Difference between “License” and “Royalty”

[Vivek Jalan]

Receipts for Transfer of “Copyright” by a Non-Resident (not having a PE in India) to a Resident in India is taxable in India as ‘royalty’. However, Transfer of “License” is not. Hence the question comes as to what is a “Copyright” and what is a “License” in a copyrighted article. Lets analyse incase of a software. For a transfer of license, the following are the criteria which may be proved -

(i)   Non-exclusive use - The software can only be used by the transfee by installing it in on a particular computer hardware.

(ii)  Non-exclusive use - The software cannot in any manner be reproduced for sale, publication, disclosure, rent lease modify, loan, distribution, etc. It cannot be altered.

(iii)  Nontransferable license - The software may be in the form of an End- User-Licence to the transferee.

(iv) The software cannot be modified other than customised for the user slightly.

(v)  There is no right in the copyright of the end-user.

(vi) The software license though may be supplied for a lifetime.

On the other hand, For a transfer of ‘copyright’, the following are the criteria which may be proved -

(i)   Software can be reproduced i.e. it can be used even other the computer hardware.

(ii)  The software may be transferred with a copyrighted agreement.

(iii)  The software can be modified by the transferee

(iv) The software can be supplied to someone else.

It was held in the case of QOGNIFY PTE LTD. VERSUS DEPUTY COMMISSIONER OF INCOME TAX, INTERNATIONAL TAXATION, CIRCLE - 1 (2) , CHENNAI. - 2024 (11) TMI 858 - ITAT CHENNAI that the fact that ‘no title or ownership’ of the software or software documentation was transferred to transferee by the transferor; the ownership of the software documentation, modification, enhancement, improvements, adaptions shall remain at all times with the transferor. Therefore, a conclusion cannot be drawn of treating the transfer as a sale of copy rights to consider as taxable under the head ‘royalty’.

The Hon’ble ITAT In support of the claim of the assessee, relied on the decision of Hon’ble Supreme Court in the case of ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PRIVATE LIMITED VERSUS THE COMMISSIONER OF INCOME TAX & ANR. - 2021 (3) TMI 138 - SUPREME COURT wherein it has been held that payments made to the supplier of software would constitute royalty, only if the copy right or ownership of software part with any of the rights/interest as specified in section 14(a) and 14(b) of the Copyright Act, 1952. The Hon’ble Supreme Court has further held that, the consideration for mere use of software for the purpose for which it was supplied does not amount to royalty for the use of copyright in the software.