2012 (2) TMI 258 - AAR - Income Tax

Payments for software sales, downloads and subscription updates qualify as 'royalty' under s.9(1)(vi) and Article 12

AAR held that payments by the Indian distributor to the foreign company for software sales, downloads and subscription updates constitute 'royalty' under ... Royalty - copyright - granting of a license - use of, or the right to use - permanent establishment - withholding tax under domestic lawRoyalty - copyright - granting of a license - Payments received from the distributor for sale/making available of the software product are in the nature of royalty under the Income-tax Act. - HELD THAT: - The Authority analysed the definition of royalty in Section 9(1)(vi) (Explanation 2) in conjunction with the Copyright Act. It held that a computer programme is a literary work and that transfer or licensing for use of software necessarily involves transfer or grant of a right to use the copyright embedded in the software. The inclusive phrase 'including the granting of a license' expands the definition to cover licences simpliciter and not only exclusive transfers. The Authority rejected the submission that sale or supply of a copyrighted article by electronic delivery could be divorced from the copyright; relying on the Copyright Act's scheme (including sections defining computer programme, license and exclusive license) it concluded that permitting use of the software confers a right to use the copyright and thus falls within the statutory definition of royalty. Earlier AAR rulings and comparative authority were considered but the determinative conclusion was that the payments are royalty. [Paras 42]Payments for the software product are royalty within the meaning of Section 9(1)(vi) of the Income-tax Act.Royalty - use of, or the right to use - copyright - Payments received are royalty within the meaning of Article 12 of the India-Australia Double Taxation Avoidance Agreement. - HELD THAT: - Applying the treaty definition, Article 12.3 covers consideration for the 'use of, or the right to use' a copyright. The Authority reasoned that there cannot be use of the software without use of the embedded copyright; Article 12's language is broader than the domestic provision and embraces payments for use or right to use the copyright in software. International and domestic authorities treating payments for use-licensed software as royalty were noted and the Authority concluded that the payments fall within Article 12.3. [Paras 43]Payments are royalty within the meaning of Article 12 of the India-Australia DTAA.Royalty - copyright - use of, or the right to use - Payments for the Citrix Subscription Advantage Programme (version updates) are royalties under the Income-tax Act and the India-Australia DTAA. - HELD THAT: - The Subscription Advantage Programme supplies updates and continued rights to use the software already granted to the end-user. On the same reasoning that licensing or sale for use of software conveys the right to use the embedded copyright, the Authority held that subscription receipts for updates likewise constitute payment for the grant of a right to use the copyright and therefore are royalty. Having reached this conclusion, the Authority declined to rule separately on whether the receipts constitute fees for technical services. [Paras 44, 46]Subscription receipts for version updates are royalty under the Income-tax Act and Article 12 of the DTAA.Permanent establishment - use of, or the right to use - royalty - Even if the applicant has no permanent establishment in India, the consideration received for software and subscription updates is taxable in India as royalty under the DTAA. - HELD THAT: - The applicant's asserted absence of a permanent establishment was considered but, given the Authority's conclusion that the receipts are royalties within Article 12, Article 12.2 makes such royalties taxable in India notwithstanding the absence of PE. Therefore the amounts are chargeable to tax in India as royalty. [Paras 47]The consideration for the original software and the Subscription Advantage Programme is taxable in India as royalty, even if no permanent establishment exists.Withholding tax under domestic law - royalty - use of, or the right to use - The distributor is required to withhold tax in India on the payments at the treaty rate applicable to royalties. - HELD THAT: - In consequence of characterising the receipts as royalty under Article 12, the Authority held that the distributor must deduct tax at source under domestic withholding provisions when making payments to the non-resident recipient. Applying the India-Australia DTAA rate for royalties, the Authority directed withholding at 10% of the gross amount of royalty as provided under Article 12.2. [Paras 48]The distributor must withhold tax at 10% of the gross royalty payable to the applicant in accordance with the DTAA and domestic withholding obligations.Final Conclusion: The