Payment made for the use of Computer Software is not ‘Royalty’ as per Indo-Singapore DTAA: ITAT Kolkata [Read Order]

Computer Software

Recently, in ITC Ltd v. ACIT, the Kolkata bench of the ITAT held that the payment made for the use of computer softer is not “Royalty” as per Indo-Singapore DTAA. The bench further clarified that no TDS under section 195 of the Income Tax Act is payable on the said amount.

The bench also made an opinion that the computer software is included in the definition of literary work and is covered under the purview and scope of copyright.

NPL, a foreign Company and tax resident of Singapore, is a developer and owner of copyright in respect of various software packages. NPL, under an agreement, granted the appellant the right to use a software developed by them upon consideration of Rs. US$ 2,80,8900/-. The Department took a stand that the payment is in the nature of royalty chargeable to tax in India and therefore the appellant herein was under an obligation to deduct tax at source at the time of making payment in terms of section 195 of the Act.

The bench found that the tax liability of the appellants are depends on the terms of Double Taxation Avoidance Agreement between India and Singapore. According to the bench, the above Treaty also defines the term “royalty” and therefore, chargeability of the impugned payment depends on the same. It was further clarified that “if under the treaty the amount paid by the appellant to NPL is not in the nature of royalty then the same, even though it might be in the nature of royalty under the Act, yet would not be chargeable to tax in India by reason of the treaty provisions being more favourable. ”

Deciding the question whether the payment made on use of software is “royalty”, the bench noted that as per s. 12(3) of the relevant DTAA,the term royalty refers to 1) patent, trademark, design or model, plan, secret formula or process. 2) Information concerning industrial, commercial or scientific experience. 3) Industrial, commercial or scientific equipment 4) Literary, artistic or scientific work including cinematograph films.

The appellant contended that mere use in the case of first three categories was royalty and in case of fourth category alone it was necessary that there should be use of copyright right. They pointed ou certain differences in the definition.

The assessment order states that the above differences do not change the position in respect of software once they are classified as process. They are also secret because the source code is not given to the user. The use of secret process implies use of a process which is secret, i.e, not available in public domain. It is not necessary that the secret should be divulged to the user. In the present world of technology, it is possible to allow others to use a process without disclosing the secrecy of the process. For instance software to determine whether a number is prime number or not is a secret process. The user of such software uses the process without knowing how the software works. The AO therefore concluded that the payment for use of software is for use of secret process and therefore the payment in question would be in the nature of royalty.

“The expression computer software was not specifically defined in the Act or the DTAA prior to insertion of Explantion-4 to Sec.9(1)(vi) of the Act. Therefore prior to such insertion, one has to look at the provisions of the Copyright Act, 1957 which defined various forms of intellectual property in India. We have to clarify that Explanation-4 to Sec.9(1)(vi) of the Act was inserted by the Finance Act, 2012 w.r.e.f 1-6-1976 which enlarges the definition of “Royalty” and therefore not beneficial to NPL in so far as it treats mere “right for use” or “right to use” a computer software as distinct from the definition in Article 12(3) of the DTAA which refers to ‘use of’ or the ‘right to use’ ‘any copyright of literary, artistic, scientific work including. In view of Sec.90(2) ofthe Act NPL can opt to be governed by the DTAA which is more favourable rather than Explanation-4 to Sec.9(1)(vi) of the Act which imposes a tax burden on NPL. The question whether Explanation-4 to Sec.9(1)(vi) which was enacted after the DTAA can override the provisions of the DTAA is another question which will be discussed later. Therefore the definition of “Royalty” as given in the DTAA has to be adopted.”

“The next question before us, at this stage, is as to whether the term ‘literary work’ as mentioned in the definition of royalty in the treaty would include ‘software’ or not? As per the provisions of section 2(o) of the Indian Copyright Act, 1957, the term ‘literary work’ includes computer programs, tables and compilations including computer data base. Therefore, the computer software has been recognized as a literary work in India, if they are original intellectual creations.”

Analyzing the relevant provisions of the Copyright Act, the bench found that the computer software is included in the definition of literary work and is covered under the purview and scope of copyright.“The exclusive rights to do or authorize the doing of certain acts as mentioned in clause (a) and clause (b) of section 14 vests in the owner of the work such as to reproduce the work, to issue copies, to make translation or adaptation, to sell or give on commercial rental in respect of a work. The internal use of the work for the purpose it has been purchased does not constitute right to use the copy right in work. A combined reading of clause-3 and clause-8 of the Agreement dated 15.12.2008 between the appellant and NPL, clearly shows that the Appellant had only a right to use the computer software and did not have right to use copyright in the computer software. In other words none of the rights as is envisaged under Sec.14(a) or (b) of the Copyright Act, 1957 was conveyed by the agreement dated 15.12.2008. Therefore the payment in question made by the Assessee to NPL cannot be regarded as “Royalty”. As we have already observed the Act does not specifically include “computer software” in the term “literary work” and under such circumstances, if we apply the provisions of Act to define the scope of “Literary Work”, then perhaps the “computer software” will be out of the scope of the term royalty as defined under the DTAA. However, if we apply the Copyright Act, then the “computer software” will have to be included in the term “literary work” but to constitute “royalty” under the DTAA, the consideration should have been paid for the use of or the right to use the copyright in the “literary work” and not the right to use “literary work” itself.”

The bench further relied upon the decision of the Delhi High Court in DIT Vs. Ericsson AB, New Delhi and held that the consideration received by the Assessee for software was not royalty. Further, the receipts would constitute business receipts in the hands of the NPL. However, the NPL cannot be chargeable to tax in India considering the admitted fact that NPL does not have a permanent establishment.

Read the full text of the order below.