sale doctrine or the essential step defense. Autodesk retained title to the software and imposed significant transfer restrictions: it stated that the license is non-transferable, the software could not be transferred or leased without Autodesk’s written consent, and the software could not be transferred outside the Western Hemisphere. The SLA also imposed use restrictions against the use of the software outside the Western Hemisphere and against modifying, translating, or reverse-engineering the software, removing any proprietary marks from the software or documentation, or defeating any copy protection device. Furthermore, the SLA provided for termination of the license upon the licensee’s unauthorized copying or failure to comply with other license restrictions. Thus, because Autodesk reserved title to Release 14 copies and imposed significant transfer and use ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.] restrictions, we conclude that its customers are licensees of their copies of Release 14 rather than owners. CTA was a licensee rather than an “owner of a particular copy” of Release 14, and it was not entitled to resell its Release 14 copies to Vernor under the first sale doctrine. 17 U.S.C. § 109(a). Therefore, Vernor did not receive title to the copies from CTA and accordingly could not pass ownership on to others. Both CTA’s and Vernor’s sales infringed Autodesk’s exclusive right to distribute copies of its work. Id. § 106(3).” (pages 1111-1112) 139. As a result, given the conditions of the software licence agreement in the facts before it, the Court held that the doctrine of first sale would not apply, as Autodesk, the copyright owner, did not part with title to the copies of the software. On the other hand, as has been held in paragraph 52 of this judgment, the EULAs and distribution agreements that the appeals before us are concerned with, do not grant a licence in terms of section 30 of the Copyright Act, but do in fact convey title to the material object embedded with a copy of the computer software to the distributors/end-users. 140. A conspectus of the aforesaid authorities would show that the doctrine of first sale/principle of exhaustion is dependent, in the first place, upon legislation which either recognises or refuses to recognise the doctrine (thereby continuing to vest distribution rights in the copyright owner, even beyond the first sale of the copyrighted work). Thus, for example, prior to the amendment of section 14(d)(ii) in 2012, dealing with a cinematograph film, the distribution right to sell or give on hire or offer for sale or hire, any copy of the film, would continue to vest in the copyright owner, “regardless of whether such copy ha[d] been sold or given on hire on earlier occasion”, which manifested the legislative intent against the application of the doctrine of first sale/principle of exhaustion. Post 2012, however, the balance between the copyright owner’s distribution right and the right of the purchaser to further resale, was tilted in favour of the latter, the words “regardless of whether such copy has been sold or given on hire on earlier occasion” being deleted by the amendment. Likewise, when it comes to section 14(a)(ii) of the Copyright Act, the distribution right subsists with the owner of copyright to issue copies of the work to the public, to the extent such copies are not copies already in circulation, thereby manifesting a legislative intent to apply the doctrine of first sale/principle of exhaustion, as has been found by the High Court of Delhi in Warner Bros. (supra). 141. Like section 14(d)(ii) of the Copyright Act, section 14(b)(ii), has, after the 1999 Amendment, with effect from 15.01.2000, also deleted the words “regardless of whether such copy has been sold or given on hire on earlier occasions’’, thereby making it clear that the same tilt that had been made in section 14(d)(ii) of the Copyright Act vide the amendment in 2012 in favour of the purchaser, is also to be found post the 1999 Amendment, in section 14(b)(ii) of the Copyright Act. 142. The language of section 14(b)(ii) of the Copyright Act makes it clear that it is the exclusive right of the owner to sell or to give on commercial rental or offer for sale or for commercial rental “any copy of the computer programme”. Thus, a distributor who purchases computer software in material form and resells it to an end-user cannot be said to be within the scope of the aforesaid provision. The sale or commercial rental spoken of in section 14(b)(ii) of the Copyright Act is of “any copy of a computer programme”, making it clear that the section would only apply to the making of copies of the computer programme and then selling them, i.e., reproduction of the same for sale or commercial rental. 143. The object of section 14(b)(ii) of the Copyright Act, in the context of a computer program, is to interdict reproduction of the said computer programme and consequent transfer of the reproduced computer programme to subsequent acquirers/end-users. By way of contrast, once a book is sold, on further resale of the same book, the purchaser loses the material book altogether, as such purchaser has, for consideration, parted with the book once and for all. This may not be so in the case of a computer programme, which is why the ECJ in UsedSoft v. Oracle (ECJ) (supra) held that unless a further resale of a computer software stored on a floppy disc/CD is accompanied by the destruction of the said software on the computer of the reseller/first acquirer, the copyright owner’s rights would be easily infringed by mere reproduction thereof. This is also recognised in section 65A of the Copyright Act which punishes the circumvention of technological protection measures, such as encryption codes, product keys etc. designed to ensure that the first acquirer’s copy is made unusable. Thus, once it is understood that the object of section 14(b)(ii) of the Copyright Act is not to interdict the sale of computer software that is “licensed” to be sold by a distributor, ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.] but that it is to prevent copies of computer software once sold being reproduced and then transferred by way of sale or otherwise, it becomes clear that any sale by the author of a computer software to a distributor for onward sale to an end-user, cannot possibly be hit by the said provision. Further, as