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
Issue before the Tribunal
1. The Tribunal observed its earlier decision in the taxpayer’s own case (DDIT v. Solid Works Corporation (ITA no. 3095/Mum/2007)), the key points of which are as follows:
2. Relying on the decision in taxpayers own case, the Tribunal held that the payment received by the taxpayer for sale of shrink wrapped software was not in the nature of royalty within the meaning of Article 12(3) of the tax treaty.
3. With regard to levy of interest under section 234B of the Act, the Tribunal relied on its earlier decision in the taxpayer’s own case and also relied on Delhi Special Bench decision in the case if Motorola Incorporation v.. DCIT (2005) 95 ITD 269 (Del) (SB) & Mumbai High Court decision in the case of DIT v.. NGC Network Asia LLC (2009) 313 ITR 187 (Bom). It was held that when a duty is cast on the payer to pay the tax at source, on failure, no interest can be imposed on the taxpayer.
This is a welcome decision in which the Mumbai tribunal held that the payment received by the taxpayer for sale of shrink wrapped software was not in the nature of royalty within the meaning of Article 12(3) of the tax treaty.
In a recent decision in the case of Dassault Systems K.K. [2010-TIOL-02-ARA-IT] the Authority for Advanced Ruling on similar facts held that the payments received by the applicant cannot be construed as ‘royalty’ taxable within the provisions of the Act or the India-Japan tax treaty. A similar view was also adopted by the Bangalore Tribunal in the recent decision in the case of M/s Velankani Mauritius Ltd & M/s Bye design Solutions Ltd. v. DDIT (2010-TII-64- ITAT-BANG-INTL) where it held that income from sale of software cannot be treated as royalty under the Income-tax Act, 1961 or the India-Mauritius tax treaty
It is important to note that recently, the Supreme Court in the case of CIT v. M/s Oracle Software India Ltd. [2010-TIOL-04-SC-IT] has held that process of transforming a blank Compact Disks (CDs) into software loaded disks by duplicating the master copy of the software on it, constitutes ‘manufacture or processing of goods’. Based on this decision it may be possible to contend that providing shrink wrap software may result into provision of goods and not service and therefore, to be treated as business income and not royalty income.
It is pertinent to note that how some of the developed economies have treated such payment as not resulting into royalty payments. As per the US regulations when there is a transfer of software program that would effectuate a minimal use of the copyright in the program then such minimal use should be disregarded for characterization purposes as it is merely ‘de minimis’ to the entire transaction. Further, the technical advisory group of Organization for Economic Co-operation and Development also had similar view which held that if the consideration is paid for a right other than a right in the intellectual property, then in that event, the payment made should not be treated as royalty as it is a purchase for the purpose of use of the product. The Singapore Government has also specifically granted exemption from withholding taxes to importers of shrink-wrapped software.