2012 (5) TMI 179 - AT - Income Tax

Transactions under a software license agreement - assessee a German company taxed as a non-resident in India owning 26% of the shareholding in two Insurance companies in India Revenue treated transaction towards Royalty receipt within the meaning of section 9(1)(vi)- Held that - The license charges earned by assessee was not liable to be treated as royalty following the judgment in Director of Income-tax Versus Ericsson A.B 2011 (12) TMI 91 - Delhi High Court - in order to qualify as royalty payment, within the meaning of Section 9(1) (vi) it is necessary to establish that there is transfer of all or any rights (including the granting of any license) in respect of copy right of a literary, artistic or scientific work - 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 but in the presence case, this has not been established - even issuing the payment made by the cellular operator is regarded as a payment by way of royalty u/s Section 9(1)(vi) it can never be regarded as royalty within the meaning of the said term in article 13 para 3 of the DTAA Article 13(3) - 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 thus no part of the payment therefore can be classified as payment towards royalty - where two views are available on an issue one favorable to the assessee and does not support levy of tax on the assessee should be preferred, should be applied to non-resident assessee in this case in favour of assessee.

Summary

Issues Involved:
1. Taxability of license charges received under a software license agreement.
2. Classification of payments as 'royalty' under Section 9(1)(vi) of the Income-tax Act, 1961.
3. Applicability of Double Taxation Avoidance Agreement (DTAA) between India and Germany.
4. Interpretation of 'copyright' vs 'copyrighted article'.

Issue-Wise Detailed Analysis:

1. Taxability of License Charges:
The appellant-assessee, a German company, received payments from its Indian affiliates, BA Life and BA General, for the use of Opus software under a software license agreement. The central issue was whether these payments, termed as 'license charges', were taxable in India. The assessee argued that these charges were for the use of a copyrighted article (Opus software) and not for the use of copyright itself, thus claiming exemption from tax in India.

2. Classification as 'Royalty':
The Revenue contended that the license charges constituted 'royalty' under Section 9(1)(vi) of the Income-tax Act, 1961, and were therefore subject to taxation in India. The Revenue's stance was that the payments fell under Article 12 of the DTAA between India and Germany, making them liable to be taxed as royalty at the rate of 10%. The Assessing Officer argued that the right to use the software Opus, acquired from CGI Group, was transferred to the Indian affiliates, thus treating the payments as royalty.

3. Applicability of DTAA:
The assessee's primary plea was that the license charges were for granting the right to use Opus software for internal business purposes and did not entail any transfer of copyright. The assessee relied on several judicial decisions, including Motorola Inc. v. Dy. CIT, Samsung Electronics Co. Ltd. v. ITO, and Dy. CIT v. Metapath Software International Ltd., to support its claim that payments for the use of a copyrighted article are not 'royalty'. The Special Bench of the Tribunal in Motorola Inc. had distinguished between payments for copyright and for copyrighted articles, a view upheld by the Hon'ble Delhi High Court.

4. Interpretation of 'Copyright' vs 'Copyrighted Article':
The Tribunal examined whether the payments were for the use of a copyrighted article or for the use of copyright itself. The Assessing Officer acknowledged that the copyright of the software remained with CGI Group, and the rights transferred were only for the use of the software. The Tribunal referred to the Special Bench decision in Motorola Inc., which held that payments for a copyrighted article are not 'royalty'. The Hon'ble Delhi High Court affirmed this view, stating that payments for the use of copyrighted software, integrated into hardware, are not 'royalty'.

Conclusion:
The Tribunal concluded that the license charges received by the assessee were for the use of a copyrighted article (Opus software) and not for the use of copyright itself. Therefore, these payments did not constitute 'royalty' under Section 9(1)(vi) of the Income-tax Act, 1961, or under the DTAA between India and Germany. The appeal of the assessee was allowed, and the license charges were not subject to tax in India.