Mumbai bench of Income-tax Appellate Tribunal (the Tribunal) in the case of Alcatel USA International Marketing Inc (see note- 1 below) (taxpayer) has held that the transfer of licensed software cannot be considered as ‘royalty’ within the meaning of article 12(3) of the India-US tax treaty (the tax treaty) in view of the decision of the Special Bench of the Delhi Tribunal in the case of Motorola Inc., Ericsson Radio Systems AB and Nokia Corporation Inc (see note-2 below).
Facts of the case
Issue before the Tribunal:- Whether the payments made by Indian company amount to ‘Royalty’ within the meaning of article 12(3) of the tax treaty?
Tax department’s contentions:- The tax department placed reliance on the decision of the Supreme Court in the case of TATA Consultancy Services Inc (see note-3 below) and contended that the software falls within the definition of ‘goods’ and hence there was transfer of rights in the software. The amount received by the taxpayer was ‘royalty’ payment towards transfer of goods.
This is a welcome decision by the Mumbai Tribunal which after relying on the decision of the Special Bench of Delhi Tribunal in the case of Motorola Inc. held that the transfer of licensed software cannot be considered as ‘royalty’ within the meaning of India-US tax treaty and the Act.
The Tribunal also discussed the decision of the Delhi Tribunal in the case of Infra soft Limited where it had held that since the payment by the taxpayer was for the transfer of a right to use the licences software, such payment cannot be considered as royalty taxable under the Act. Further, the Supreme Court in the case of TATA Consultancy Services had held that the computer software was held to be ‘goods’ not only under the Sales tax Act but also under the constitution of India.
1. DDIT Vs Alcatel USA International Marketing Inc [2009-TIOL-733-ITAT-MUM).
2. Motorola Inc., Ericsson Radio Systems AB and Nokia Corporation Vs. DCIT  96 TTJ 1 (Del) (SB) where it was held that since payments received by the taxpayer were for the sale of copyrighted articles and not for the sale of a copyright the payments cannot be treated as ‘royalty’.
3. TATA Consultancy Services Vs. State of Andhra Pradesh  271 ITR 407 (SC) (LB).
4. Infra soft Limited Vs. ADIT [2009-TIOL-21-ITAT-DEL]