S/s. 9, 195 – Payment for Software Licence under a standalone agreement, and not an integral part of purchase of equipment (embedded software) is consideration for transfer or use of copyright and is taxable as royalty, both under the Act and various DTAAs. Purchase of embedded software amounts to purchase of copyrighted article, not taxable as royalty.
Facts:
The Taxpayer, an Indian telecom company, wanted to establish a wireless telecommunications network in India. It entered into a contract with an Indian company (ICo.) for supply of hardware, software and services for establishing the network. The software supply contract was thereafter assigned by ICo. to its Foreign Group Company (FCo.) under a tripartite agreement between the Taxpayer, FCo. and ICo. FCo. supplied software under this agreement. Various other shrink-wrap/off-the-shelf software were acquired from third parties. All software was meant for use in operation of network equipments.
The Tax Authority considered the payments made to FCo. to be in the nature of royalty and rejected the nil withholding application made by the Taxpayer.
On appeal, the CIT(A) observed that the Taxpayer was forbidden to decompile, reverse engineer, disassemble, decode, modify or sub-license the software, as per the agreements and hence as the Taxpayer only had a “copy of software” without any part of “copyright of the software”, the payments did not amount to royalty.
Aggrieved, the Tax Authority appealed before the Tribunal.
Held:
The Tribunal, based on facts distinguished the decisions in the case of Motorola Inc. [270 ITR (AT) 62 (SB)], Delhi High Court in Erickson [343 ITR 370] and Nokia Networks [25 taxmann.com 225]. The Tribunal noted that in the above decisions there was purchase of software along with hardware and the same was purchase of “copyrighted article” and no “copyright” was involved. Software was an integral part of the supply of equipment for telecommunications, generally called embedded software and there was no separate sale of software.
In the present case, the Taxpayer purchased the software by virtue of a standalone “software license agreement”. The software was neither an integral part of purchase of equipment nor was it embedded software. The delivery was separate, in the form of CDs, mostly abroad and was installed in India separately.
The Tribunal also concluded as follows:
FCo. transferred a license to use its copyright to the Taxpayer where FCo. continued to be the owner of the copyright and all other IPRs. The licence granted for making use of the “copyright” in respect of shrink-wrapped software/off-the-shelf software, authorising the end user to make use of its own network equipment, would also amount to transfer of part of the copyright. Consequently, this would amount to transfer of “right to use the copyright” for internal business.
The Karnataka HC decisions in the cases of Samsung [345 ITR 494 (Kar)] and Synopsis International [212 Taxman 454 (Kar)] dealt with facts similar to the facts in the present case. The Karnataka HC held that the end users of the computer program are granted use of a “copyright” when a license to make copies of the computer program for back-up or archival purposes is given.
In another Karnataka HC decision in the case of Lucent Technologies [348 ITR 196 (Kar)], wherein, on similar facts, it was held that payment for purchase of copy of a computer program that was supplied as a bundled contract, along with hardware on which the computer program was to be installed, was taxable as royalty.
Based on the above, the Tribunal ruled that payment made by the Taxpayer to FCo. and various other suppliers was taxable as royalty.
