Whether still royalty

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PURUSOTTAM PANDA (Querist)
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12 November 2024 Sir,

Payments made for software license but hit by Circular No.21/2012, consequently, no tax deducted u/s 194J.

Whether the said amount would still be booked under royalty?

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)
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13 November 2024 No. Buyer doesn’t get use of copyright, payment not royalty: SC

PURUSOTTAM PANDA

PURUSOTTAM PANDA (Querist)
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13 November 2024 Sir,

1. Explanation 2 and 4 to Section 9(1)(vi) specifically brought payments for computer software under Royalty.

2. Honourable Supreme Court ruling in this regard is discussed with specific mention of DTAA (one party is non-resident) and DTAA overrides the Income-tax Act. Also, the ruling stated that the amended provisions of Section 9(1)(vi) wouldn't be applicable with retrospective effect. However, the said ruling hasn't barred it's application from the amendment date.

3. In our case, the transactions are between residents. Thus, DTAA provisions aren't applicable to us. We will be governed by the domestic Tax Act.

This is my POV. Please share your views, Sir.

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)
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14 November 2024 he Supreme Court ruling in Engineering Analysis Centre of Excellence (P.) Ltd. v. CIT clarified that payments for software licenses are not considered royalty if they do not involve the transfer of copyright. Therefore, if the license agreement does not transfer copyright, it may not be considered royalty.
The court stated that regarding the expression "use of or the right to use", the position would be the same under explanation 2(v) of section 9(1)(vi) because there must be, under the license granted or sales made, a transfer of any rights contained in sections 14(a) or 14(b) of the Copyright Act. It said that to this extent there will be no difference in the position between the definition of ‘royalties’ in the DTAs and in Explanation 2(v) of section 9(1)(vi) of the ITA.

As the end-user only gets the right to use computer software under a non-exclusive license, ensuring the owner continues to retain under section 14(b) of the Copyright Act read with sub-section 14(a) (i)-(vii), payments for computer software sold/licensed on a CD/other physical media cannot be classed as a royalty.

Though in general it is been treated as royalty.

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