Distribution of Software Licenses not constituted as Royalty

Facts of the case:

• The assessee is a Singapore based company, which has not filed its Income Tax Return for the AY 2010- 11. However, the assessee company has earned income from sale of Software Licenses and income from Support, Maintenance and Training services during the year under consideration.
• The Assessing officer “AO” has initiated re-assessment proceedings u/s 148 of the Income Tax Act,1961.

Contention of Department:

• The AO has opined that the payment received by the assessee for supply of software and rendition of software related services constitutes Royalty under the Act as well as DTAA between India and Singapore. The AO then considered the receipts of the assessee in its total income and computed the total income at Rs. 48,01,58,318/-.
• The order of the AO has been upheld by the Dispute Resolution Panel, when the AO raised objections before Dispute Resolution Panel on the basis of decision of CIT Vs. Samsung Electronics Co. Ltd. (2010) 320 ITR 209

Contention of Assessee:

• The Assessee was not the owner of the software licenses rather it was only permitted to distribute such software. Furthermore, the assessee had not been given any exclusive right in relation to the software licenses and the core of the transaction was to authorize the end-user to have access to and make use of the “licensed” computer software product.

Decision of the Court:

• The court held that the amount cannot be brought under the ambit of royalties under Article 12 of the DTAA. Furthermore, the amount cannot take the character of Royalty under the Act as the explanation 4 to section 9(1)(vi) inserted by the Finance Act 2012, which basically constitute the amount as Royalty under the Act is irrelevant to the fact of the case as the year under consideration is AY 2010-11.
• Once it is held that the amount is not taxable as royalty, it will be in the nature of business profit under the DTAA and the business profits could not be taxable in India in the absence of Permanent Establishment.

Explanation 4 – It is hereby clarified that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a license) irrespective of the medium through which such right is transferred for the purpose of constituting it as royalty.

Case Law: BMC Software Asia Pacific Pte Ltd., v. ACIT (International Tax), Circle-1, Pune, ITA No. 2048/PUN/2019

-Aayush Singh, Associate, SW India