Court rules payments for software rights to foreign suppliers as 'royalty' subject to taxationWhether the consideration paid by the Indian customers or end users to the assessee - a foreign supplier, for transfer of the right to use the software/computer programme in respect of the copyrights falls within the mischief of 'royalty' as defined under sub-clause [v] to Explanation 2 to Clause [vi] of section 9[1] of the Act – Held that:- yes, it is within the mischief of 'royalty' as defined under sub-clause [v] to Explanation 2 to Clause [vi] of section 9[1] of the Income Tax Act, 1961. Dec... ... ... Issues:
Interpretation of 'royalty' under the Income Tax Act, 1961 for consideration paid by Indian customers to foreign suppliers for the right to use software/computer programs.

Analysis:
The High Court of Karnataka heard an appeal by the revenue against a Tribunal order favoring the assessee. The court referred to two previous cases, CIT v. Synopsis International Old Ltd. and CIT v. Samsung Electronics Co. Ltd., where the issue of whether consideration paid by Indian customers to foreign suppliers for software use constituted 'royalty' was discussed. In both cases, it was concluded that such payments fell within the definition of 'royalty' under the Income Tax Act, 1961.

The court reiterated that the consideration paid by Indian customers to foreign suppliers for the right to use software/computer programs, involving copyrights, constituted 'royalty' as per the relevant provisions of the Income Tax Act, 1961. Citing the precedents set by the earlier cases, the court held that the substantial questions of law in the present case were also decided in favor of the revenue and against the assessee.

In conclusion, the court allowed the appeal by the revenue, emphasizing the consistent interpretation of 'royalty' in cases involving payments made by Indian customers to foreign suppliers for the transfer of software/computer program rights. The judgment reaffirmed the position that such payments are subject to taxation as 'royalty' under the Income Tax Act, 1961. Whether the consideration paid by the Indian customers or end users to the assessee - a foreign supplier, for transfer of the right to use the software/computer programme in respect of the copyrights falls within the mischief of 'royalty' as defined under sub-clause [v] to Explanation 2 to Clause [vi] of section 9[1] of the Act – Held that:- yes, it is within the mischief of 'royalty' as defined under sub-clause [v] to Explanation 2 to Clause [vi] of section 9[1] of the Income Tax Act, 1961. Decided in favour of the revenue and against the assessee. Appeal is allowed. Commissioner of Income-tax, International Taxation Versus Sonata Information Technology Ltd.
Income Tax
2012 (6) TMI 203 - KARNATAKA HIGH COURT - TMI
KARNATAKA HIGH COURT - HC
Dated:- 15-3-2012
IT Appeal No. 1054 of 2006 - -
Income Tax
N. Kumar and Ravi Malimath, JJ. K.V. Aravind and M.V. Seshachala for the Appellant. Smt. Vani H. for the Respondent. JUDGMENT N. Kumar, J. - The revenue has preferred this appeal against the order passed by the Tribunal, which has granted relief to the assessee. 2. In fact, the substantial question of law which arises for consideration in this appeal arose for consideration before this court in two appeals, firstly, in the case of CIT v. Synopsis International Old Ltd. [ITA Nos. 11 to 15/2008 decided on 3.8.2010] where the substantial question of law was as under: "Whether the consideration paid by the Indian customers or end users to the assessee - a foreign supplier, for transfer of the right to use the software/computer programme in respect of the copyrights falls within the mischief of 'royalty' as defined under sub-clause [v] to Explanation 2 to Clause [vi] of section 9[1] of the Act." 3. Again in the case of CIT v. Samsung Electronics Co. Ltd. [2011] 203 Taxman 477/16 taxmann.com 141 (Kar.) the substantial question of law framed was as under: "The question which the High Court will answer is whether on facts and circumstances of the case, the ITAT was justified in holding that the amounts paid by the appellants to the foreign software suppliers was not 'royalty' and that the same did not give rise to any 'income' taxable in India and, therefore, the appellant[s] was not liable to deduct any tax at source?" 4. In both the cases, it was held that the consideration paid by the Indian customers or end users to the assessee - a foreign supplier, for transfer of the right to use the software/computer programme in respect of the copyrights falls within the mischief of 'royalty' as defined under sub-clause [v] to Explanation 2 to Clause [vi] of section 9[1] of the Income Tax Act, 1961. 5. In view of the aforesaid law declared by this court, the substantial questions of law framed in this case are also answered in favour of the revenue and against the assessee. 6. Appeal is allowed.
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