Purchase of Computer software does not qualify as use of copyright in literary work under the copyright Act – Such payment falls outside the ambit of royalty under the DTAA .
Facts
The Taxpayer is a public limited company incorporated in India. It had purchased different types of software from residents of different countries viz. Australia, Canada, Singapore, Netherlands, Germany, USA, UK, and France etc. (collectively referred to as FCo). The software purchased by the Taxpayer was operational software for the internal use of its business. Taxpayer contended that payment for purchase of software does not constitute royalty. Further as FCo does not have a PE in India such payment is not taxable in India. The A.O. however, argued that the consideration paid by the Taxpayer, falls in the definition of ‘royalty’ and hence taxable in India.
Aggrieved, Taxpayer appealed before the CIT(A). The CIT(A) upheld the contention of AO. Being aggrieved, the Taxpayer filed appeal before the Tribunal.
Held
Definition of royalty under the DTAA is short and restrictive definition, when compared to the definition under the Act. The Act was amended to include computer software within the ambit of “right, property or information” specified in S. 9(1)(vi). However, the right to use computer software program is not specifically mentioned in DTAA 3.
The contention of A.O. that the term literary work used in the DTAA includes software is incorrect for the following reasons.
• “Computer software has neither been included nor is deemed to be included within the scope or definition of “literary work under section 9(1)(vi) of the Act. Infact, computer software and literary work have been recognized as a separate item in s. 9(1) (vi) of the Act.
• It has been well settled that where a term is not defined under DTAA it should be understood as per the definition under the domestic laws applying the DTAA , unless the context requires otherwise. In the present case both “copyright’ and ‘literary work’ are not defined under the Act. However, they are defined under the Copyright Act. Thus the term ‘copyright’ under the DTAA has to be understood as per the Copyright Act in India.
• Computer software has been recognized as a literary work in India under the Copyright Act, if they are original intellectual creations. However, the issue that arises is whether sale of such computer software amounts to use of copyright in a literary work. Once it is incorporated on a media it becomes ‘goods’ and cannot be said to be a copyright in itself.
• To constitute “royalty under DTAA, it is the consideration for transfer of “use of copyright in the work and not the “use of work itself. Hence, one needs to understand the difference between the term “use of copy right in software and “use of software itself.
• In case of purchase of software embedded in a disk, what the buyer purchases is the copyrighted product and he is entitled to fair use of the product. The restriction or the terms mentioned in the agreement are the conditions of sale restricting misuse and cannot be said to be license to use. Moreover, the purchaser pays the price for the product itself and not for the license to use.
• Copyright Act provides certain exclusive rights to the owner of the work. The fair use of the work for the purpose it has been purchased does not constitute right to use the copy right in work or infringement of copyright.
• Sale of a CD ROM/diskette containing software is not a license but it is a sale of a product which is a copyrighted product and the owner of the copyright by way of agreement puts the conditions and restrictions on the use of the product so that his copyrights in such copyrighted article or the work, may not be infringed.
• As per the Copyright Act, even if the owner of the copyrighted work restricts the use or right to use the work by way of certain terms of the license agreement, it cannot be said to be grant of or infringement of copyright.
Thus consideration paid by the Taxpayer falls outside the scope of the definition of ”royalty” as provided in DTAA and would be taxable as business income of the recipient.