Authority ruled that the payments received by the applicant from the distributor for supply/licence of the software and for subscription updates constitute 'royalty' under Section 9(1)(vi) of the Income tax Act and under Article 12 of the India-Australia DTAA, are taxable in India as royalty even if no permanent establishment exists, and that the distributor must withhold tax at 10% on the gross royalty payable. Issues Involved:1. Taxability of payments received for software products as 'royalty' under Section 9(1)(vi) of the Income-tax Act, 1961.2. Taxability of payments received for software products as 'royalty' under Article 12 of the India-Australia Tax Treaty.3. Taxability of payments received for the Citrix Subscription Advantage Programme as 'royalty' under Section 9(1)(vi) of the Income-tax Act.4. Classification of payments for the Citrix Subscription Advantage Programme as 'fees for technical services' under Section 9(1)(vii) of the Income-tax Act.5. Taxability of payments for the Citrix Subscription Advantage Programme as 'royalty' under Article 12 of the India-Australia Tax Treaty.6. Taxability of payments in India in the absence of a permanent establishment.7. Withholding tax obligations under Section 195 of the Income-tax Act.Detailed Analysis:1. Taxability of Payments for Software Products as Royalty under Section 9(1)(vi) of the Income-tax Act:The primary issue was whether payments received by the applicant from the distributor for the software product Citrix XenApp constituted 'royalty.' The applicant argued that the payments were for the sale of copyrighted articles and not for the transfer of any copyright. However, the ruling emphasized that the software's use involves the right to use the copyright embedded in the software. The definition of 'royalty' in the Income-tax Act includes consideration for the transfer of all or any rights in respect of any copyright. Therefore, the payments received by the applicant were deemed as royalty under Section 9(1)(vi) of the Act.2. Taxability of Payments for Software Products as Royalty under Article 12 of the India-Australia Tax Treaty:The second issue was whether the payments constituted 'royalty' under Article 12 of the India-Australia Tax Treaty. The ruling noted that Article 12.3 of the DTAA defines royalties as payments for the use of or the right to use any copyright. The payment for the software was considered a payment for the use of the copyright embedded in the software. Thus, the payments were classified as royalty under Article 12 of the DTAA.3. Taxability of Payments for the Citrix Subscription Advantage Programme as Royalty under Section 9(1)(vi) of the Income-tax Act:The third issue addressed whether payments for the Citrix Subscription Advantage Programme were considered 'royalty.' The ruling reiterated that the payments for updates and support services under the Subscription Advantage Programme were for the use of the copyright embedded in the software. Therefore, these payments were also classified as royalty under Section 9(1)(vi) of the Income-tax Act.4. Classification of Payments for the Citrix Subscription Advantage Programme as Fees for Technical Services:The fourth issue was whether the payments for the Subscription Advantage Programme constituted 'fees for technical services.' Given the ruling that these payments were royalty, it was unnecessary to determine if they were also fees for technical services. The ruling declined to address this question.5. Taxability of Payments for the Citrix Subscription Advantage Programme as Royalty under Article 12 of the India-Australia Tax Treaty:The fifth issue was whether payments for the Subscription Advantage Programme were considered 'royalty' under Article 12 of the DTAA. The ruling confirmed that these payments were for the use of the copyright embedded in the programme, thus classifying them as royalty under Article 12 of the DTAA.6. Taxability of Payments in the Absence of a Permanent Establishment:The sixth issue examined whether the payments were taxable in India, given the applicant's claim of not having a permanent establishment in India. The ruling stated that even without a permanent establishment, the payments were taxable as royalty under Article 12.2 of the DTAA.7. Withholding Tax Obligations under Section 195 of the Income-tax Act:The seventh issue was whether the distributor, Ingram, was required to withhold taxes on payments to the applicant. The ruling concluded that Ingram must withhold taxes at a rate of 10% on the gross amount of royalty, as stipulated under Article 12.2 of the DTAA.Conclusion:The ruling comprehensively determined that payments received by the applicant for software products and the Citrix Subscription Advantage Programme are classified as 'royalty' under both the Income-tax Act and the India-Australia DTAA. Consequently, these payments are taxable in India, and the distributor is required to withhold taxes at the prescribed rate.