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2013 (11) TMI 1382 - HC - Income TaxSupply of software on license Whether royalty or not Held that - For a payment to qualify as royalty payment, it is necessary to establish that there is transfer of all or any rights (including the granting of any licence) in respect of copyright - It is to be established that the licensee, by making such payment, obtains all or any of the copyright rights - Distinction has to be made between the acquisition of a copyright right and a copyrighted article . Copyright is distinct from the material object, copyrighted. Copyright is an intangible incorporeal right in the nature of a privilege, quite independent of any material substance. The license granted to the licensee permitting him to download the computer programme and storing it in the computer for his own use is only incidental to the facility extended to the licensee to make use of the copyrighted product for his internal business purpose - The licensee were allowed to make only one copy of the software and associated support information for backup purposes with a condition that such copyright shall include Infrasoft copyright and all copies of the software shall be exclusive properties of Infrasoft - Licensee was allowed to use the software only for its own business as specifically identified and was not permitted to loan/rent/sale/sub-licence or transfer the copy of software to any third party without the consent of Infrasoft - The licensee has been prohibited from copying, decompiling, de-assembling, or reverse engineering the software without the written consent of Infrasoft. The licence agreement between the Assessee company and its customers stipulates that all copyrights and intellectual property rights in the software and copies made by the licensee were owned by Infrasoft and only Infrasoft has the power to grant licence rights for use of the software. The incorporeal right to the software i.e. copyright remains with the owner and the same was not transferred by the Assessee. The right to use a copyright in a programme is totally different from the right to use a programme embedded in a cassette or a CD which may be a software and the payment made for the same cannot be said to be received as consideration for the use of or right to use of any copyright to bring it within the definition of royalty as given in the DTAA Following Delhi High Court in DIT v. M/s Nokia Networks OY 2012 (9) TMI 409 - DELHI HIGH COURT - The right to make a backup copy purely as a temporary protection against loss, destruction or damage does not amount to acquiring a copyright in the software - What has been transferred is not copyright or the right to use copyright but a limited right to use the copyrighted material and does not give rise to any royalty income - The consideration received on grant of licences for use of software is not royalty within the meaning of Article 12(3) of the Double Taxation Avoidance Agreement between India and the United States of America Decided against Revenue.
Issues Involved:
1. Whether the ITAT erred in holding that the nature of receipts amounting to Rs. 2,74,00,630/- was business income and not royalty income within the meaning of Section 9(1)(vi) read with Article 12 of Indo-US-DTAA? 2. Whether the supply of software on a license is royalty/included services within the meaning of Section 9(1)(vi) / Article of Income Tax Act / Indo-USA-DTAA? Detailed Analysis: Issue 1: Nature of Receipts as Business Income or Royalty Income The primary contention was whether the receipts from the sale/licensing of software should be classified as business income or royalty income under the Income Tax Act and the Indo-US Double Taxation Avoidance Agreement (DTAA). The Assessing Officer (AO) classified the receipts as royalty income, subject to tax at 20% under Section 44D read with Section 115A of the Income Tax Act. The AO's reasoning was based on the definition of royalty under Section 9(1)(vi) and Article 12 of the DTAA, asserting that the software license involved the use of copyrighted material. The Assessee argued that the software was a copyrighted article, not a copyright, and thus should be treated as business income under Article 7 of the DTAA. The ITAT supported this view, distinguishing between a copyrighted article and a copyright right, concluding that the payments were for the purchase of a copyrighted article, not for the use of a copyright. Issue 2: Supply of Software on License as Royalty/Included Services The AO and CIT(A) argued that the software license involved granting rights to use copyrighted material, which should be classified as royalty income. The Assessee contended that the software was sold as a product, not as a license to use a copyright. The ITAT, relying on the Special Bench decision in Motorola Inc. and subsequent rulings, held that the payments were for a copyrighted article and not for the use of a copyright. The ITAT emphasized that the licensees did not acquire any rights to commercially exploit the software, which remained with the Assessee. Legal Precedents and Analysis: 1. Motorola Inc. Case: The ITAT referred to the Motorola Inc. case, where it was held that payments for software should be classified based on whether they were for a copyrighted article or a copyright right. The ITAT concluded that the Assessee's case involved the sale of a copyrighted article, not a copyright right. 2. Tata Consultancy Services Case: The Supreme Court held that software, once put on a medium, becomes a marketable commodity and is considered goods. The ITAT applied this principle, stating that the Assessee's software was sold as a product, not as a license to use a copyright. 3. OECD Commentary: The ITAT also referred to the OECD Model Convention, which distinguishes between payments for copyrighted articles and copyright rights. The rights transferred in the Assessee's case were limited to enabling the use of the software, not commercial exploitation. 4. Delhi High Court Decisions: The ITAT relied on Delhi High Court rulings in Nokia Networks OY and Ericsson AB, which held that payments for software are not royalties if they do not involve the transfer of copyright rights. Conclusion: The High Court upheld the ITAT's decision, concluding that the payments received by the Assessee were for copyrighted articles, not for the use of a copyright. Therefore, the receipts were classified as business income under Article 7 of the DTAA, not as royalty income under Article 12. The court emphasized that the DTAA provisions, being more beneficial to the Assessee, take precedence over the Income Tax Act provisions. The appeal was dismissed, affirming that the consideration received for software licenses does not constitute royalty income under the DTAA.
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