Thursday, June 14, 2012

S. 9(1)(vi): Income from licence of software assessable as “royalty”

CIT vs. Samsung Electronics Co Ltd (Karnataka High Court)

S. 9(1)(vi): Income from licence of software assessable as "royalty"

The assessee imported "shrink-wrapped"/ "off-the-shelf" software from suppliers in foreign countries and made payment for the same without deducting tax at source u/s 195. The AO & CIT (A) held that the payments were assessable to tax as "royalty" u/s 9(1)(vi)/ Article 12 and that the assessee was liable to pay the tax u/s 201. On appeal, the Tribunal relied on the judgement of the Supreme Court in Tata Consultancy Services vs. State of AP 271 ITR 401 (SC) and held that the assessee had acquired a "copyrighted article" but not the "copyright" itself and so the amount paid was not assessable as "royalty". On appeal by the department, HELD reversing the Tribunal:

(i) U/s 9(1)(vi) of the Act & Article 12 of the DTAA, "payments of any kind in consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work" is deemed to be "royalty". Under the Copyright Act, 1957, a software programme constitutes a "copyright". A right to make a copy of the software and use it for internal business by making copy of the same and storing it on the hard disk amounts to a use of the copyright u/s 14 (1) of that Act because in the absence of such a licence, there would have been an infringement of the copyright. Accordingly, the argument that there is no transfer of any part of the copyright and the transaction involves only a sale of a copyrighted article is not acceptable. The amount paid to the supplier for supply of the "shrink-wrapped" software is not the price of the CD alone nor software alone nor the price of licence granted. It is a combination of all. In substance unless a licence was granted permitting the end user to copy and download the software, the CD would not be helpful to the end user;

(ii) There is a difference between a purchase of a book or a music CD because while these can be used once they are purchased, software stored in a dumb CD requires a license to enable the user to download it upon his hard disk, in the absence of which there would be an infringement of the owner's copyright. (TCS vs. State of AP distinguished as being in the context of sales-tax);

Note: The same view has been taken in Microsoft/ Gracemac 42 SOT 550 (Del), Millennium IT Software Ltd 338 ITR 391(AAR) & ING Vysya Bank Ltd 61 DTR 401( Bang) while a contrary view has been taken in Motorola Inc 96 TTJ 1 (Del) (SB) & TII Team Telecom International 60 DTR 177. See also Is Income From Software Taxable As "Royalty"?

Related Judgements
CIT vs. Samsung Electronics (Karnataka High Court) The effect of the judgement of the Supreme Court in Transmission Corporation of India 239 ITR 587 is that the moment there is a payment to a non-resident, there is an obligation on the payer to deduct tax at source u/s 195 (1). The only way to escape the…
In Re Millennium IT Software Ltd (AAR) S. 9(1)(vi) & Article 12 define the term "royalty" to include any payment for the use of, or the right to use, a "copyright" of scientific work. Software programmes are a "copyright" and are protected under the Copyright Act, 1957. As the software programme is a "copyright", any payment…
Kansai Nerolac Paints vs. ADIT (ITAT Mumbai) The effect of the judgements in Tata Consultancy Services vs. State of AP 271 ITR 401 (SC), Samsung Electronics Co 94 ITD 91 (Bang), Motorola Inc 95 ITD 269 (SB) & Dassault Systems 229 CTR 105 (AAR) is that the primary condition for coming within the definition of `royalty'…

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