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Part C : Tribunal & AAR International Tax Decisions
2 GeoQuest Systems B.V., In re
AAR No. 774 of 2008 (AAR)
Article 7, 12 of India-Netherlands DTAA;
S. 9(1)(vi) (vii) of Income-tax Act
Dated : 6-8-2010
A Netherlands resident company received payments for grant of
licence for off-the-shelf software to an Indian customer. No right in the
copyright was transferred. The AAR held that payments were not royalty or FTS
under DTAA and since the company did not have PE in India, payments were not
taxable in India.
Facts :
The applicant was a company incorporated in the Netherlands
(‘DutchCo’). It was engaged in the business of supplying special-purpose
computer software for use in exploration and production of mineral oils. The
software was not prepared to suit the special requirements of any particular
customer and hence DutchCo described it as off-the-shelf. Under an agreement
DutchCo granted an exclusive non-transferable licence for the software to an
Indian company. DutchCo was to retain all IPRs in the software as well as in
modifications and updates. DutchCo was to supply the software package to the
customer outside India and the customer was to pay the consideration also
outside India. On termination of the agreement the customer was to discontinue
the use of the software and return the same. The agreement also contained
certain other restrictions on use of the software by the customer.
The issue before the AAR was, whether the income from supply
of the software would be taxable as royalty under the Income-tax Act or DTAA ?
Drawing distinction between transfer of copyright in a
product and transfer of a copyrighted product, DutchCo contended before the AAR
that the transfer was of a copyrighted product and hence, the consideration
should not be taxed as royalty.
The tax authority initially contended that the payment was
royalty but later on contended that as per the AAR ruling in Airports Authority
of India, In re (323 ITR 211) (AAR), it was FTS.
Held :
The AAR observed that the core question was whether the
payment conferred any rights in the copyright or right to use the copyright. The
AAR relied on its earlier rulings in Factset Research Systems Inc., In re (317
ITR 169) (AAR) and Dassault Systems K K, In re (322 ITR 125) (AAR) wherein it
was held that what was transferred to the end-user was copyrighted software but
not copyright therein and mere transfer of computer software de-hors any
copyright does not amount to royalty.
The AAR distinguished its earlier ruling in Airports
Authority of India, In re (323 ITR 211) (AAR) and observed that in that case,
apart from the licence of the software, the contract also envisaged imparting of
technical knowledge and hence, that ruling was not applicable to this case.
The AAR relied on the OECD commentary and held that Article
12.4 of DTAA contemplates conferring of right of use of copyright. As transfer
of such right was not evident from the agreement, the payments were not in the
nature of royalty or FTS under DTAA. As DutchCo did not have a PE in India, the
payments were not taxable in India.
