Payment received by taxpayer for sale of shrink wrapped software is not royalty under Article 12(3) of the India-USA tax treaty

Court :Mumbai bench of the Income-tax Appellate Tribunal

Citation : ADIT Vs. Solid Works Corporation [2010-TII-130-ITAT-MUM-INTL]

Brief : Recently, the Mumbai bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of ADIT v. Solid Works Corporation [2010-TII-130-ITAT-MUM-INTL] Judgment date 1 April 2010, Assessment Year 2005-06) held that payment received by the taxpayer for sale of shrink wrapped software is not in the nature of royalty within the meaning of Article 12(3) of the India-USA tax treaty (tax treaty).

Facts of the case

• · The taxpayer, a tax resident of USA, develops and markets 3D mechanical design solution. The software named Solid works 2003 is provided in a packed form to the customers in India along with an end user license agreement (EULA).
• · The designed data prepared by software provides data which are 100 percent editable.
• · The taxpayer owns and retains all copyright, trade mark, trade secrets and other proprietary rights. Further, the end user is not permitted to make any modification, make works derivative of the software, reverse engineer, decompile, disassemble or otherwise discover the source code of the software.
• · For the purposes of marketing the shrink wrap software, the taxpayer entered into agreement with various distributors/re sellers in India. However, distributors do not get any right to disassemble, decompile or reverse engineer the software. Also, distributors do not get any exclusive distributor right.
• · The taxpayer observed that shrink wrap software was sold to customers for their personal use without transfer of any copyright, trade mark, or patent etc. Accordingly, the taxpayer took the view that the payment received for supply of software was not payments received for royalty as per the tax treaty.
• · Further, the taxpayer took a view that since it did not have a permanent establishment (PE) in India, its business income was not taxable as per Article-7 of the tax treaty.
• · The AO held that the payment received by the taxpayer, for the use of software, was in the nature of royalty as per the tax treaty.
• · Further, the AO levied interest under section 234B of the Income tax Act, 1961 (the Act).

Issue before the Tribunal