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Recently, it has been held by Hon’ble Delhi ITAT in case of Halliburton Export Inc. v. Assistant Director of Income-tax (International Taxation), Circle-1(2) [2014] 43 223 (Delhi - Trib.) that where there is a case of Sale of Software (without transfer of actual copyright of the software) the same by relying on the earlier Jurisdictional High Court judgement shall not be taxable under royalty and rather shall be covered in the ambit of Business Profits.

Facts of the case

a) The assessee was a company incorporated in the USA engaged in the business of supplying pre-packaged software and providing maintenance and other support services associated with it. The assessee entered into agreements with various customers in India for rendering the above services.

b) The assessee declared nil income in his return for the relevant assessment year and claimed refund.

c) During the assessment proceedings the Assessing Officer noted that assessee had received a gross amount of Rs. 6.04 Crores for sale and maintenance of software from its Indian customers in relation to the agreements entered into by it.

d) Thus, the Assessing Officer held that the payments so received by the appellant, were taxable as 'royalty', in terms of section 9(1)(vi) as well as Article 12 of the India- US Double Taxation Avoidance Agreement.

e) The Assessing Officer also charged interest under section 234B.

Assessee’s contention for No Taxability

a) That the Assessing Officer, while holding as above, has failed to appreciate that the payments received by the appellant constitute business profits and cannot be brought to tax in India, as per provisions of Article 7 (read with Article 5) of the DTAA, in absence of a permanent establishment in India

Nature of Royalty as per Income tax Act

b) Explanation 2 to section 9(1)(vi) defines "royalty" to include any consideration for transfer of all or any rights in respect of any copyright, literary, artistic or scientific work. The expression 'copyright' is not defined in the Act it must be understood in accordance with the law governing copyright in India, i.e. the Copyright Act, 1957 (hereinafter referred to as the "ICA"). In terms of the ICA, a copyright subsists in literary work, which includes computer programme. It is submitted that only those payments in relation to supply of software, which result in transfer of any rights in relation to a copyright, can be said to be taxable as royalty under the provisions of the Act.

Nature of Royalty as per Article 12 of Indo-US Treaty

c) Article 12 defines royalty to include consideration received for the use of, or the right to use, any copyright or a literary, artistic, or scientific work. A plain reading of the definition shows that when the assessee transfers the rights over a copyright, the same shall be said to be in the nature of royalty.

Nature of Business Profits as per Article 7 (r.w. Article 5) of Indo-US Treaty

d) In case the income of the assessee is not in the nature of royalty, then the same may be taxed under Article 7 as business income if the assessee has a Permanent Establishment (hereinafter referred to as the "PE") in India and the above income is attributable to such PE.

Why Assessee’s Income is not Royalty

e) As submitted above, the requisite condition for any payment in relation to supply of software to be classified a royalty-both in terms of the Act and the DTAA, it is necessary that the right in relation to the 'copyright' and not the 'copyrighted article' must be transferred:

a. Passing on a right to use and facilitating the use of a product for which the assessee has a copyright is not the same thing as transferring or assigning rights in relation to the copyright. The enjoyment of some or all the rights of a copyright is necessary to trigger the royalty.

b. However, non-exclusive and non-transferable license enabling the use of a copyrighted product cannot be construed as an authority to enjoy any or all of them enumerated rights ingrained in a copyright. Rather such a transfer of software license tantamount to sale of 'copyrighted article' as laid down by the Apex Court in the case of Tata Consultancy Services v. State of Andhra Pradesh [2004] 271 ITR 401.

c.  Reliance in this regard may also be placed on the Authority for Advance Ruling decision in the case of Dassault Systems K.K. In re [2010] 322 ITR 125 wherein it has been emphasized that the right to download and store a computer programme for internal business purpose is use of the copyrighted product and payments made in this regard cannot be considered as 'royalties' taxable under the provisions of the Act or under the tax treaty. Accordingly, the Authority held that payments received from sale of licensed software would be characterized as 'business profits', which in the absence of PE shall not be taxable in India.

f) In the present case, the purpose of the license or the transaction is only to establish access to the copyrighted product for internal business purpose. Thus it cannot be said that the copyright itself has been transferred to any extent. It does not make any difference even if the computer programme passed on to the use is a highly specialized one. The parting of intellectual property rights, inherent in and attached to the software product, in favour of the licensee/ customer is mandatory requirement by the Act and the tax treaty to consider it as 'royalty'.

