2012 (8) TMI 618 - AT - Income Tax

India - Germany DTAA - Receipt of license charges from Indian Joint venture entities - right to use Opus software was treated as Royalty income by Revenue - Held that - In order to qualify as royalty payment, within the meaning of Section 9(1) (vi) and particularly clause (v) of Explanation-II thereto, 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, aliistic or scientific work. Section 2 (0) of the Copyright Act makes it clear that a computer programme is to be regarded as a literary work - Thus, 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. In the presence case, this has not been established. It is not even the case of the Revenue that any right contemplated under Section 14 of the Copyright Act,1957 stood vested in this cellular operator as a consequence of Article 20 of the Supply contract. Distinction has to be made between the acquisition of a copyright right and a copyrighted article . Even assuming the payment made by the cellular operator is regarded as a payment by way of royalty as defined in Explanation 2 below Section 9(1) (vi), nevertheless, it can never be regarded as royalty within the meaning of the said term in article 13 para 3 of the DTAA - the consideration received by the assessee in that case allowing the use of the software was not considered as a royalty and instead, it was held as business receipts in the hands of the assessee - in favour of assessee.

Issues Involved:
1. Whether the license charges received under the software license agreement granting user rights in software constitute 'royalty' under the Income Tax Act and the India-Germany tax treaty.
2. Whether the consideration received for provision of user rights of software "OPUS" to Bajaj Allianz Life Insurance Company Ltd. (BA Life) is taxable as 'royalty' under the Act and the tax treaty.
3. Whether the Tribunal's previous decision in the assessee's own case for the assessment year 2005-06 should be followed in the current appeals for assessment years 2004-05 and 2007-08.

Detailed Analysis:

Issue 1: License Charges as 'Royalty' under the Act and Tax Treaty
The primary issue revolves around whether the license charges received by the assessee for granting user rights in the OPUS software should be treated as 'royalty' under Section 9(1)(vi) of the Income Tax Act and Article 12 of the India-Germany tax treaty. The Assessing Officer (AO) argued that these charges constitute 'royalty' as they are periodic payments for the right to use the software, and thus, taxable in India. The AO relied on the decision of the Hon'ble Karnataka High Court in the case of CIT Vs. Samsung Electronics Company Ltd., which held that payments for software licenses are taxable as royalty.

Issue 2: Consideration for User Rights of Software "OPUS"
The appellant contended that the consideration received from BA Life for the user rights of OPUS software does not qualify as 'royalty'. The appellant argued that they had provided BA Life with user rights to a copyrighted article (the OPUS software) and not the right to use the copyright itself. This distinction is crucial because, under the Act and the tax treaty, payments for the use of a copyrighted article are not considered 'royalty'. The appellant cited the Tribunal's decision in their own case for the assessment year 2005-06, where it was held that such license charges are business receipts and not royalty.

Issue 3: Tribunal's Previous Decision
The Tribunal noted that the issue had already been decided in favor of the assessee in the assessment year 2005-06. The Tribunal had held that the license charges received by the assessee were for the use of a copyrighted article and not for the use of the copyright itself. This distinction was supported by the Hon'ble Delhi High Court in the case of Ericsson A.B., New Delhi, and the Special Bench of the Tribunal in the case of Motorola Inc. The Tribunal found no new evidence or material to deviate from its previous decision.

Judgment:
The Tribunal considered the rival arguments, the relevant legal provisions, and previous judicial pronouncements. It concluded that the license charges received by the assessee for the user rights of the OPUS software do not constitute 'royalty' under the Income Tax Act or the India-Germany tax treaty. The Tribunal emphasized that the payments were for a copyrighted article and not for the use of the copyright itself. Consequently, the appeals for both assessment years 2004-05 and 2007-08 were allowed, and the AO's orders were set aside.

Conclusion:
The Tribunal upheld the appellant's contention that the license charges for the OPUS software are not taxable as 'royalty' under the Act or the tax treaty. This decision aligns with the Tribunal's earlier ruling in the assessee's case for the assessment year 2005-06 and is consistent with the legal principles established by the Hon'ble Delhi High Court and the Special Bench of the Tribunal. The appeals filed by the assessee for the assessment years 2004-05 and 2007-08 were allowed in favor of the assessee.

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