has rightly been pointed out by Shri S. Ganesh, learned Senior Advocate appearing on behalf of Sonata Information Technology Ltd. in C.A. Nos. 8737- 8941/2018, the distributor cannot use the computer software at all and has to pass on the said software, as shrink-wrapped by the owner, to the end-user for a consideration, the distributor’s profit margin being that of an intermediary who merely resells the same product to the end-user. 144. For all these reasons, we cannot accede to the argument made by the learned Additional Solicitor General that the distribution of copyrighted computer software, on the facts of the appeals before us, would constitute the grant of an interest in copyright under section 14(b)(ii) of the Copyright Act, thus necessitating the deduction of tax at source under section 195 of the Income Tax Act. INTERPRETATION OF TREATIES, OECD COMMENTARY AND THE REVENUE’S OWN UNDERSTANDING 145. The DTAAs that have been entered into by India with other Contracting States have to be interpreted liberally with a view to implement the true intention of the parties. This Court, in Azadi Bachao Andolan (supra) put it thus: “98. In John N. Gladden v. Her Majesty the Queen [85 DTC 5188 at p. 5190] the principle of liberal interpretation of tax treaties was reiterated by the Federal Court, which observed: “Contrary to an ordinary taxing statute a tax treaty or convention must be given a liberal interpretation with a view to implementing the true intentions of the parties. A literal or legalistic interpretation must be avoided when the basic object of the treaty might be defeated or frustrated insofar as the particular item under consideration is concerned.”” “Interpretation of treaties 130. The principles adopted in interpretation of treaties are not the same as those in interpretation of a statutory legislation. While commenting on the interpretation of a treaty imported into a municipal law, Francis Bennion observes: “With indirect enactment, instead of the substantive legislation taking the well-known form of an Act of Parliament, it has the form of a treaty. In other words, the form and language found suitable for embodying an international agreement become, at the stroke of a pen, also the form and language of a municipal legislative instrument. It is rather like saying that, by Act of Parliament, a woman shall be a man. Inconveniences may ensue. One inconvenience is that the interpreter is likely to be required to cope with disorganised composition instead of precision drafting. The drafting of treaties is notoriously sloppy usually for a very good reason. To get agreement, politic uncertainty is called for. … The interpretation of a treaty imported into municipal law by indirect enactment was described by Lord Wilberforce as being ‘unconstrained by technical rules of English law, or by English legal precedent, but conducted on broad principles of general acceptation. This echoes the optimistic dictum of Lord Widgery, C.J. that the words ‘are to be given their general meaning, general to lawyer and layman alike … the meaning of the diplomat rather than the lawyer’.” [Francis Bennion: Statutory Interpretation, p. 461 [Butterworths, 1992 (2nd Edn.)].] 131. An important principle which needs to be kept in mind in the interpretation of the provisions of an international treaty, including one for double taxation relief, is that treaties are negotiated and entered into at a political level and have several considerations as their bases. Commenting on this aspect of the matter, David R. Davis in Principles of International Double Taxation Relief [ David R. Davis: Principles of International Double Taxation Relief, p. 4 (London, Sweet & Maxwell, 1985).], points out that the main function of a Double Taxation Avoidance Treaty should be seen in the context of aiding commercial relations between treaty partners and as being essentially a bargain between two treaty countries as to the division of tax revenues between them in respect of income falling to be taxed in both jurisdictions. It is observed (vide paragraph 1.06): ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.] “The benefits and detriments of a double tax treaty will probably only be truly reciprocal where the flow of trade and investment between treaty partners is generally in balance. Where this is not the case, the benefits of the treaty may be weighed more in favour of one treaty partner than the other, even though the provisions of the treaty are expressed in reciprocal terms. This has been identified as occurring in relation to tax treaties between developed and developing countries, where the flow of trade and investment is largely one-way. Because treaty negotiations are largely a bargaining process with each side seeking concessions from the other, the final agreement will often represent a number of compromises, and it may be uncertain as to whether a full and sufficient quid pro quo is obtained by both sides.” And, finally, in paragraph 1.08: “Apart from the allocation of tax between the treaty partners, tax treaties can also help to resolve problems and can obtain benefits which cannot be achieved unilaterally.”” 146. Further, the House of Lords in Ostime (Inspector of Taxes) v. Australian Mutual Provident Society, [1959] AC 259 by a judgment dated 16.07.1959 remarked upon, what it termed the “international tax language” of bilateral taxation agreements, as follows: “Bilateral agreements for regulating some of the problems of double taxation began, at any rate so far as the United Kingdom was concerned, in 1946. The form employed, which, for obvious reasons, employs similar forms and similar language in all agreements, is derived, I believe, from a set of model clauses proposed by the financial commission of the League of Nations. The aim is to provide by treaty for the tax claims of two governments, both legitimately interested in taxing a particular source of income either by resigning to one of the two the whole claim or else by prescribing the basis on which the tax claim is to be shared between them. For our purpose it is convenient to note that the language employed in this agreement is what may be called international tax language and that such categories as “enterprise,” “commercial or industrial profits” and “permanent establishment” have no exact counterpart in the taxing code of the United Kingdom.” (page 480) 147. All the DTAAs with which we are concerned, have, as their starting point, either the OECD Model Tax Convention on Income and Capital [“OECD Model Tax Convention”] and/or the United Nations Model Double Taxation Convention between Developed and Developing Countries [“UN Model Convention”] insofar as the taxation of royalty for parting with copyright is concerned. 