Case Law Details

Case Name : DDIT Vs Reliance Industries Ltd ( ITAT Mumbai)
Appeal Number : ITA No.1980, 1981, 1982, 1984, 1986, 2523, 2529/M/2008 & Others
Date of Judgement/Order : 18/05/2016
Related Assessment Year :

Brief of the Case:

Purchase of a license to use shelf/shrink-wrapped software is purchase of a “product” and not a “copyright”.

Wherever the Government of India intended to include consideration for the use of software as ‘Royalties’, it explicitly provided so in the DTAA with the concerned country (e.g. India-Malaysia DTAA). In case relevant Article of a DTAA does not specifically treat any consideration for the use of or the right to use any ‘computer software’ as Royalty, the said consideration cannot be taxed as Royalty under such DTAA.

Brief facts

The assessees herein purchased different type of software from residents of different countries such as Australia, Canada, Singapore, Netherlands, Germany, USA, UK, and France etc.; Undisputedly, India has a tax treaty/Double Taxation Avoidance Agreement (hereinafter referred to as DTAA) with all these countries. According to the AO, the consideration paid by the assessees in these cases for the purchase of the software form the foreign resident companies, falls in the definition of “royalty‘ hence taxable in India, whereas, the contention of the assessees is that the same does not constitute royalty hence not taxable in India and they, therefore, were not liable to withhold tax upon the said consideration paid.

Mumbai ITAT

A comparison of the definition of “royalty” as provided under India-US DTAA (‘the DTAA’), with the definition of “royalty” as provided under Income-tax Act, 1961 (‘the Act’) shows that the same are not in pari-materia with each other. The definition provided under the DTAA is very short and restrictive definition, whereas, the definition of the royalty as provided under the Act is a very wide and inclusive definition. The consideration paid for “computer software” has not been specifically included under the definition of royalty under the DTAA.

Delhi High Court rulings in the case of Infrasoft, Ericsson A.B., Nokia Networks OY,  and New Skies Satellite BV and Delhi Tribunal ruling in the case of Datamine International Ltd. (order dated 14.03.16) were referred to.

In New Skies Satellite BV, Delhi High Court observed that no amendment to the Act, whether retrospective or prospective can be read in a manner so as to extend its operation to the terms of an international treaty.

In Datamine International Ltd. the Tribunal in para 12.1 observed that in the India-UK Treaty, in para 3(a) of Article 13 which deals with the definition of “royalty” in the relevant India-UK Treaty, there was no specific mention of word “computer software” along with other terms such as “literary, artistic or scientific work, patent, trade mark” etc. The Tribunal observed that such a language of the India-UK DTAA was in sharp contrast to the specific use of the term “computer software” or “computer software programme” together with other terms such as literary, artistic or scientific work, patent, trade mark etc. in many other DTAAs such as India-Malaysia Treaty, wherein, the term “computer software programme” has been separately mentioned along with the words copy right of a literary, artistic or scientific work …. plan, knowhow, computer software programme, secret formula or process. It is thus clear that wherever the Government of India intended to include consideration for the use of software as ‘Royalties’, it explicitly provided so in the DTAA with the concerned country. Since Article 13(3)(a) of the DTAA with UK does not contain any consideration for the use of or the right to use any ‘computer software’, the same cannot be imported into it.

In view of above, the assessee cannot be said to have paid the consideration for use of or the right to use copyright but has simply purchased the copyrighted work embedded in the CD- ROM which can be said to be sale of “good” by the owner.

Hon‘ble Delhi High Court in the case of DIT vs. Infrasoft Ltd. (supra) has discussed the ruling favouring the revenue in the case of CIT vs. Samsung Electronics Company Ltd (2012) 345 ITR 494 and has taken the view in favour of the assessee. If two views in regard to the interpretation of a provision are possible, the Court would be justified in adopting that construction which favours the assessee. We accordingly adopt the construction in favour of the assessee.

Explanation 4 to section 9(1)(vi) inserted by Finance Act, 2012 with retrospective effect 01.06.1976, vide which the right for use or right to use a computer software including granting of license has been included in the definition of the term right, property or information, the consideration paid for which has been deemed to be income by royalty under section 9(1)(vi) of the Act, though preceded with the phrase “it is hereby clarified” and is followed by the words “includes” and “has always included” yet the said explanation cannot be applied retrospectively.

The assessee was not supposed to deduct TDS on the remittance made for the purchase of software prior to the amendment/insertion of Explanation 4 to section 9(1)(vi) of the Act, as per the interpretation of the relevant provision done by various courts, the assessee was under bonafide belief that no TDS was deductable as the consideration paid for purchase off the shelf/shrink wrapped software would not fall in the definition of royalty. (Sedco Forex International Drill INC. & Others vs. Commissioner of Income Tax & another (2005) 199 CTR (SC) 320 (SC).

Even in cases where there is no treaty/DTAA of India with the country of which the recipient is a resident, in the light of the law laid down by the Hon‘ble Supreme Court in the case of Sedco Forex International Drill INC. & Others vs. CIT & another and in view of the observations made above, the assessee during the relevant period prior to the insertion of explanation 4 to section 9(1)(vi) of the I.T. Act, was not liable to deduct TDS even in above said two cases also even though there was no DTAA with the countries from the residents of whom the assessee had made the purchases.


On the issue of taxability of software as royalty, this judgment gives a sturdy additional basis of argument in favour of assessee.

(Author CA Deepak Goel, can be reached at:  Mob: +91 9911839405, Mail: [email protected])
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