The Income Tax Appellate Tribunal (ITAT), Bangalore Bench ruled that consideration for the sale of software cannot be treated like royalty.
The assessee, M/s. World Courier (India) Pvt. Ltd. is a company. It is a wholly-owned subsidiary of World Courier (Group) Inc, USA. The assessee provides specialized courier services and supply chain services to domestic and overseas customers. For Assessment Year 2014-15, the assessee filed the return of income declaring a total income of Rs.5,93,68,070/-. In the course of assessment proceedings, the AO noticed that the assessee had paid a sum of Rs.1,24,82,818/- to its overseas group company World Courier Management Inc, USA. The AO was of the view that the above said payment to the non-resident was in the nature of royalty and therefore was taxable in India. Since the assessee did not deduct tax at source while making the payment to the aforesaid non-resident as required under section 195 of the Act, the AO was of the view that the sum claimed as a deduction should be disallowed and added to the total income of the assessee.
The assessee submitted that there was a Management Information System (MIS) maintenance agreement under which the World Courier Management Inc, USA, which was the proprietor of software that would help the World Courier Group offices located across the globe to track the movements of the courier. The in-house developed software is supported by Information Systems based out of Stamford, Connecticut which is the main computer center for the World Courier Group and supplies a variety of information to the operating, marketing, sales and finance, and administration teams. This also includes Infrastructure Services, which is responsible for the design and availability of IT infrastructure for the World Courier Group. It incurs infrastructure, maintenance, and development costs. The development costs may be specific to projects for an individual group entity or related to the development of common international systems. The costs are charged to group entities on the basis of actual users.
The AO did not agree with the submissions made by the assessee and following the decision of the Hon’ble Karnataka High Court in the case of Samsung Electronics Co. Ltd., 345 ITR 495 (Karn), he held that the payment in question was in the nature of royalty as it is a payment for a right to use the software and he accordingly disallowed the claim of the assessee for deduction of a sum of Rs.1,28,84,818/-. He, however, allowed depreciation on computer software at 60% and disallowed a sum of Rs.84,89,691/-.
The two-member bench of Vice President N.V.Vasudevan and Accountant Member, Chandra Poojari held that a license from a copyright owner, conferring no proprietary interest on the licensee, does not involve parting with any copyright. It said this is different from a license issued under section 30 of the Copyright Act, which grants the licensee an interest in the rights mentioned in sections 14(a) and 14(b) of the Copyright Act. What is ‘licensed’ by the foreign, non-resident supplier to the distributor and resold to the resident end-user, or directly supplied to the resident end-user, is the sale of a physical object which contains an embedded computer program. Therefore, it was a case of the sale of goods. The payments made by end-users and distributors are akin to a payment for the sale of goods and not for a copyright license under the Copyright Act.
“The decision of Hon’ble Karnataka High Court in the case of CIT vs. Samsung Electronics Ltd. 345 ITR 494 on the basis of which the revenue authorities concluded that the payment in question is in the nature of royalty, now stand overruled by the decision of the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P) Ltd. (2021) 125 Taxmann.com 42 (SC). The Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P) Ltd. (2021) 125 Taxmann.com 42 (SC) held that A copyright is an exclusive right that restricts others from doing certain acts. A copyright is an intangible right, in the nature of a privilege, entirely independent of any material substance,” the ITAT clarified.
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