Software payments deemed royalty under tax laws

Citrix Systems Asia Pacific Pty. Limited,

Citrix Systems Asia Pacific Pty. Limited, - [2012] 343 ITR 1 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.