g) Accordingly, merely authorizing or enabling a customer to have the benefit of the instructions/programme contained therein without any further right to deal with them independently does not amount to transfer of rights in relation to copyright or conferment of the right of using the copyright.

h) Principle that the payments from sale of licensed software, being sale of a copyrighted article, cannot be regarded as 'royalty' has been time and again emphasized by various Courts. An illustrative list of such cases is given below:

a. Motorola Inc. v. Dy. CIT [2005] 95 ITD 269 (Delhi) (SB)

b. DDIT v. Alcatel USA International Marketing Inc. (2009-+ITOL-733-ITAT-Mum)

c. Infrasoft Ltd. v. Asstt. DIT [2009] 28 SOT 179 (Delhi)

d. Lucent Technologies International Inc. v. Dy. CIT [2009] 28 SOT 98 (Delhi)

e. Rational Software Corpn. (India) Ltd. v. ITO ITA Nos. 608 to 610/Bang/2008

f. Sonata Information Technology Ltd. v. Addl. CIT [2006] 103 ITD 324 (Bang.)

g. Hewlett-Packard (India) (P.) Ltd. v. ITO [2006] 5 SOT 660 (Bang.)

h. Wipro Ltd. v. Dy. CIT [2006] 5 SOT 805 (Bang.)

i. FactSet Research Systems Inc. [2009] 317 ITR 169/182 Taxman 268 (AAR - New Delhi)

Revenue’s Contention of why the said Income is in the nature of Royalty (3 Main Decisions)

a) Samsung Electronics Ltd. {Karnataka High CourtU2011- TII-43-HC-KAR-INTLl

a. The High Court in para 15 (page 39) has referred to Supreme Court's decision the case of Sun Engg. Works to reiterate the settled position of law that a decision is in authority for what it decides. In para 19 (page 43) the High Court has held that a literary work is entitled to copyright and computer software has been recognized as a copyright work in India. In para 20 (page 44) after referring to the terms of the software licence agreement the High Court has held that what is transferred is only a licence to use the copyright belonging to the supplier and the supplier continues to be the owner of the copyright and all other IPRs. The High Court did not accept the contention of the taxpayer that there is no transfer of copyright or any part thereof.

b. In para 21 and 22 the High Court has considered the issue as to whether the software is to be treated as goods and whether there is sale of the software. The Supreme Court's decision in the case of TCS has also been discussed. The High Court has held that the aforesaid decision of the Supreme Court is not applicable as the question whether the payment made for supply of software was royalty or not was not at all the issue in TCS case. The Court held that the aforesaid decision would not preclude it from holding that the payment received by the supplier would amount to royalty unless it is proved that the payment is for the sale of software.

c. In para 23 (page 45) the High Court had referred to the definition of copyright under the Copyright Act, 1957 wherein it is clearly stated that 'literary work' includes computer programmes etc. In para 24 (page 47) the High Court after referring to section 51 and 52 of the Copyright Act has held that licence is granted for taking copy of software and to store it in the hard disk and to take a backup copy and right to make and copy itself is a part of the copyright. The High Court further held that when licence to make use of the software by making copy of the same and to store it to the hard disk is given then what is transferred is right to use the software, an exclusive right, which the owner of copyright owns and what is transferred is only right to use copy of the software. The High Court thus did not accept the taxpayer's contention that there was no transfer of any part of copyright or copyright under the agreements or licences. The High Court held that right to make a copy of the software and use it for internal business itself amounts to copyright work u/s. 14(1) of the Copyright Act. According to the High Court what is granted under the licence is only right to copy of the software and there is no sale involved in the transactions. The High Court held-that amount paid to the supplier for the supply of shrink wrapped software was not the price of the CD alone or software alone nor the price of licence granted. This is combination of all: In the aforesaid para the High Court has also highlighted the difference between the computer software and copyright in respect of books etc.

d. In para 25 (page 48) the High Court has concluded that payment for supply of software would constitute royalty within the meaning of the D~ and under the I.T. Act as the right that is transferred in such a case is transfer of copyright. The High Court has also held that the payment would constitute royalty for imparting of any information concerning technical; industrial, commercial or scientific knowledge, experience or skill.

