Sale of Software without granting right to duplicate, amounts to sale of copyrighted article and not the transfer of copyright and therefore not taxable as ‘Royalty’

Novel Inc. Vs. DDIT (Intl. taxation) – The proceeds from sale of Software to Distributors, without granting the right to duplicate / alter / modify the software, cannot be construed as ‘Royalty’, regardless of the fact that the taxpayer choose to describe its product as ‘intellectual value’ in its invoices. The Tribunal held that if the creator himself exploits his work by converting it into end products ready for use and transfers the right to use such end products to another but not further the right to copy the same, it would be a case of transfer of a copyrighted product.

Further, the Tribunal held that under Article 12(3)(a) of the India-USA tax treaty (tax treaty), the distinction between ‘use’ or the ‘right to use’ a copyright and the ‘use’ or ‘right to use a’ copyrighted article is required to be kept in mind, for falling within the domain of `Royalty’.Also, the Tribunal held that once a particular stand has been taken by the tax department in one transaction in the hands of the payer, it is impermissible to take diagonally contrary stand on the same transaction in the hands of the payee.

INCOME TAX APPELLATE TRIBUNAL, MUMBAI

ITA No. 4368/Mum/2010 : Asst.Year: 2007-2008

M/s. Novel Inc.

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