Amounts paid by Indian companies to non-resident manufacturers/suppliers for resale/use of the computer software not royalty, hence, not taxable in India: SC
There has been a lot of ambiguity arisen with regards payment made to a non-resident entity for the grant of the use of computer software by a businessman in India for internal business purposes. Income Tax Department has treated such payments as royalty and accordingly, brought the same to tax in India. On the other hand, the assessees who has used the software, have been taking a stand that the aforesaid payment is of the nature of business profits and therefore, the same would not be liable to tax in India, because of the provisions of Article 7 of the Double Taxation Avoidance Agreement (DTAA), entered into between India and several foreign countries. In this case, the assessees have been taking a stand that the scope of the definition of royalty under section 9(1) (vi) is quite wide, whereas the scope of the definition of royalty under Article 12(3) of the DTAA is restrictive.
In this case, it may also be stated that the Delhi High Court has been adopting a very firm view that the amount received by the assessee under the license agreement for allowing the use of the software is not royalty, because what is transferred is neither the copyright in the software nor the use of the copyright in the software, but what is transferred is the right to use the copyrighted material or article, which is distinct from the rights in a copyright.
The Madras High Court has also followed the aforesaid view adopted by the Delhi High Court.
However, the Karnataka High Court has adopted an erroneous view in this regard, (in the case of Samsung Electronics Co. Ltd)
Before we proceed to deal with the aforesaid issues in detail, it may be necessary to understand: –
a. The meanings of the terms “Royalty” and “Business profit” and the difference between the two.
b. Characterization of cross-border software payments or payments concerning the import of technical services, as either royalty or business profits or some other head, has always been a contentious issue in India. The underlying point of the question involved herein is that whether such a transaction would amount to a “transfer of a copyright” or “transfer of a copyrighted article”.
Given the definition of royalties contained in Article 12 of the DTAAs mentioned in paragraph 41 of this judgment, it is clear that there is no obligation on the persons mentioned in section 195 of the Income Tax Act to deduct tax at source, as the distribution agreements/EULAs in the facts of these cases do not create any interest or right in such distributors/end-users, which would amount to the use of or right to use any copyright. The provisions contained in the Income Tax Act (section 9(1)(vi), along with explanations 2 and 4 thereof), which deal with royalty, not being more beneficial to the assessees, have no application in the facts of these cases.
Our answer to the question posed before us, is that the amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India, as a result of which the persons referred to in section 195 of the Income Tax Act were not liable to deduct any TDS under section 195 of the Income Tax Act. The answer to this question will apply to all four categories of cases enumerated by us in paragraph 4 of this judgment.
The appeals from the impugned judgments of the High Court of Karnataka are allowed, and the aforesaid judgments are set aside. The ruling of the AAR in Citrix Systems (AAR) (supra) is set aside. The appeals from the impugned judgments of the High Court of Delhi are dismissed.
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