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

Citrix Systems Asia Pacific Pty. Limited,

AAR held that payments by the Indian distributor to the foreign company for software sales, downloads and subscription updates constitute 'royalty' under ... Nature of payments received for software products as 'royalty' u/s 9(1)(vi) Or royalty within the meaning of Article 12 of the DTAA - DTAA with Australia - Australian company entered into distribution agreement with Indian Company(IMI Ltd) for the distribution and sale of its software and hardware products in India - Sale and collection of software product is made through the distributor - no physical delivery of the product is made to the distributor - taxability of the payments made by distributor for the software product, and for the right to download/receive version updates for the software products of the applicant - applicant submitted that payment received are for sale of copyrighted article. Held that:- In the Income-tax Act, royalty is defined as consideration for the transfer of all or any rights (including the grant of license) in respect of any Copyright. Article 12 of the India-Australia DTAC defines royalties to mean payment made as consideration for the use of or the right to use any copyright, patent, design or model, plan, secret formula or process, trademark or other like property or right. The definition in article is seen to be wider than the one contained in the Income-tax Act. Therefore, payments concerned would be royalty as defined in Article 12 of the DTAA between India and Australia and u/s 9(1)(vi) of the Income-tax Act. Payment received by way of Subscription for the updates would also be royalty and not 'FTS' under DTAC & Income Tax Act. Applicant contention about non-existence of PE in India – Held that:- Since payment received is royalty, the amount is liable to be taxed in India under Article 12.2 of the DTAC. Further, distributor IMI Ltd is required to withhold taxes in India in terms of Section 195 of the Income-tax Act at the rate of 10% of the gross amount of royalty, as provided under Article 12.2 of the DTAC. 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.