The Software Royalty Issue

Dy. Director of Income Tax v. Reliance Industries Ltd, Hon'ble ITAT Mumbai

Date of Decision: 29/10/2010

The decision was rendered a day after the Microsoft Judgment by the Hon'ble ITAT, Delhi Bench. The issue of software royalty may require reconsideration by a Special Bench or by a higher court.

Facts: Reliance Industries Limited entered into a license agreement with M/s TIBCO Software Inc., 3165 Port, Palo Alto, California 94304, USA (“TIBCO”) in terms of which M/s TIBCO granted to the appellant and affiliates perpetual, non-exclusive, irrevocable, royalty-free, unlimited, non-transferable license in connection with the software maintained by M/s. TIBCO which allows internal operations including use of software as its backward infrastructure for ASP services and Web Hosting services Payments of license fees under the agreement were to be made gross of withholding taxes in India US$ 13,00,000/-. The AO held that the appellant was getting only license to use the software and no other title or interest in the software is being transferred to the appellant. The AO held that the software is an intellectual property and falls in the category of copyrights, patents, designs, trade-marks, formula, process, commercial/scientific knowledge and therefore consideration received for the license to use the software would constitute royalty. Accordingly, the AO held that the payment for purchase of software amounts to royalty within the meaning of section 9(1)(vi) of the I.T. Act and Article-12(3) of the DTAA.

This claim of the AO was rejected by the CIT (A) and it held that the appellant under the Software Contract acquired only a copy of software program and did not acquire any copyright over such software as envisaged by section-14 of the Copyright Act. Under these circumstances, payment made by the appellant to M/s TIBCO cannot be said to be payment for the use of or right to use of copyright. Thus, the said payment was made only for purchase of copyright article and does not amount to royalty within the meaning of Article-12(3) of the DTAA.

The Tribunal, while rejecting the claim of the AO and upholding the order of the CIT(A) observed at para 12:

“a) It is now established law that Computer software after being put on to a media and then sold, becomes goods like any other Audio Cassette or painting on canvas or a book and that the AO is wrong in holding that Computer software on a media, continues to be an intellectual property right and that the AO was wrong in treating this computer software as a “Patent” or as “Invention”. Thus the payment cannot be termed as “Royalty”.

b) That the definition of the term ‘Royalty’ in article 12(3) of the Indo-US DTAA is more restrictive than what is provided in section 9(1)(vii) of the Income-tax Act, 1961 and that in such a situation the provisions of the Double Taxation Avoidance Agreement override the domestic law.

c) That the assessee has purchased a copyrighted article and not the copyright itself. There is no transfer of any part of copyright.

d) As what is paid is not “royalty” under the Indo-US DTAA, and as it is covered under Article 7, which deals with “Business Profit” and as the foreign party does not have a Permanent Establishment in India, the same is not taxable in India and hence the assessee is not required to deduct tax at source from the said payment.”

The decision is available here.