2019 (10) TMI 858 - AT - Income Tax

Receipts from sale of software be treated as royalty or not - income accrued in India - DTAA - HELD THAT - Right to use granted through licensing of a software does not fall within the meaning of Royalty as provided for in the domestic law or the DTAA. Any consideration for the same is not taxable as Royally under section 9(1)(vi) or the relevant DTAA. What has been transferred by the appellant is neither the copyright in the software nor the use of the copyright in the software, but what is transferred is the right to use the copyrighted material or article which is clearly distinct from the rights in a copyright. The right that is transferred is not a right to use the copyright but is only limited, to the right to use the copyrighted material and the same does not give rise to any royalty income. Regarding the applicability of amendment in Section 9(1)(vi) brought out by Finance Act, 2012, we find that this issue of applicability has been examined in the case of DIT Vs New Skies Satellite BV 2016 (2) TMI 415 - DELHI HIGH COURT as observed that the only manner in which change in position of the provisions of the treaty can be relevant only if such change is incorporated into the agreement itself and not otherwise. A change in executive position cannot bring about a unilateral legislative amendment into a treaty concluded between two sovereign states. It is fallacious to assume that any change made to domestic law to rectify a situation of mistaken interpretation can spontaneously further their case in an international treaty. Therefore, mere amendment to Section 9(1)(vi) cannot result in a change. It is imperative that such amendment is brought about in the agreement as well. The Hon ble High Court s observation is relevant to the instant case with regard to the amendment to the Act even though the judgment was given in the case of determination of royalty of payment of transponder fee, it adequately dealt with the issue of Section 9(1)(vi). From the above judgment, it can be concluded that the amendment in the DTAA unilaterally cannot be enforced, hence, the provisions of Section 9(1)(vi) are not applicable to the instant case. The contention of the Assessing Officer cannot be upheld. - Decided against revenue

Summary

Issues Involved:
1. Whether the receipts from the sale of software are taxable as royalty.
2. Whether the effect of the amendment in Section 9(1)(vi) brought about by the Finance Act, 2012, can be read into the treaty.

Issue-Wise Detailed Analysis:

1. Taxability of Software Receipts as Royalty:

The primary issue was whether the receipts from the sale of software by the assessee, a company incorporated in Sweden, should be treated as royalty. The assessee engaged in the sale of software products and IT services, including the software 'QlikView'. The Assessing Officer (AO) determined the receipts from the sale of software products as taxable under 'royalty' per Article 12 of the India-Sweden DTAA and Section 9(1)(vi) of the Act.

The CIT(A) held that the right to use the software granted through licensing does not constitute 'royalty' under domestic law or the DTAA. The CIT(A) emphasized that what was transferred was not the copyright in the software nor the use of the copyright, but the right to use copyrighted material, distinct from rights in the copyright.

The Tribunal upheld the CIT(A)'s decision, relying on the Delhi High Court's judgment in DCIT Vs Infrasoft Ltd., which clarified that a non-exclusive, non-transferable license to use software does not amount to transferring copyright rights. The Tribunal noted that the payment for the use of copyrighted material is different from payment for the copyright itself and does not qualify as royalty.

2. Applicability of Amendment in Section 9(1)(vi):

The second issue was whether the amendment to Section 9(1)(vi) by the Finance Act, 2012, could be read into the treaty. The amendment sought to clarify that consideration for the transfer of all or any right to use computer software is taxable as royalty.

The Tribunal referred to the Delhi High Court's judgment in DIT Vs New Skies Satellite BV, which stated that changes in domestic law cannot unilaterally amend a treaty. The High Court emphasized that any change in the interpretation of treaty terms must be incorporated into the treaty itself. Therefore, the amendment to Section 9(1)(vi) does not automatically apply to the DTAA unless explicitly included in the treaty.

Conclusion:

The Tribunal concluded that the receipts from the sale of software do not constitute royalty under the DTAA or domestic law. The right transferred was the right to use copyrighted material, not the copyright itself. Additionally, the amendment to Section 9(1)(vi) cannot unilaterally alter the treaty's provisions. Thus, the appeals by the revenue were dismissed.

Order Pronounced in the Open Court on 17/10/2019.