Contrast to decision of Karnataka HC in Samsung Electronics 345
ITR 494, Delhi HC has held that ‘Payment for non-exclusive &
non-transferable license to use ‘Software’ is not taxable as royalty under
India-US DTAA.
This goes against the basis applied in Reliance Infocom/ Lucent
Technologies (ITAT Mum) where it was held that Ericson AB 343 ITR 370 (Del)
& Nokia Networks OY 25 taxmann.com 225 applied only to cases where the
software was embedded in the hardware and not to pure license cases.
Conclusion is, CONFUSION STILL PREVAILS.
The assessee, a USA company, set up a branch office in India for
the supply of software called “MX”. The software was customized for the requirements
of the customer (not “shrink wrap”). The Indian branch imported the software
package in the form of floppy disks or CDs and delivered it to the customer. It
also installed the software and trained the customers. The AO & CIT(A) held
that the software was a “copyright” and the income from its license was
assessable as “royalty” under Article 12 of the India-USA DTAA. On appeal by
the assessee, the Tribunal held, following Motorola 270 ITR (AT) (SB) 62, that
the income from license of software was not taxable as “royalty”. Before the
High Court, the Department argued that in view of CIT vs. Samsung Electronics
345 ITR 494 (Kar), the right to make a copy of the software and storing it
amounted to copyright work u/s 14(1) of the Copyright Act and payment made for
the grant of a license for the said purpose would constitute royalty. HELD by
the High Court dismissing the appeal:
In order to qualify as a royalty payment under Article 12(3) of
the India-USA DTAA, it is necessary to establish that there is a transfer of
all or any rights (including the granting of any licence) in respect of a
copyright of a literary, artistic or scientific work. There is a clear
distinction between royalty paid on transfer of copyright rights and
consideration for transfer of copyrighted articles. Right to use a copyrighted
article or product with the owner retaining his copyright, is not the same
thing as transferring or assigning rights in relation to the copyright. The
enjoyment of some or all the rights which the copyright owner has, is necessary
to invoke the royalty definition. Viewed from this angle, a non-exclusive and
non-transferable licence enabling the use of a copyrighted product cannot be
construed as an authority to enjoy any or all of the enumerated rights ingrained
in Article 12 of DTAA. Where the purpose of the licence or the transaction is
only to restrict use of the copyrighted product for internal business purpose,
it would not be legally correct to state that the copyright itself or right to
use copyright has been transferred to any extent. The parting of intellectual
property rights inherent in and attached to the software product in favour of
the licensee/customer is what is contemplated by the Treaty. Merely authorizing
or enabling a customer to have the benefit of data or instructions contained
therein without any further right to deal with them independently does not,
amount to transfer of rights in relation to copyright or conferment of the
right of using the copyright. The transfer of rights in or over copyright or
the conferment of the right of use of copyright implies that the
transferee/licensee should acquire rights either in entirety or partially
co-extensive with the owner/ transferor who divests himself of the rights he
possesses pro tanto. The license granted to the licensee permitting him to
download the computer programme and storing it in the computer for his own use
is only incidental to the facility extended to the licensee to make use of the
copyrighted product for his internal business purpose. The said process is
necessary to make the programme functional and to have access to it and is
qualitatively different from the right contemplated by Article 12 because it is
only integral to the use of copyrighted product. Apart from such incidental facility,
the licensee has no right to deal with the product just as the owner would be
in a position to do. Consequently there is no transfer of any right in respect
of copyright by the assessee and it is a case of mere transfer of a copyrighted
article. The payment is for a copyrighted article and represents the purchase
price of an article and cannot be considered as royalty either under the
Income-tax Act or under the DTAA (Ericson AB 343 ITR 370 (Del) & Nokia
Networks OY 25 taxmann.com 225 followed; Samsung Electronics 345 ITR 494 (Kar)
not followed)
Source: ITAT Online
No comments:
Post a Comment