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2010 (10) TMI 346 - AT - Income TaxDTAA - Royalty - the appellant under the Software Contract acquired only a copy of software program and did not acquire any copyright over such software as envisaged by section 14 of the Copyright Act - the software has been supplied to the assessee on computer disk from outside India on FOB basis - It is now established law that Computer software after being put on to a media and then sold, becomes goods like any other Audio Cassette or painting on canvas or a book and that the Assessing Officer is wrong in holding that Computer software on a media, continues to be an intellectual property right and that the Assessing Officer was wrong in treating this computer software as a Patent or as Invention - As what is paid is not royalty under the Indo-US DTAA, and as it is covered under Article 7, which deals with Business Profit and as the foreign party does not have a Permanent Establishment in India, the same is not taxable in India and hence the assessee is not required to deduct tax at source from the said payment
Issues Involved:
1. Whether the payment for the purchase of software amounts to royalty under Section 9(1)(vi) of the Income-tax Act and Article 12(3) of the Indo-US DTAA. 2. Whether the payment for the purchase of software is taxable in India in the absence of a Permanent Establishment (PE) of the non-resident party in India. Issue-wise Detailed Analysis: 1. Payment for Software as Royalty: The primary issue revolves around whether payments made for software licenses constitute royalty under Section 9(1)(vi) of the Income-tax Act and Article 12(3) of the Indo-US DTAA. - Assessing Officer's View: The Assessing Officer (AO) held that the payment for software licenses is royalty. The AO argued that the software licenses granted to the appellant were for the use of or the right to use copyrights, patents, and other intellectual properties, thus falling under the definition of royalty as per Section 9(1)(vi) of the Income-tax Act and Article 12(3) of the DTAA. - CIT (Appeals) Decision: The CIT (Appeals) disagreed with the AO, concluding that the appellant acquired only a copy of the software program, not the copyright itself. The CIT (Appeals) held that the payment was for a copyrighted article and not for the use of or right to use any copyright, thus not constituting royalty. - Tribunal's Analysis: The Tribunal upheld the CIT (Appeals) decision, emphasizing that the appellant did not acquire any rights to modify, reverse engineer, or distribute the software. The Tribunal referenced several case laws, including the decisions in Samsung Electronics Co. Ltd. and Motorola Inc., which distinguished between payments for copyrighted articles and payments for copyrights. The Tribunal concluded that the payment was for copyrighted articles and not for the use of copyrights, thus not falling under the definition of royalty. 2. Taxability in India without Permanent Establishment: The second issue is whether the payment for software is taxable in India when the non-resident party does not have a Permanent Establishment (PE) in India. - Assessing Officer's View: The AO held that the payment for software licenses is taxable in India as royalty, irrespective of the presence of a PE. - CIT (Appeals) Decision: The CIT (Appeals) held that since the payment did not constitute royalty, it should be considered business income. As the non-resident party did not have a PE in India, the business income was not taxable in India under Article 7 of the DTAA. - Tribunal's Analysis: The Tribunal agreed with the CIT (Appeals), stating that the payment was business income and not royalty. Since the non-resident party did not have a PE in India, the income was not taxable in India under the DTAA. The Tribunal emphasized that the definition of royalty under the Indo-US DTAA is narrower than under the Income-tax Act, and in cases of conflict, the DTAA provisions prevail. Conclusion: The Tribunal dismissed the appeals filed by the Revenue, upholding the CIT (Appeals) decision that the payment for software licenses did not constitute royalty and was not taxable in India in the absence of a PE. The Tribunal's decision was based on a detailed analysis of the software license agreements, relevant case laws, and the provisions of the Income-tax Act and the Indo-US DTAA.
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