148. The OECD Model Tax Convention speaks of the importance of the OECD Commentary, as follows: “2. It has long been recognised among the member countries of the Organisation for Economic Co-operation and Development that it is desirable to clarify, standardise, and confirm the fiscal situation of taxpayers who are engaged in commercial, industrial, financial, or any other activities in other countries through the application by all countries of common solutions to identical cases of double taxation. These countries have also long recognised the need to improve administrative co-operation in tax matters, notably through exchange of information and assistance in collection of taxes, for the purpose of preventing tax evasion and avoidance. 3. These are the main purposes of the OECD Model Tax Convention on Income and on Capital, which provides a means of settling on a uniform basis the most common problems that arise in the field of international juridical double taxation. As recommended by the Council of OECD, member countries, when concluding or revising bilateral conventions, should conform to this Model Convention as interpreted by the Commentaries thereon and having regard to the reservations contained therein and their tax authorities should follow these Commentaries, as modified from time to time and subject to their observations thereon, when applying and interpreting the provisions of their bilateral tax conventions that are based on the Model Convention.” “29.2 Similarly, taxpayers make extensive use of the Commentaries in conducting their businesses and planning their business transactions and investments. The Commentaries are of particular importance in countries that do not have a procedure for obtaining an advance ruling on tax matters from the tax administration as the Commentaries may be the only available source of interpretation in that case.” (OECD Model Tax Convention 2017 – Condensed Version) (emphasis supplied) ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.] 149. The OECD Model Tax Convention, in Article 12 thereof, defines the term “royalties” as follows: “Article 12 ROYALTIES xxx xxx xxx 2. The term “royalties” as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience.” 150. When the definition of “royalties” is seen in all the DTAAs that we are concerned with, it is found that “royalties” is defined in a manner either identical with or similar to the definition contained in Article 12 of the OECD Model Tax Convention. This being the case, the OECD Commentary on the provisions of the OECD Model Tax Convention then becomes relevant. The OECD Commentary has been referred to and relied upon in several earlier judgments. See: i. Union of India v. Azadi Bachao Andolan, (2004) 10 SCC 1 at pages 42-43; ii. Formula One World Championship Ltd. v. CIT, (2017) 15 SCC 602 at pages 629-630; and iii. CIT v. E-Funds IT Solution Inc., (2018) 13 SCC 294 at pages 322-323. 151. The importance of the OECD Commentary, when it comes to DTAAs, was also underscored by the High Court of Australia in Thiel v. Federal Commissioner of Taxation, High Court of Australia, [1990] 94 ALR 647, which put it thus: “Article 31 of the Vienna Convention provides that a treaty is to be interpreted “in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose’’. The context includes, in addition to the text, any instrument which was made by one or more parties in connection with the conclusion of the treaty and accepted by the other parties as an instrument related to the treaty. For my part, I do not see why the OECD model convention and commentaries should not be regarded as having been made in connection with and accepted by the parties to a bilateral treaty subsequently concluded in accordance with the framework of the model. However, some doubts have been expressed about the applicability, as a matter of language, of Art. 31 to the commentaries in the case of a bilateral treaty such as a double taxation agreement: see Jones et al., “The Interpretation of Tax Treaties with Particular Reference to Article 3(2) of the OECD Model-II’’, (1984) British Tax Review 90 at p. 92. I turn, therefore, to Art. 32 of the Vienna Convention which allows recourse to be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of Art. 31, or to determine the meaning when the interpretation according to Art. 31 leaves the meaning ambiguous or obscure or leads to a result which is manifestly absurd or unreasonable. Whilst the model convention and commentaries may not strictly amount to work preparatory to the double taxation agreement between Australia and Switzerland, they are documents which form the basis for the conclusion of bilateral double taxation agreements of the kind in question and, as with treaties in pari materia, provide a guide to the current usage of terms by the parties. They are, therefore, a supplementary means of interpretation to which recourse may be had under Art. 32 of the Vienna Convention.”47 (Concurring Opinion of Dawson J., pages 653-654) “The Agreement is a treaty and is to be interpreted in accordance with the rules of interpretation recognised by international lawyers: Shipping Corporation of India Ltd. v. Gamlen Chemical Co. (A/Asia) Pty. Ltd. (1980) 147 C.L.R. 142 at p. 159. Those rules have now been codified by the Vienna Convention on the Law of Treaties to which Australia, but not Switzerland, is a party. 47 This Court, in Ram Jethmalani v. Union of India, (2011) 8 SCC 1, noted that though India is not a party to the Vienna Convention on the Law of Treaties, the principles of international law and the principle of interpretation contained in Article 31 thereof provide broad guidelines to interpret treaties in the Indian context also. (See paragraph 69). ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.] Nevertheless, because the interpretation provisions of the Vienna Convention reflect the customary rules for the interpretation of treaties, it is proper to have regard to the terms of the Convention in interpreting the Agreement, even though Switzerland is not a party to that Convention: Fothergill v. Monarch Airlines Ltd. (1981) A.C. 251 at pp. 276, 282, 290; Commonwealth v. Tasmania (the Tasmanian Dam case) (1983) 158 C.L.R. 1 at p. 222; Golder case (1975) 57 I.L.R. 201 at pp. 213-214. Article 31 of the Convention requires a treaty to be interpreted in accordance with the ordinary meaning to be given to its terms “in their context and in the light of its object and purpose’’. The context includes the preamble and annexes to the treaty: Art. 31(2). Recourse may also be had to “supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion’’ to confirm the meaning resulting from the application of Art. 31 or to determine the meaning of the treaty when interpretation according to Art. 31 leaves its meaning obscure or ambiguous or leads to a result which is manifestly absurd or unreasonable: Art. 32. The Agreement is one “for the avoidance of double taxation with respect to taxes on income’’. Accordingly, it is necessary to interpret the words of the Agreement with that particular purpose in mind. Moreover, the term “enterprise’’ in Art. 3 and 7 of the Agreement is ambiguous because, on the one hand, it can mean a project or activity undertaken and, on the other hand, it can mean a framework for making and carrying out decisions in respect of activities and projects. Consequently, it is proper to have regard to any “supplementary means of interpretation’’ in interpreting the Agreement. In this case, the “supplementary means of interpretation’’ are the 1977 OECD Model Convention for the Avoidance of Double Taxation with respect to Taxes on Income and on Capital, which was the model for the Agreement, and a commentary issued by the OECD in relation to that model convention. But before referring to those two documents, it is necessary to describe the Agreement in more detail.” (Concurring Opinion of McHugh J., pages 658-659) 152. The OECD Commentary on royalty payments under Article 12 is instructive, and states as follows : “12. Whether payments received as consideration for computer software may be classified as royalties poses difficult problems but is a matter of considerable importance in view of the rapid development of computer technology in recent years and the extent of transfers of such technology across national borders. In 1992, the Commentary was amended to describe the principles by which such classification should be made. Paragraphs 12 to 17 were further amended in 2000 to refine the analysis by which business profits are distinguished from royalties in computer software transactions. In most cases, the revised analysis will not result in a different outcome. 12.1 Software may be described as a program, or series of programs, containing instructions for a computer required either for the operational processes of the computer itself (operational software) or for the accomplishment of other tasks (application software). It can be transferred through a variety of media, for example in writing or electronically, on a magnetic tape or disk, or on a laser disk or CD-Rom. It may be standardised with a wide range of applications or be tailor-made for single users. It can be transferred as an integral part of computer hardware or in an independent form available for use on a variety of hardware. 12.2 The character of payments received in transactions involving the transfer of computer software depends on the nature of the rights that the transferee acquires under the particular arrangement regarding the use and exploitation of the program. The rights in computer programs are a form of intellectual property. Research into the practices of OECD member countries has established that all but one protect rights in computer programs either explicitly or implicitly under copyright law. Although the term “computer software” is commonly used to describe both the program — in which the intellectual property rights (copyright) subsist — and the medium on which it is embodied, the copyright law of most OECD member countries recognises a distinction between the copyright in the program and software which incorporates a copy of the copyrighted program. Transfers of rights in relation to software occur in many different ways ranging from the alienation of the entire rights in the copyright in a program to the sale of a product which is subject to restrictions on the use to which it is put. The consideration paid can also take numerous forms. These ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.] factors may make it difficult to determine where the boundary lies between software payments that are properly to be regarded as royalties and other types of payment. The difficulty of determination is compounded by the ease of reproduction of computer software, and by the fact that acquisition of software frequently entails the making of a copy by the acquirer in order to make possible the operation of the software. 13. The transferee’s rights will in most cases consist of partial rights or complete rights in the underlying copyright (see paragraphs 13.1 and 15 below), or they may be (or be equivalent to) partial or complete rights in a copy of the program (the “program copy”), whether or not such copy is embodied in a material medium or provided electronically (see paragraphs 14 to 14.2 below). In unusual cases, the transaction may represent a transfer of “know- how” or secret formula (paragraph 14.3). 13.1 Payments made for the acquisition of partial rights in the copyright (without the transferor fully alienating the copyright rights) will represent a royalty where the consideration is for granting of rights to use the program in a manner that would, without such license, constitute an infringement of copyright. Examples of such arrangements include licenses to reproduce and distribute to the public software incorporating the copyrighted program, or to modify and publicly display the program. In these circumstances, the payments are for the right to use the copyright in the program (i.e. to exploit the rights that would otherwise be the sole prerogative of the copyright holder). It should be noted that where a software payment is properly to be regarded as a royalty there may be difficulties in applying the copyright provisions of the Article to software payments since paragraph 2 requires that software be classified as a literary, artistic or scientific work. None of these categories seems entirely apt. The copyright laws of many countries deal with this problem by specifically classifying software as a literary or scientific work. For other countries treatment as a scientific work might be the most realistic approach. Countries for which it is not possible to attach software to any of those categories might be justified in adopting in their bilateral treaties an amended version of paragraph 2 which either omits all references to the nature of the copyrights or refers specifically to software. 