2012 (6) TMI 232 - HC - Income Tax

Whether the consideration paid by the Indian customers or end users to the assessee - a foreign supplier, for transfer of the right to use the software/computer programme in respect of the copyrights falls within the mischief of royalty as defined under sub-clause v to Explanation 2 to Clause vi of section 9 1 of the Act Held that - yes, it is within the mischief of royalty as defined under sub-clause v to Explanation 2 to Clause vi of section 9 1 of the Income Tax Act, 1961. Decided in favour of the revenue and against the assessee. Appeal is allowed.

Summary

Issues:
Interpretation of 'royalty' under sub-clause [v] to Explanation 2 to Clause [vi] of section 9(1) of the Income-tax Act, 1961.

Analysis:
The High Court heard an appeal by the revenue against a Tribunal order favoring the assessee. The court referred to two previous cases to address the substantial question of law regarding the definition of 'royalty' under the Income-tax Act. In the case of CIT v. Synopsis International Old Ltd., it was questioned whether consideration paid by Indian customers to a foreign supplier for software use falls under 'royalty.' Similarly, in CIT v. Samsung Electronics Co. Ltd., the issue was whether payments to foreign software suppliers constituted 'royalty' and were taxable in India. The court held in both cases that such payments indeed qualify as 'royalty' under the relevant tax provisions.

The court, based on the precedent set by the earlier judgments, concluded that the consideration paid by Indian customers to foreign suppliers for software use falls within the definition of 'royalty.' Therefore, the substantial questions of law in the present case were resolved in favor of the revenue and against the assessee. Consequently, the appeal by the revenue was allowed, upholding the tax implications on such transactions involving the transfer of software rights between Indian customers and foreign suppliers.