2013 (2) TMI 448 - HC - Income Tax

Royalty Income Whether fees received can be treated as royalty as defined under section 9(l)(vi) Assessee i.e. Synopsys International Limited, Ireland has been granted a licence by Synopsis U.S., owner of the copyright - The technical license agreement is for a consideration to enable the assessee to use and commercially exploit the intellectual property in the Electronic Design Automation(EDA) Tool and Software in certain geographies - Special Bench of the Tribunal was of the view that the crux of the issue is whether the payment is for copyright or for a copyrighted article . If it is for copyright, it should be classified as royalty both under the Income-tax Act and under the DTAA and it would be taxable in the hands of the assessee on that basis. If the payment is really for a copyrighted article, then it only represents the purchase price of the article and, therefore, cannot be considered as royalty either under the Act or under the DTAA. Issue - Whether the consideration paid by the Indian customers or end-users, to the assessee for transfer of the right to use the software/computer programme is in respect of the copyright and 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 - As is clear from the description of the agreement it is an end-user software licence agreement - Synopsys hereby grants licencee a non-exclusive, non-transferable license, without right of sub-licence of use the licensed software and design techniques only in the quantity authorized by a licensee in accordance with the documentation in the use area. Licensee may make a reasonable number of copies of the licensed software for backup and/or archival purposes only. Merely because the words non-exclusive and non-transferable is used in the said licence it does not take away the software out of the definition of the copyright. The word licenced software has been defined. Similarly, the words design, design technique is also defined. The word documentation is also defined and it is not in dispute what is granted is a license. Even if it is not transfer of exclusive right in the copyright, the right to use the confidential information embedded in the software in terms of the aforesaid licence makes it abundantly clear that there is transfer of certain rights which the owner of copyright possess in the said computer software/programme in respect of the copyright owned. In terms of the DTAA the consideration paid for the use or right to use the said confidential information in the form of computer programme software itself constitutes royalty and attracts tax. It is not necessary that there should be a transfer of exclusive right in the copyright as contended by the assessee. The consideration paid is for rights in respect of the copyright and for the user of the confidential information embedded in the software/computer programme. Therefore, it falls within the mischief of Explanation (2) of clause (vi) of sub-section (1) of section 9 of the Act and there is a liability to pay the tax. If there was any doubt regarding the taxability of this income the parliament by Finance Act, 2010 has substituted the explanation to section 9 which gives a clear intention of the legislature insofar as the liability of tax under this provision is concerned. A perusal of the said explanation makes it clear that as there was a doubt earlier, they want to remove the doubts by introducing this explanation. By the explanation they have declared that for the purpose of section 9 which deals with income deemed to accrue or arise in India, under clauses (v), (vi) and (vii) of sub-section (1), such income shall be included in the total income of the non-resident, whether or not (i) the non-resident has a residence or place of business or business connection in India, (ii) the non-resident has rendered services in India. Therefore, the object is to levy tax on the income of a non-resident, if it has accrued or arisen in India and one such income is the income from royalty Appeals allowed - In favour of revenue.

Issues Involved:
1. Whether the fees received by the assessee can be treated as royalty under Section 9(1)(vi) of the Income-tax Act, 1961.
2. The applicability of Double Taxation Avoidance Agreement (DTAA) between India and Ireland.
3. The interpretation of the term "royalty" and its implications on taxability.
4. The distinction between the transfer of a copyright and the transfer of a copyrighted article.
5. The impact of the Finance Act, 2010 on the interpretation of Section 9 of the Income-tax Act.

Detailed Analysis:

1. Whether the Fees Received by the Assessee Can Be Treated as Royalty Under Section 9(1)(vi) of the Income-tax Act, 1961:
The core issue was whether the fees received by the assessee for the use of Electronic Design Automation (EDA) software could be classified as "royalty" under Section 9(1)(vi) of the Income-tax Act. The Tribunal initially ruled that these fees were not royalty, relying on previous decisions in similar cases (Samsung Electronics Co. Ltd. v. ITO and Motorola Inc. v. Dy. CIT). However, the High Court overturned this decision, emphasizing that the fees paid for the use of software, which includes the transfer of certain rights associated with the copyright, fall within the definition of "royalty" as per Explanation 2 to Section 9(1)(vi).

2. The Applicability of Double Taxation Avoidance Agreement (DTAA) Between India and Ireland:
For the assessment years 2001-02 and 2002-03, there was no DTAA between India and Ireland. The DTAA came into effect on 1/4/2002. The court held that even under the DTAA, the definition of "royalty" includes payments for the use or the right to use any copyright. Thus, the fees received by the assessee would still be considered royalty and subject to tax in India.

3. The Interpretation of the Term "Royalty" and Its Implications on Taxability:
The court provided a detailed interpretation of the term "royalty" under Explanation 2 to Section 9(1)(vi). It clarified that the term "in respect of" used in the provision is broad and includes any payment for the use of or the right to use a copyright. The court emphasized that the legislative intent was to include all forms of consideration for the use of intellectual property within the ambit of "royalty."

4. The Distinction Between the Transfer of a Copyright and the Transfer of a Copyrighted Article:
The court examined the argument that there is a distinction between the transfer of a copyright and a copyrighted article. It concluded that even if the transaction involves the transfer of a copyrighted article, the payment for the use of the intellectual property embedded in the software constitutes royalty. The court rejected the narrow interpretation that only payments for the transfer of exclusive rights in the copyright would qualify as royalty.

5. The Impact of the Finance Act, 2010 on the Interpretation of Section 9 of the Income-tax Act:
The court noted that the Finance Act, 2010, introduced an explanation to Section 9 to remove any doubts regarding the taxability of income from royalty. The explanation clarified that income from royalty would be taxable in India irrespective of whether the non-resident has a place of business or renders services in India. This legislative amendment reinforced the court's interpretation that the fees received by the assessee for the use of software are taxable as royalty.

Conclusion:
The High Court allowed the appeals, setting aside the Tribunal's order and restoring the order of the Commissioner of Income Tax (Appeals), which affirmed the Assessing Officer's decision to treat the fees as royalty and levy tax accordingly. The court's decision underscores the broad interpretation of "royalty" under the Income-tax Act and the DTAA, ensuring that payments for the use of intellectual property are subject to tax in India.

← Previous Next →