14. In other types of transactions, the rights acquired in relation to the copyright are limited to those necessary to enable the user to operate the program, for example, where the transferee is granted limited rights to reproduce the program. This would be the common situation in transactions for the acquisition of a program copy. The rights transferred in these cases are specific to the nature of computer programs. They allow the user to copy the program, for example onto the user’s computer hard drive or for archival purposes. In this context, it is important to note that the protection afforded in relation to computer programs under copyright law may differ from country to country. In some countries the act of copying the program onto the hard drive or random access memory of a computer would, without a license, constitute a breach of copyright. However, the copyright laws of many countries automatically grant this right to the owner of software which incorporates a computer program. Regardless of whether this right is granted under law or under a license agreement with the copyright holder, copying the program onto the computer’s hard drive or random access memory or making an archival copy is an essential step in utilising the program. Therefore, rights in relation to these acts of copying, where they do no more than enable the effective operation of the program by the user, should be disregarded in analysing the character of the transaction for tax purposes. Payments in these types of transactions would be dealt with as commercial income in accordance with Article 7. 14.1 The method of transferring the computer program to the transferee is not relevant. For example, it does not matter whether the transferee acquires a computer disk containing a copy of the program or directly receives a copy on the hard disk of her computer via a modem connection. It is also of no relevance that there may be restrictions on the use to which the transferee can put the software. 14.2 The ease of reproducing computer programs has resulted in distribution arrangements in which the transferee obtains rights to make multiple copies of the program for operation only within its own business. Such arrangements are commonly referred to as “site licences”, “enterprise licenses”, or “network licences”. ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.] Although these arrangements permit the making of multiple copies of the program, such rights are generally limited to those necessary for the purpose of enabling the operation of the program on the licensee’s computers or network, and reproduction for any other purpose is not permitted under the license. Payments under such arrangements will in most cases be dealt with as business profits in accordance with Article 7. 14.3 Another type of transaction involving the transfer of computer software is the more unusual case where a software house or computer programmer agrees to supply information about the ideas and principles underlying the program, such as logic, algorithms or programming languages or techniques. In these cases, the payments may be characterised as royalties to the extent that they represent consideration for the use of, or the right to use, secret formulas or for information concerning industrial, commercial or scientific experience which cannot be separately copyrighted. This contrasts with the ordinary case in which a program copy is acquired for operation by the end user. 14.4 Arrangements between a software copyright holder and a distribution intermediary frequently will grant to the distribution intermediary the right to distribute copies of the program without the right to reproduce that program. In these transactions, the rights acquired in relation to the copyright are limited to those necessary for the commercial intermediary to distribute copies of the software program. In such transactions, distributors are paying only for the acquisition of the software copies and not to exploit any right in the software copyrights. Thus, in a transaction where a distributor makes payments to acquire and distribute software copies (without the right to reproduce the software), the rights in relation to these acts of distribution should be disregarded in analysing the character of the transaction for tax purposes. Payments in these types of transactions would be dealt with as business profits in accordance with Article 7. This would be the case regardless of whether the copies being distributed are delivered on tangible media or are distributed electronically (without the distributor having the right to reproduce the software), or whether the software is subject to minor customisation for the purposes of its installation. 15. Where consideration is paid for the transfer of the full ownership of the rights in the copyright, the payment cannot represent a royalty and the provisions of the Article are not applicable. Difficulties can arise where there is a transfer of rights involving: — exclusive right of use of the copyright during a specific period or in a limited geographical area; — additional consideration related to usage; — consideration in the form of a substantial lump sum payment. 16. Each case will depend on its particular facts but in general if the payment is in consideration for the transfer of rights that constitute a distinct and specific property (which is more likely in the case of geographically-limited than time limited rights), such payments are likely to be business profits within Article 7 or a capital gain within Article 13 rather than royalties within Article 12. That follows from the fact that where the ownership of rights has been alienated, the consideration cannot be for the use of the rights. The essential character of the transaction as an alienation cannot be altered by the form of the consideration, the payment of the consideration in instalments or, in the view of most countries, by the fact that the payments are related to a contingency. 