Payment for Software Supply Not Royalty: Tribunal Dismisses Revenue's Appeal

The Tribunal held that the payment received for the supply of software did not qualify as 'royalty' under Article 12(3) of the DTAA and section 9(1)(vi) of the Income-tax Act. The Revenue's appeal was dismissed, and the assessee's cross-objection was deemed academic.

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Issues Involved:
1. Whether the amount received by the assessee for the supply of software is in the nature of 'royalty' liable for taxation in India.
2. Whether the payment for obtaining computer software is considered 'royalty' within the meaning of Article 12(3) of the DTAA.

Summary:

Issue 1: Nature of Payment for Software Supply
The Revenue contended that the amount of Rs. 15,75,78,477 received by the assessee for the supply of software should be treated as 'royalty' and thus taxable in India. The Assessing Officer (AO) argued that the payment made for the software license falls under the definition of 'royalty' as per Article 12 of the DTAA and section 9(1)(vi) of the Income-tax Act. The AO emphasized that the assessee had only granted a license to use the software without transferring any intellectual property rights to Reliance Infocomm Ltd. (Reliance).

The CIT(A) examined the agreement and concluded that Reliance was only granted a perpetual, irrevocable, non-exclusive, royalty-free, worldwide license to use the software, without any transfer of copyright. The CIT(A) held that the payment made by Reliance was for the purchase of a copyrighted article and not for the use of or right to use a copyright, thus not amounting to 'royalty' under Article 12(3) of the DTAA.

Issue 2: Definition of 'Royalty' under DTAA
The CIT(A) referred to various case laws and the provisions of the Copyright Act to determine that the software supplied did not involve the transfer of any copyright. The CIT(A) cited the Supreme Court's decision in Tata Consultancy Services v. State of Andhra Pradesh [2004] 271 ITR 401, which held that software, once placed on a media, becomes goods. The CIT(A) also referred to the ITAT Bangalore Bench's decision in Lucent Technologies Hindustan Ltd. v. ITO [2005] 92 ITD 366, which held that payment for software integrated with hardware did not constitute 'royalty'.

The CIT(A) further analyzed the definition of 'royalty' under Article 12(3) of the DTAA and section 14 of the Copyright Act, concluding that the payment for the software did not involve the transfer of any copyright. The CIT(A) relied on several ITAT decisions, including Samsung Electronics Co. Ltd. v. ITO 93 TTJ 658 and Motorola Inc. [2005] 270 ITR(AT) 62, which distinguished between the sale of copyrighted articles and the transfer of copyrights.

The Tribunal upheld the CIT(A)'s findings, agreeing that the supply of software to Reliance did not amount to a transfer of copyright and the payment was for the purchase of a copyrighted article, not 'royalty'. Consequently, the Revenue's appeal was dismissed, and the assessee's cross-objection became academic.

Conclusion:
The Tribunal concluded that the payment received by the assessee for the supply of software did not constitute 'royalty' under Article 12(3) of the DTAA and section 9(1)(vi) of the Income-tax Act. The appeal by the Revenue was dismissed, and the cross-objection by the assessee was also dismissed as academic.

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