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2016 (7) TMI 762 - HC - Income TaxSale of pre-packaged software - royalty or fee for technical services - whether not taxable as business income? - Held that - It is not in dispute that Article 12 (3) of the Double Taxation Avoidance Agreement ( DTAA ) between India and the United States of America (USA) is relevant for deciding the above issue. Section 90 (3) of the Act makes it clear in the context of an agreement ( treaty ) for avoidance of double taxation, that it is only when the provisions of the Act are more beneficial to the Assessee the Act will prevail over the treaty. Conversely, where the provision of the treaty is more beneficial to the Assessee, the treaty would prevail over the Act. the right to use a copyright in a programme is totally different from the right to use a programme embedded in a cassette or a CD which may be a software and the payment made for the same cannot be said to be received as consideration for the use of or right to use of any copyright to bring it within the definition of royalty as given in the DTAA. What the licensee has acquired is only a copy of the copyright article whereas the copyright remains with the owner and the Licensees have acquired a computer programme for being used in their business and no right is granted to them to utilize the copyright of a computer programme and thus the payment for the same is not in the nature of royalty. See Director of Income Tax v. Infrasoft Limited (2013 (11) TMI 1382 - DELHI HIGH COURT )
Issues:
1. Interpretation of whether consideration received on sale of pre-packaged software constitutes 'royalty' or 'fee for technical services' for tax purposes. Analysis: 1. The appeals by the Revenue challenge the ITAT's order regarding the taxability of consideration received by the Assessee on the sale of pre-packaged software. The main issue is whether such consideration should be classified as 'royalty' or 'fee for technical services' and consequently taxed as business income for AYs 2009-10 and 2010-11. 2. The Court referred to the DTAA between India and the USA, specifically Article 12(3), to determine the tax treatment of the software sale. The Court noted a previous decision in a similar case (ITA No. 477 of 2014) where it was held that the consideration for the sale of pre-packaged software is not taxable as royalty based on the DTAA provisions and the distinction between copyright rights and copyrighted articles. 3. The Court analyzed the decision in Director of Income Tax v. Infrasoft Limited, emphasizing the distinction between royalty payments for transfer of copyright rights and consideration for transfer of copyrighted articles. It was concluded that the license granted for software use does not amount to transfer of copyright rights, and the payment received is not in the nature of royalty as per the DTAA. 4. The Court further discussed the effect of the subsequent amendment to Section 9(1)(vi) of the Income Tax Act, 1961, but held that since the Assessee is covered by the DTAA, which is more beneficial, the provisions of the Act do not apply in this case. The legal position regarding the supremacy of treaty provisions over domestic laws in cases of double taxation agreements was reiterated. 5. The Revenue argued that the Court did not discuss the effect of the amendment to Section 9(1)(vi) in the Infrasoft Limited case. However, the Court maintained that the issue was settled in previous judgments and declined to re-examine it. It was held that no substantial question of law arose, and the appeals were dismissed with no orders as to costs.
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