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DDIT vs. Reliance Infocom Ltd/ Lucent Technologies (ITAT Mumbai)
September, 10th 2013

Consideration for supply of software which is not embedded in equipment is taxable as “royalty”

The assessee, Reliance Infocomm Ltd, wanting to establish a wireless telecommunications network in India, entered into a contract with Lucent Technologies for supply of software required for the telecom network. The assessee claimed, relying on Tata Consultancy Services 271 ITR 401 (SC), Ericson AB 343 ITR 370 (Del), Nokia Networks OY 25 225 & Motorola 270 ITR (AT) (SB) 62, that the amount paid by it to Lucent for acquiring the software was for purchase of a “copyrighted article” and “goods” and that it was not assessable to tax as “royalty” u/s 9(1)(vi) or Article 12(3) of the India-USA DTAA. The claim was upheld by the CIT(A). On appeal by the department to the Tribunal HELD allowing the appeal:

There is a distinction between a case where the software is supplied along with hardware as part of the equipment and there is no separate sale of the software and a case where the software is sold separately. Where the software is an integral part of the supply of equipment, the consideration for that is not assessable as “royalty”. However, in a case where the software is sold separately, the consideration for it is assessable as “royalty”. On facts, the assessee had acquired the software independent of the equipment. It had received a license to use the copyright in the software belonging to the non-resident. The non-resident supplier continued to be the owner of the copyright and all other intellectual property rights. As there was a transfer of the right to use the copyright, the payment made by Reliance to Lucent was “for the use of or the right to use copyright” and constituted “royalty” under s. 9(1)(vi) and Article 12(3) of the India-USA DTAA (Synopsis International 212 Taxman 454 (Kar), Samsung Electronics 345 ITR 494 (Kar), Lucent Technologies 348 ITR 196 (Kar), Citrix Systems 343 ITR 1 (AAR) & Microsoft/Gracemac Corp 42 SOT 550 (Del) followed).

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