It is to be noted that in this connection, the taxpayers 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 of the DTAAs is restrictive. In this connection, it may also be stated that the Delhi High Court2 in the case of Intrasoft Ltd. and Ericsson A.B3 has been adopting a very firm view that the amount received by the assessee under the license agreement for allowing the use of
Background
The Hon'ble Supreme Court1 in the case of Engineering Analysis Centre of Excellence Private Limited v. The Commissioner of Income Tax & ANR. has put the controversial issue of tax on payments made for buying software to rest by deciding it in favour of the taxpayers. The case revolves around the taxability of cross-border payments for purchase of software i.e whether the payment received by a non-resident for giving licence of the computer software for further distribution would be taxable as royalty or would it be a normal sale transaction. The court held that the non-resident owner continues to have proprietary rights in the software and the use of the software by the Indian company is limited to making backup copy and redistribution. So, the payment received for the sale of computer software is business income and in the absence of a permanent establishment of the seller in India, tax could not be levied.
Introduction
There have been a lot of ambiguities regarding the payment made to a non-resident entity for the grant of the use by a business in India either for internal use or for further distribution. The Income Tax Department has been treating such payments as royalty and accordingly, bringing the same to tax in India at the rate of 10% u/s 115A of the Income-tax Act, 1961. It would be worthy to recall that India began expanding its tax base in 2012 wherein the definition of royalty under the IT Act was broadened. As a result, the Indian revenue authorities started treating the software payments at large as royalty and demanding tax on it.
On the other hand, the assessees who make use of such computer 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, typically because of the provisions of Article 7 of the Double Taxation Avoidance Agreement (DTAA), entered into between India and several foreign countries.
It is to be noted that in this connection, the taxpayers 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 of the DTAAs is restrictive. In this connection, it may also be stated that the Delhi High Court2 in the case of Intrasoft Ltd. and Ericsson A.B3 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. However, the Karnataka High Court in the case of Samsung Electronics Co. Ltd4 has held the same in the favor of revenue stating that the payment for software amounted to royalty.