17. Software payments may be made under mixed contracts. Examples of such contracts include sales of computer hardware with built-in software and concessions of the right to use software combined with the provision of services. The methods set out in paragraph 11 above for dealing with similar problems in relation to patent royalties and know-how are equally applicable to computer software. Where necessary the total amount of the consideration payable under a contract should be broken down on the basis of the information contained in the contract or by means of a reasonable apportionment with the appropriate tax treatment being applied to each apportioned part.” (emphasis supplied) 153. However, the learned Additional Solicitor General has taken us through the positions taken by India (in the capacity of an OECD non-member) with regard to Article 12 of the OECD Model Tax Convention and the OECD Commentary, first in 2008, reiterated in 2014 and 2017, as follows: ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.] “4.1 India reserves the right to: tax royalties and fees for technical services at source; define these, particularly by reference to its domestic law; define the source of such payments, which may extend beyond the source defined in paragraph 5 of Article 11, and modify paragraphs 3 and 4 accordingly.” “17. India reserves its position on the interpretations provided in paragraphs 8.2, 10.1, 10.2, 14, 14.1, 14.2, 14.4, 15, 16 and 17.3; it is of the view that some of the payments referred to may constitute royalties” (Positions on Article 12, OECD Commentary 2014) 154. From these positions taken, which use the language “reserves the right to” and “is of the view that some of the payments referred to may constitute royalties”, it is not at all clear as to what exactly the nature of these positions are. This may be contrasted with the categorical language used by India in its positions taken with respect to other aspects (“India does not agree to”), as follows: “18. India does not agree with the interpretation that information concerning industrial, commercial or scientific experience is confined to only previous experience.” “20. India does not agree with the interpretation in paragraph 9.1 of the Commentary on Article 12 according to which a payment for transponder leasing will not constitute royalty. This notion is contrary to the Indian position that income from transponder leasing constitutes an equipment royalty taxable both under India’s domestic law and its treaties with many countries. It is also contrary to India’s position that a payment for the use of a transponder is a payment for the use of a process resulting in a royalty under Article 12. India also does not agree with the conclusion included in the paragraph concerning undersea cables and pipelines as it considers that undersea cables and pipelines are industrial, commercial or scientific equipment and that payments made for their use constitute equipment royalties. 21. India does not agree with the interpretation in paragraph 9.2 of the Commentary on Article 12. It considers that a roaming call constitutes the use of a process. Accordingly, the payment made for the use of that process constitutes a royalty for the purposes of Article 12. It is also the position of India that a payment for a roaming call constitutes a royalty since it is a payment for the use of industrial, commercial or scientific equipment. 22. India does not agree with the interpretation in paragraph 9.3 of the Commentary on Article 12. It considers that a payment for spectrum license constitutes a royalty taxable both under India’s domestic law and its treaties with many countries.” (Positions on Article 12, OECD Commentary 2014) 155. In Director of Income Tax v. New Skies Satellite BV, (2016) 382 ITR 114 [“New Skies Satellite”], a Division Bench of the High Court of Delhi correctly observed that mere positions taken with respect to the OECD Commentary do not alter the DTAA’s provisions, unless it is actually amended by way of bilateral re-negotiation. This was put thus: “68. On a final note, India’s change in position to the OECD Commentary cannot be a fact that influences the interpretation of the words defining royalty as they stand today. The only manner in which such change in position can be relevant is if such change is incorporated into the agreement itself and not otherwise. A change in executive position cannot bring about a unilateral legislative amendment into a treaty concluded between two sovereign states. It is fallacious to assume that any change made to domestic law to rectify a situation of mistaken interpretation can spontaneously further their case in an international treaty. Therefore, mere amendment to Section 9(1)(vi) cannot result in a change. It is imperative that such amendment is brought about in the agreement as well. Any attempt short of this, even if it is evidence of the State’s discomfort at letting data broadcast revenues slip by, will be insufficient to persuade this Court to hold that such amendments are applicable to the DTAAs.” (emphasis in original) 156. It is significant to note that after India took such positions qua the OECD Commentary, no bilateral amendment was made by India and the other Contracting States to change the definition of royalties contained in any of the DTAAs that we are concerned with in these appeals, in accordance with its position. As a matter of fact, DTAAs that were amended subsequently, such as the Convention between the Republic of India and the Kingdom of Morocco for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.] Taxes On Income,48 [“India-Morocco DTAA”], which was amended on 22.10.2019,49 incorporated a definition of royalties, not very different from the definition contained in the OECD Model Tax Convention, as follows: “The term “royalties” as used in this Article means: (a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work, including cinematograph films or recordings on any means of reproduction for use for radio or television broadcasting, any patent, trade mark, design or model, plan, computer software programme, secret formula or process, or for information concerning industrial, commercial or scientific experience; and (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment” (Article 12.3) 157. Similarly, though the India-Singapore DTAA came into force on 08.08.1994, it has been amended several times, including on 01.09.2011,50 and 23.03.2017.51 However, the definition of “royalties” has been retained without any changes. Likewise, the Convention between the Government of the Republic of India and the Government of Mauritius for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital Gains and for the Encouragement of Mutual Trade and Investment,52 [“India-Mauritius DTAA”] was entered into on 06.12.1983, and was amended subsequently on 10.08.2016,53 without making any change to the definition of “royalties”. 