2024 (3) TMI 1063 - AT - Income Tax

Software license payments don't constitute royalty under DTAA when no copyright ownership transfers to user

The ITAT Bangalore held that payments for computer software under a non-exclusive, non-transferable license do not constitute royalty under the DTAA. The ... TDS u/s 195 - liability u/s 201 and 201(1A) - non deduction of TDS payment in the nature of FTS to the NDS Ltd. UK - royalty receipts or not? - CIT(A) quashing the order of the AO relying on case of Engineering Analysis Centre of Excellence Pvt. Ltd. [2021 (3) TMI 138 - SUPREME COURT] HELD THAT:- We are of the opinion that similar issue came for consideration in assessee’s own case [2023 (12) TMI 1300 - ITAT BANGALORE] held that a copyright is an exclusive right that restricts others from doing certain acts. Computer programs are categorised as literary work under the Copyright Act. Section 14 of the Copyright Act states that a copyright is an exclusive right to do or authorise the doing of certain acts in respect of a work, including literary work. Term ‘copyright’ has to be understood in the context of the Copyright Act. The court said that by virtue of Article 12(3) of the DTAA, royalties are payments of any kind received as a consideration for 'the use of, or the right to use, any copyright 'of a literary work includes a computer program or software. As held that the regarding the expression 'use of or the right to use', the position would be the same under explanation 2(v) of section 9(1)(vi) because there must be, under the licence granted or sales made, a transfer of any rights contained in sections 14(a) or 14(b) of the Copyright Act. Since the end-user only gets the right to use computer software under a non-exclusive licence, ensuring the owner continues to retain ownership under section 14(b) of the Copyright Act read with sub-section 14(a) (i)-(vii), payments for computer software sold/licenced on a CD/other physical media cannot be classed as a royalty. The terms of the licence in the present case does not grant any proprietory interest on the licencee and there is no parting of any copy right in favour of the licencee. It is non-exclusive non-tranferrable licence merely enabling the use of the copy righted product and does not create any interest in copy right and therefore the payment for such licence would not be in the nature of royalty as defined in DTAA. We therefore hold that the sum in question cannot be brought to tax as royalty - Decided against revenue. Issues Involved:1. Whether the payments made by the assessee to NDS Ltd. UK were in the nature of Fees for Technical Services (FTS) and subject to tax deduction under section 195 of the Income Tax Act.2. Whether the CIT(A) was correct in quashing the order of the AO based on the ITAT order and the Supreme Court judgment in the case of Engineering Analysis Centre of Excellence Pvt. Ltd.3. Whether the provisions of the DTAA between India-UK regarding royalty should be interpreted in harmony with Section 9 of the Income Tax Act, 1961.4. Whether the CIT(A) was right in ignoring the AO's observation regarding the technical know-how and expertise made available to the distributor under the Distributorship Agreement.Summary:Issue 1: Fees for Technical Services (FTS)The assessee, a subsidiary of NDS Ltd. UK, made payments to NDS Ltd. UK for services related to installation, configuration, maintenance, etc., and did not deduct taxes, arguing that no technical knowledge or process was made available to it. The AO held that the services were highly technical and classified the payments as FTS under the Act and DTAA. Consequently, the AO held the assessee in default for non-compliance with section 195 and calculated the tax liability and interest.Issue 2: CIT(A)'s Decision and Supreme Court JudgmentThe CIT(A) allowed the assessee's appeal, relying on the ITAT's earlier order and the Supreme Court's judgment in Engineering Analysis Centre of Excellence Pvt. Ltd., which held that payments for software licenses do not constitute royalty. The revenue contested this, arguing that the Department had filed a review petition against the Supreme Court's decision.Issue 3: Interpretation of DTAA and Section 9The revenue argued that the provisions of the DTAA between India-UK regarding royalty should be interpreted in harmony with Section 9 of the Income Tax Act. The CIT(A) disregarded this argument, relying on the Supreme Court's interpretation that the DTAA provisions take precedence if they are more beneficial to the taxpayer.Issue 4: Technical Know-How and ExpertiseThe AO noted that the Distributorship Agreement initially included a clause for making technical know-how available to the distributor, which was later deleted. The AO suspected this amendment was to circumvent the 'make available' clause of the DTAA. The CIT(A) ignored this observation, focusing on the Supreme Court's ruling that the payments were not for the use of copyright but for the sale of goods.Conclusion:The ITAT, following its previous decisions and the Supreme Court's judgment, ruled in favor of the assessee, holding that the payments made to NDS Ltd. UK were not in the nature of FTS and thus not subject to tax deduction under section 195. All four appeals filed by the revenue were dismissed.