b) CIT v. Sunray Computers Ltd: [2012] 348 ITR 196/204 Taxman 1/[2011] 16 268 Karnataka In this case the taxpayer had imported computer software in India. The assessee had also imported hardware separately. It integrated the software and hardware and supplied the same to telecommunication department (para 5, Page 9). The ITAT held that the payment for software was not royalty as the assessee had not acquired rights in the copyright programme and hence the same could not be exploited commercially (para 7, Page 10). The High Court held that since supply of software was an independent transaction the payment for it amounted to royalty (para 10-11, page 12).

c) Citrix Systems Asia Pacific (P.) Ltd., In re [2012] 343 ITR 1/205 Taxman 320/18 172 (AAR - New Delhi)

a. This decision of the AAR also pertains to the payment for supply of shrink wrapped software where the distinction between copyright and copyrighted article, etc. is mentioned. AAR also states that use of a copyright either by a owner or a licensee would not be an infringement of a copyright. The transfer of ownership can be by an assignment of the copyright either wholly or partially. A licence can be granted by the owner of copyright of any interest in the right. The AAR has held that when a licensee acquires a computer programme he also gets the right to use that programme to a limited extent. He also gets the right, absolute or limited to use the copyright.

b. AAR has held that when a software is created by a person who acquires a copyright for it, he becomes the owner of that copyright and he can transfer or licence that right. While selling or licensing the software the owner is also selling or licensing the right to use the copy right embedded therein. It was further held that software is a literary work and copyright of the creator over the software is an important and commercially valuable right and therefore whenever a software is assigned or licensed for use, there is an assignment of the right to use the embedded copyright in the software or a license to use the embedded copyright. The AAR thus held that it is not possible to divorce the software from the IPR of the creator of the software embedded therein.

c. AAR has held that sale or licensing of software for use passes to the grantee a copyright as defined in section 14 of the Copyright Act. In para 22 (page 13) after holding that license is not confined to an exclusive license, the AAR has held that where a software is acquired the licensee or purchaser gets the right to use it without being held guilty of infringement of the copyright. The AAR has held that sale or licensing of the software involves the grant of a right to use the copyright embedded in the software. The Authority thus did not accept the taxpayer's argument that licensing of the software is the mere sale of a copyrighted article and does not involve the grant of a right to use the copyright in the software.

d. In para 23 to 27 (page 14 & 15) and para 43 (page 17) the AAR referred to the decisions in the case Factset System, M/s. Dassault, Geoquest and TCS and has disagreed/distinguished the decisions. The Authority has held that whenever a software is transferred or license for used, it takes within it the copyright embedded in the software and the one cannot be divorced from the other.

e. In paragraph 32 (page 16) the AR has held that the distinction between copyright and copyrighted article is illusory as when a copyrighted article is permitted or licensed the permission involves not only the physical or electronic manifestation of a programme, but also the use of or the right to use the copyright embedded therein. In para 39 (page 17) the AAR has reiterated that the sale or license for use of a copyright software amounts to or amounts also to the grant of a right to use of a copyright.

f. In para 42 & 43 (page 17) the AAR has held that payment for supply of software would be royalty both under the I.T. Act and under the DTAA.

As held by Judiciary

a) “We have heard both the sides, considered the material on record as well as the precedent already relied upon at the time of original hearing and Mumbai Bench Decision in group of cases Reliance Infocom Ltd. (supra) and Jurisdictional High Court decision in the case of Infrasoft Ltd. (supra) cited by the Department and Ld. counsel for the assessee respectively at the time of fresh hearing, we find that since the issue is covered in favour of the assessee as contended by the Ld. A.R. and the same was not disputed by the Ld. D.R., therefore, following the Jurisdictional High Court's decision, we decide the issue in favour of the assessee and allow the appeal of the assessee on this issue and direct to delete the impugned addition made for sale of software and provisions of maintenance / other support services to the customers in India being not taxable.”


Hence it was held by the judiciary in favour of assessee that such income shall not be treated as royalty income but shall be treated as business profits. Since the assessee has no permanent Establishment in India hence the same shall be not liable to any Income tax.

About the Author:

Author is practicing Chartered Accountant in New Delhi and specialising in Indirect Taxes, Corporate Laws and Transfer Pricing. He can be reached at

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CA Ankit Gulgulia
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