158. It is thus clear that the OECD Commentary on Article 12 of the OECD Model Tax Convention, incorporated in the DTAAs in the cases before us, will continue to have persuasive value as to the interpretation of the term “royalties” contained therein. 48 Notification : No. GSR 245(E), dated 15-3-2000. 49 Amended by Notification No. S.O. 3789(E) [No.84/2019/F.No.503/09/2009-FTD- II], Dated 22-10-2019. 50 Notification No. S.O. 2031(E). 51 Notification No. S.O. 935(E). 52 Notification No. GSR 920(E). 53 Notification No. S.O. 2680(E) (No.68/2016 (F.No.500/3/2012-FTD-II). 159. Viewed from another angle, persons who pay TDS and/or assessees in the nations governed by a DTAA have a right to know exactly where they stand in respect of the treaty provisions that govern them. Such persons and/or assessees can thus place reliance upon the OECD Commentary for provisions of the OECD Model Tax Convention, which are used without any substantial change by bilateral DTAAs, in the absence of judgments of municipal courts clarifying the same, or in the event of conflicting municipal decisions. From this point of view also, the OECD Commentary is significant, as the Contracting States to which the persons deducting tax/assessees belong, can conclude business transactions on the basis that they are to be taxed either on income by way of royalties for parting with copyright, or income derived from licence agreements which is then taxed as business profits depending on the existence of a PE in the Contracting State. 160. The learned Additional Solicitor General, however, relied upon the HPC Report 2003 and the E-Commerce Report 2016. The HPC Report 2003, noting the various characterisation issues in relation to e- commerce payments, recommended as follows: “…The Committee also recommends that a clear position on each category of transactions should be taken by the Central Board of Direct Taxes (“CBDT”). This will ensure uniformity of approach among all the assessing officers. Since new categories of transactions are likely to emerge at a fast pace with advances in technology, it is also recommended that the CBDT should closely monitor the developments and issue guidelines to the assessing officers on new emerging categories of transactions as a continuing process. The monitoring should be through an expert advisory body on which the tax administration, the profession and the concerned industry is represented.” (pages 146-147) 161. The E-Commerce Report 2016 proposed an equalization levy to be chargeable on specified digital services (see paragraph 11.2) and noted that its recommendation to impose a withholding tax on digital transactions would require an express inclusion in tax treaties in order to be feasible, as follows: “108. After taking cognizance of these observations, the Committee considers that the option of “withholding tax” offers a ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.] practical way of allocating partial taxing rights in respect of income from digital economy, which shares attributes that may be similar to royalty or fee for technical services, and which can be complied in respect of B2B transactions by the process of withholding. However, such a tax on income would be feasible only if it is included in the tax treaties, which take precedence over Indian domestic laws, unless it is designed as a tax on the gross payment.” (emphasis supplied) 162. These reports also do not carry the matter much further as they are recommendatory reports expressing the views of the committee members, which the Government of India may accept or reject. When it comes to DTAA provisions, even if the position put forth in the aforementioned reports were to be accepted, a DTAA would have to be bilaterally amended before any such recommendation can become law in force for the purposes of the Income Tax Act. 163. The learned Additional Solicitor General also sought to rely on a decision of the Audiencia Nacional (Spanish National Court) in Case No. 207019/1990 dated 28.02.1995 and a decision of the Tribunal Supremo (Spanish Supreme Court) in Case No. 8066/1994 dated 02.10.1999. Quite apart from the fact that he only presented certain extracts and not the entire judgment rendered in these cases, these authorities have no relevance to the appeals before us, having been decided on the basis of the taxation law of Spain. 164. The learned Additional Solicitor General then referred to the judgment of this Court in Commissioner of Customs v. G.M. Exports, (2016) 1 SCC 91, and in particular on the four propositions that were culled out in the context of the levy of an anti-dumping duty in consonance with the General Agreement on Tariffs and Trade (GATT), 1994, as follows: “23. A conspectus of the aforesaid authorities would lead to the following conclusions: (1) Article 51(c) of the Constitution of India is a directive principle of State policy which states that the State shall endeavour to foster respect for international law and treaty obligations. As a result, rules of international law which are not contrary to domestic law are followed by the courts in this country. This is a situation in which there is an international treaty to which India is not a signatory or general rules of international law are made applicable. It is in this situation that if there happens to be a conflict between domestic law and international law, domestic law will prevail. (2) In a situation where India is a signatory nation to an international treaty, and a statute is passed pursuant to the said treaty, it is a legitimate aid to the construction of the provisions of such statute that are vague or ambiguous to have recourse to the terms of the treaty to resolve such ambiguity in favour