Revenue earned from sale/distribution copyrighted article is distinct from copyright, hence not chargeable to tax in India as Royalty under Article 12 of India-Ireland DTAA

Facts of the Case:

• The Assessee is a non-resident corporate entity incorporated in Ireland and is engaged in the business of sale of software and hardware and provision of support services to its customers. During the year under assessment, the Assessee had earned revenue from sale of software as well as provision of support services in India.
• The Assessee offered the revenue earned from provision of support services to tax by treating it as fee for technical services under Article 12 of India – Ireland Double Taxation Avoidance Agreements (DTAA/tax treaty). However, the amount received towards supply of software was treated as business income and not offered to tax by taking shelter under Article 7 of India – Ireland tax treaty (i.e., in absence of a permanent establishment in India that income has to be charged in the other country only).
• However, the Assessing Officer (AO) while examining the Assessees’ claim of exemption under Article 12 of the tax treaty in respect of income earned from sale of software was of the opinion that the revenue received is in the nature of royalty and to be taxed in India. Further, the AO relied on the judgement passed by the Hon’ble Karnataka High Court in case of Samsung Electronics Co. Ltd.
• Accordingly, the AO held that the receipts derived from sale of software is royalty only and to be taxed at the rate of 10% on such gross receipts. Thereafter, the Assessee raised objections before learned Dispute Resolution Panel (DRP). However, the DRP relying on the direction in Assessees own case in previous two assessment years upheld the decision of the AO. Aggrieved by the same the Assessee is in appeal before the Hon’ble Tribunal.

Issue before the Hon’ble Tribunal:

• Whether the revenue earned from sale/distribution of software is chargeable to tax in India as royalty under Article 12 of India-Ireland DTAA?

Decision of the Hon’ble Tribunal:

• The Hon’ble ITAT placed reliance on the earlier (i.e., AY 2013-14 and 2014-15) judgements of coordinate bench of ITAT in Assessees’ own case wherein the ITAT had decided the matter in favour of the Assessee only. While holding the matter in favour of the Assessee, the ITAT relied on the judgement of Hon’ble Jurisdictional High Court wherein this issue has been squarely covered in favour of the Assessee.
• The Hon’ble Jurisdictional High Court has (in case of Ericsson A.B and Infrasoft Ltd.) observed that a fair distinction has to be made between the acquisition of a ‘copyright right’ and a ‘copyrighted article’ while analyzing it from perspective of royalty and in the instant case the Assessee has received consideration for the transfer of a copyrighted product and not for the transfer of copyrights in the computer software programme.
• The Hon’ble High Court observed that copyright is an intangible incorporeal right in the nature of a privilege, quite independent of any material substance, such as a manuscript. However, if someone has copyrighted article, it does not follow that one also has the copyright in it. Copyright or even right to use copyright is distinguishable from sale consideration paid for ‘copyrighted article’ since this sale consideration on ‘copyrighted article’ is for purchase of goods and is not in the nature of royalty payments.
• On a simpler note, it can be said that copyright is a tangible incorporeal right in the nature of a privilege, quite independent of any material substance, either entirely or partially equivalent to copyright owner’s right, whereas in copyrighted software/article it is a license of authorization to use the software with restrictions i.e., the said software can’t be rented, sold or sub-licensed to any third party.
• Accordingly, receipts derived by the Assessee from ‘sale of software’ is not in nature of ‘royalty’ as defined under Article 12 of India-Ireland DTAA. Since treaty provisions are more beneficial, an adjudication on nature of receipts vis a vis provisions of Section 9(1)(vi) of the Income Tax Act, 1961 is not required to be discussed.
• Hence, the Hon’ble ITAT following the consistent view in Assessees own case held that amount received by the Assessee from sale of software cannot be treated as royalty under Article 12 of India-Ireland tax treaty. Thereby, additions made by the AO has been deleted and the Assessees appeal has been allowed.

SW Point of View:

Hon’ble ITAT has correctly relied on the judgement issued by the Hon’ble Delhi High Court wherein the Hon’ble Court has provided a clear distinction between the ‘Copyright’ and ‘Copyrighted Article’ by simply noting that merely authorizing or enabling a customer to have the benefit of data or instructions without any further right to use them independently will not tantamount to transfer of right in relation to copyright. It is only when those rights are given to a customer which divest the owner/transferor from the right he possesses into will results into transfer of right or right of use of copyright.

Virendra Vikram, Tax Associate, SW India