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Pr. CIT vs. M Tech India P. Ltd (Delhi High Court)
January, 27th 2016

S. 9(1)(vi): While consideration paid to acquire the right to use software is assessable as "royalty", payments made for purchase of software as a product is not for use or the right to use the software and is not assessable as "royalty"

The Assessee had entered into a “VAR Agreement” with Track Health Pty. Limited, Australia (THPL). The assessee was required to promote, market and sell the Products in accordance with a business plan. The Assessee was entitled to use the software and source codes for a limited purposes to sell and promote the software for use by third parties; demonstrate the software to third parties; and to customise the software for the purposes of End Users. The said agreement further contains a number of covenants to ensure that the Intellectual Property Rights in respect of the software, related material and source codes remains with THPL. A plain reading of the aforesaid agreement indicates that the Assessee has been appointed for the purposes of reselling THPL’s software. The AO held that the said payment was assessable as “royalty” and that the assessee ought to have deducted tax at source. The CIT(A) and ITAT upheld the assessee’s claim that the Assessee was engaged in the resale of software and the payments made by it to THPL and others were on account of purchases made by the Assessee. On appeal by the department HELD dismissing the appeal:

(i) In the cases where an Assessee acquires the right to use a software the payment so made would amount to royalty. However in cases where the payments are made for purchase of software as a product, the consideration paid cannot be considered to be for use or the right to use the software. It is well settled that where software is sold as a product it would amount to sale of goods. In the case of Tata Consultancy Services v. State of Andhra Pradesh (2004) 271 ITR 401 (SC), the Supreme Court examined the transactions relating to the purchase and sale of software recorded on a CD in the context of the Andhra Pradesh General Sales Tax Act. The court held the same to be goods within the meaning of Section 2(b) of the said Act and consequently exigible to sales tax under the said Act. Clearly, the consideration paid for purchase of goods cannot be considered as ‘royalty’. Thus, it is necessary to make a distinction between the cases where consideration is paid to acquire the right to use a patent or a copyright and cases where payment is made to acquire patented or a copyrighted product/ material. In cases where payments are made to acquire products which are patented or copyrighted, the consideration paid would have to be treated as a payment for purchase of the product rather than consideration for use of the patent or copyright.

(ii) A Coordinate Bench of this Court has also expressed a similar view in the case of Director of Income Tax v. Infrasoft Ltd.: (2014) 220 Taxman 273 (Del). In that case, the Revenue sought to tax the receipts on sale of licensing of certain software as royalty. The Tribunal held that there was no transfer of rights in respect of the copyright held by the Assessee in the software and it was a case of mere transfer of copyrighted article. This Court concurred with the Tribunal and held that what was transferred was not copyright or the right to use a copyright but a limited right to use the copyrighted material and that did not give rise to any royalty income.

(iii) Insofar as the reliance placed by the Revenue on the decision of the Karnataka High Court in CIT v. Samsung Electronics Co. Ltd (2012) 345 ITR 494 (Kar) is concerned, a Coordinate Bench of this Court in Director of Income Tax v. Infrasoft Ltd.: (2014) 220 Taxman 273 (Del) has unequivocally expressed its view that it was not in agreement with that decision. Thus, the said decision is of no assistance to the Revenue in this case. In another case, CIT v. Dynamic Vertical Software India P. Ltd (2011) 332 ITR 222 (Del), this Court had reiterated the view that payment made by a reseller for the purchase of software for sale in the Indian market could by no stretch be considered as royalty.

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