In a recent decision, the Mumbai bench of the ITAT held that the payment made by the assessee-company for use of software owned by USA Company is not “royalty” and therefore, the provisions relating to TDS under the Income Tax Act cannot be applied in such cases.
Coming to the facts of the case, he assessee-company,primarily engaged in providing employment background screening services to its clients, has entered into an agreement with a US Company for use of the CSPi software.As per this agreement, if the appellant is required by law to make any withholding or deduction in respect of income tax as per the provisions of the Act from the consideration payable to FADV US, the appellant shall pay to FADV US such consideration in full, free and clear of any deduction and set-offs without deduction or withholding for or on any income tax as per the Act. The liability on account of withholding tax, if any, will be borne by the appellant.that consideration payable towards use of CSPi Software is not taxable in the hands of FADV US under the Act as well as not under the India-USA DTAA. Hence, the payment is not subject to deduction of tax at source. the AO, however, rejected the contention and completed assessment accordingly.
On first appeal, the CIT(A) held that the payment made by the assessee for use of software owned by USA company is not “royalty” subject to deduction of tax at source.
The assessee contended that they have obtained only license to use the software exclusively for its internal business operations. Further, the ownership, title and interest in the IPR of the software vested with the US company and the assessee has no right in respect of the same except the license to use the software as expressly granted under the agreement and therefore, the payment made by the assessee to a copyrighted article, which is akin to “off the shelf”software is not royalty.
The bench noted that as per article 12(4) of the relevant DTAA, the term “royalty” refers to payments of any kind received as a consideration for the use of, or the right to use any ‘copyright’ of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience.The bench also analyzed the provisions of s. 14 of the Copyright Act, 1957 which the definition of ‘copyright’ in section 14 is an exhaustive definition and it refers to bundle of rights.
“In respect of computer programming, which is relevant for the issue under consideration before us, the copyright mainly consists of rights as given in clause (b), that is, to do any of the act specified in clause (a) from (i) to (vii) as reproduced above. Thus, to fall within the realm and ambit of right to use copyright in the computer software programme, the aforesaid rights must be given and if the said rights are not given then, there is no copyright in the computer programme or software. As noted by the CIT(A), under the terms of the agreement between the assessee and INFOR India, the agreement specifically forbids them from decompiling, reverse engineering or disassembling the software. The agreement also provides that the end user shall use the software only for the operation and shall not sub license or modify the software. None of the conditions mentioned in section 14 of the Copyright Act are applicable. If the conclusion of Ld, CIT(A) are based on these facts and agreement, then he has rightly concluded that the consideration received by the assessee is for pure sale of “shrink wrapped software” off the shelf and hence, cannot be considered as a “royalty” within the meaning of Article 12(4) of the DTAA, as the same is consideration for sale of copyrighted product and not to use of any copyright.
Read the full text of the order below.