of a meaning that is consistent with the provisions of the treaty. (3) In a situation where India is a signatory nation to an international treaty, and a statute is made in furtherance of such treaty, a purposive rather than a narrow literal construction of such statute is preferred. The interpretation of such a statute should be construed on broad principles of general acceptance rather than earlier domestic precedents, being intended to carry out treaty obligations, and not to be inconsistent with them. (4) In a situation in which India is a signatory nation to an international treaty, and a statute is made to enforce a treaty obligation, and if there be any difference between the language of such statute and a corresponding provision of the treaty, the statutory language should be construed in the same sense as that of the treaty. This is for the reason that in such cases what is sought to be achieved by the international treaty is a uniform international code of law which is to be applied by the courts of all the signatory nations in a manner that leads to the same result in all the signatory nations.” 165. The conclusions in the aforestated paragraph have no direct relevance to the facts at hand as the effect of section 90(2) of the Income Tax Act, read with explanation 4 thereof, is to treat the DTAA provisions as the law that must be followed by Indian courts, notwithstanding what may be contained in the Income Tax Act to the contrary, unless more beneficial to the assessee. For all these reasons therefore, these submissions of the learned Additional Solicitor General are rejected. ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.] 166. At this juncture, it is also important to point out that vide Circular No.10/2002 dated 09.10.2002, the Revenue, after referring to section 195 of the Income Tax Act and deciding that a No Objection Certificate from the Department would not be necessary if the person making the remittance is to submit an undertaking along with the certificate of an accountant to the Reserve Bank of India [“RBI”], has itself made a distinction in the proforma of the certificate to be issued in Annexure B to the aforesaid Circular, between remittances for royalties (see Row No. 5) and remittances for supply of articles or computer software (see Row No. 7), as follows: ANNEXURE ‘B’ CERTIFICATE 1. Name and address of the beneficiary of the remittance and the name of the foreign country to which remittance is being made. 2. Amount of remittance is foreign currency indicating the proposed date/month and bank through which remittance is being made. 3. Details of tax deducted at source, rate at which tax has been deducted and date of deduction. Foreign Indian Amount to be remitted ….. ….. Tax deducted at source ….. …… Actual Amount remitted ….. ….. Rate at which deducted ….. ….. Date of Deduction …… ….. 4. In case the remittance as indicated in (2) above is net of taxes, whether tax payable has been grossed up? If so, computation thereof may be indicated. 5. If the remittance is for royalties, fee for technical services, interest, dividend, etc., the clause of the relevant DTAA under which the remittance is covered along with reasons and the rate at which tax is required to be deducted in terms of such clause of the applicable DTAA. 6. In case that tax has been deducted at a rate lower than the rate prescribed under the applicable DTAA, the reasons thereof. (emphasis supplied) 167. The Revenue, therefore, when referring to “royalties” under the DTAA, makes a distinction between such royalties, no doubt in the context of technical services, and remittances for supply of computer software, which is then treated as business profits, taxable under the relevant DTAA depending upon whether there is a PE through which the assessee operates in India. This is one more circumstance to show that the Revenue has itself appreciated the difference between the payment of royalty and the supply/use of computer software in the form of goods, which is then treated as business income of the assessee taxable in India if it has a PE in India. CONCLUSION 168. Given the definition of royalties contained in Article 12 of the DTAAs mentioned in paragraph 41 of this judgment, it is clear that there is no obligation on the persons mentioned in section 195 of the Income Tax Act to deduct tax at source, as the distribution agreements/EULAs in the facts of these cases do not create any interest or right in such distributors/end-users, which would amount to the use of or right to use 7. In case remittance is for supply of articles or things (e.g., plant, machinery, equipment, etc.) or computer software, please indicate :— i. Whether there is any permanent establishment in India through which the beneficiary of the remittance is directly or indirectly carrying on such activity of supply of articles or things? ii. Whether such remittance is attributable to or connected with such permanent establishment? iii .If so, the amount of income comprised in such remittance which is liable to tax. iv. If not, the reasons in brief therefor. 8. In case remittance is on account of business income please indicate :— i. Whether such income is liable to tax in India? ii. If so, the basis for arriving at the rate of deduction of tax. iii. If not, the reasons thereof. 9. In case tax is not deducted at source for any other reason, details thereof. ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.] any copyright. The provisions contained in the Income Tax Act (section 9(1)(vi), along with explanations 2 and 4 thereof), which deal with royalty, not being more beneficial to the assessees, have no application in the facts of these cases. 169. Our answer to the question posed before us, is that the amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India, as a result of which the persons referred to in section 195 of the Income Tax Act were not liable to deduct any TDS under section 195 of the Income Tax Act. The answer to this question will apply to all four categories of cases enumerated by us in paragraph 4 of this judgment. 170. The appeals from the impugned judgments of the High Court of Karnataka are allowed, and the aforesaid judgments are set aside. The ruling of the AAR in Citrix Systems (AAR) (supra) is set aside. The appeals from the impugned judgments of the High Court of Delhi are dismissed. Devika Gujral Appeals disposed of.