If I haven’t told you already, let me warn that I might be additionally snarky over the course of this series on account of losing three perfectly solid pieces to a Microsoft Word malfunction.
In this piece, I will be dealing with the distinction between “copyright” and “copyrighted article”, as discussed in the marvellous 120 paragraph order of Qualcomm. v. ACIT.
As usual, let us quickly get acquainted with the so-called “Relevant facts”.
Once, there existed a software called Binary Runtime Environment for Wireless.
It liked to be called BREW.
Qualcomm provided BREW to Tata and Reliance.
Failed fable telling attempts aside, the question was:
Is the provision of BREW, sale of “copyrighted article” or licensing of “copyright”?
The distinction is relevant because the proceeds arising out of sale of “copyrighted article” would be taxed under “business income” (lower rates), while the former would be taxed under the head of “royalty”.
Prior to reaching the Tribunal, the Assessing Officer held the income to be “royalty”.
The reasoning used by him was rather peculiar. Here is an excerpt:
“The license fee for the right to reproduce and use the BREW Software cannot be anything else but royalty. There is a distinction between sale and license since in a sale no agreement is entered into between buyer and seller, however in case of licensing of software an agreement is entered into between copyright holder and the user.”
His understanding of a sale involved transfer of intellectual property, without any conditions whatsoever (“no agreement“). So, any kind of conditional transfer, in his eyes, constituted licensing and not sale.
The Tribunal considered the case of DIT v. Infrasoft Limited.
This case lays down the litmus test for such dilemmas involving software.
I shall reproduce the relevant excerpt and then proceed to deconstruct.
“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.”
There exist certain rights which are enumerated in the Copyright Act. These rights are the sub-rights that are associated with the ownership of copyright. The Delhi HC held that it was only when there was a transfer in any or all of the rights enumerated in the statute would it constitute licensing of “copyright”. All other transfers would be considered to be sale in “copyrighted article”.
Let us look at the rights enumerated in the Act.
“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:-
(a) in the case of a literary, dramatic or musical work, not being a computer programme, –
(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);
(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.
Therefore, the Assessing Officer was absolutely wrong in stating that the fundamental character of a sale is an unconditional transfer. The presence or absence of conditions is irrelevant. The key factor that we need to look at is the character of transfer. If the above mentioned rights are involved, then it is a clear licensing agreement. Otherwise, it is mere sale of “copyrighted article”.
After discussing the above case, the Tribunal, with no further analysis, simply concluded that no distinction could be drawn from the above case and therefore, the transfer was held to be sale of “copyrighted article”.
Next, we will discuss the CDMA technology. (click here)
Cover image from here.