Software licence payments as royalty: treaty taxability upheld, no permanent establishment found, withholding and return filing followed.
Consideration for software installation, licence and maintenance was treated as royalty because the licence permitted use and limited exploitation of the programme in a manner involving copyright rights, so the receipts were taxable in India under the Income-tax Act and the India-Sri Lanka DTAA. The service permanent establishment test was not satisfied on the facts, so no permanent establishment arose in India. Because the receipts were taxable as royalty, withholding tax obligations applied and the applicant was required to file a return of income.
Issues: (i) Whether consideration for installation, licence and maintenance of software amounted to royalty and was taxable in India under the Income-tax Act and the India-Sri Lanka DTAA. (ii) Whether the applicant had a permanent establishment in India under Article 5 of the DTAA. (iii) Whether, once the receipts were taxable in India, tax was required to be withheld and the applicant was required to file a return of income.
Issue (i): Whether consideration for installation, licence and maintenance of software amounted to royalty and was taxable in India under the Income-tax Act and the India-Sri Lanka DTAA.
Analysis: The right granted under the agreement was not a mere sale of a copyrighted article. The software licence permitted use of the programme, copying it for business use, and exploitation of the copyright in a limited form. Computer programmes are literary works under the Copyright Act, and the rights protected by copyright include the right to reproduce and authorise use. A licence to use software, where use without permission would amount to copyright infringement, is treated as consideration for use of or right to use copyright. The definition of royalty under the Act and the wider treaty language covered such payment.
Conclusion: The software-related fees were taxable as royalty in India and the finding was in favour of Revenue.
Issue (ii): Whether the applicant had a permanent establishment in India under Article 5 of the DTAA.
Analysis: The service permanent establishment test under the treaty required the relevant threshold period of physical presence. On the facts, even on the Revenue's computation, the period of activity did not satisfy the applicable threshold under the treaty as applied by the Authority. The maintenance and implementation activities therefore did not create a permanent establishment in India.
Conclusion: The applicant did not have a permanent establishment in India, and this finding was in favour of the applicant.
Issue (iii): Whether, once the receipts were taxable in India, tax was required to be withheld and the applicant was required to file a return of income.
Analysis: Since the consideration was held taxable as royalty in India, the payer's withholding obligation arose under the Act. Consequentially, the applicant remained liable to tax in India and was required to comply with the return-filing provisions.
Conclusion: Withholding tax under section 195 applied and the applicant was required to file a return of income; this was in favour of Revenue.
Final Conclusion: The Authority held the software licence and maintenance receipts to be royalty taxable in India, while rejecting the contention that the applicant had a permanent establishment in India; the tax withholding and return-filing consequences followed from the taxability finding.
Ratio Decidendi: Where a software licence permits copying or use of the programme in a manner that would otherwise infringe copyright, the consideration is royalty for use of copyright and not merely payment for a copyrighted article.