Transfer of licensed software was a transfer of copyrighted article and not the right in the copyright and, consequently, income from the transfer thereof was not royalty.
The Delhi Bench of the Income-tax Appellate Tribunal (the Tribunal) has held that the amount received by the taxpayer company for transfer of the right to use the licenced software was not for the use of copyright in the software but only the software as such (which was a copyrighted article) and, therefore, could not be taxed as royalty but as business income under Article 7 of the India-UK Tax Treaty (the tax treaty). The Tribunal further held that other receipts on account of maintenance charges and training fees being incidental to the software receipts assume the same character as that of software receipts and, are also therefore, taxable as business income.
Facts of the case
The taxpayer was marketing and Development Company of an international group owned by a USA based holding company, which was the leader in civil engineering software and had developed software for civil engineering work in various countries. The taxpayer had set up a branch office in India, after obtaining the necessary approval, mainly for import and supply of software. The branch office also provided support services including system related services such as installation of software, interface to peripherals, uninstallation, imparting of training on the application of the software, etc. In the return of income of its India branch, the taxpayer company had shown the receipts from sale/licensing of the software as business income. The Assessing Officer (AO) held that the entire amount received by the taxpayer for transfer of software and the other incidental services was taxable as royalty and such royalty having been accrued or arisen to the taxpayer through its permanent establishment (PE) in India (the branch), the same was taxable under Article 13(6) of the tax treaty and under section 44D read with section 115A of the Income-tax Act, 1961 (the Act).
The Commissioner of Income-tax (Appeals) [CIT(A)] observed that the taxpayer had transferred certain rights to Indian customers to use the software for fixed license fees. It was observed that the software supplied by the taxpayer was customised to include Indian standard on project specific requirements of the Indian customers.
The CIT(A) strongly relied on the report of the High powered committee set up by Ministry of Finance, Government of India in the year 1999 for categorisation of the software payment as royalty which was different from the revised OECD Commentary relied on by the taxpayer and held that the amount received by the taxpayer from its Indian customers under software license agreement was in the nature of royalty and the same was chargeable to tax in India as per Explanation (2) to Section 9(1)(vi) of the Act as well as the tax treaty.
The CIT(A) also held that the decision of the Supreme Court in the case of Tata Consultancy Services v. State of Andhra Pradesh [2004] 271 ITR 401(SC) relied upon by the taxpayer was not of much help because the transfer of right to use software has been held as ‘sale of goods’ under the Sales Tax Laws, however, such transfer would be taxable as royalty under the Act. The CIT (A) also distinguished various decisions cited by the taxpayer on facts.
Issue for consideration:- Whether the amount received by the taxpayer in respect of sale of the licenced software was royalty or business income?
Taxpayer’s Contentions
