T. C. A. Ramanujam on a Tribunal ruling about the acquisition of copyrighted software
T. C. A. Ramanujam
If a copyright is transferred as such, it can be commercially exploited and may fall in the category of `royalty'. Royalty payment will attract a withholding tax of 10-20 per cent. This tax element is normally taken into account in working out the cost of the final price of the product. If the agreements between the Indian buyer and the foreign supplier are intelligently worded, there can be an escape from the withholding tax.
Several Benches of the Tribunal in Bangalore and Delhi have examined this issue in depth. A leading company developed software meant for telecommunications systems, office and computer appliances, mobile devices, and so on. Software is often branded and supplied to Indian companies as off-the-shelf software packages from several countries in the West. What about the payments made by the Indian companies to their foreign counterparts for purchase of software? The matter involved the interpretation of the term `royalty' under Section 9(1)(Vi) of the I-T Act, 1961 read with Article 12(2) of our Double Taxation Avoidance Agreement (DTAA) with the US and Sweden.
The definition under the Act is much wider than that given under the treaty provisions. It was contended by the company that no withholding tax was attracted on the payments to the foreign supplier because software imported by the company was a shrink-wrap product and not customised. The consideration paid by the Indian company will not amount to royalty. It is widely recognised that software, otherwise known as `computer program', falls under the broad category of literary, artistic or scientific work which is copyrightable.
A computer program can be the subject matter of copyright. But the company argued that only exploitation of the copyright can amount to royalty and the right of the person in possession of the computer program should be to utilise such copyright. If the subject matter of copyright is embedded without right to exploit the copyright, it does not entail use or right to use the copyright.
The Tribunal observed that the definition of royalty in Section 9(1)(vi) is wider than the one given in the double taxation treaties. In this situation, as per Section 90(2), the provisions of the DTAA will have to be followed being more favourable to the taxpayer.
The Tribunal pointed out that the Indian company had purchased copyrighted articles or goods without any right to use any copyright, a position accepted by the Revenue. The company had acquired the right to use such article through the licence. It also referred to the Supreme Court ruling in the Tata Consultancy Services vs. State of AP (271 ITR 401) case, wherein it was held that software was `goods' under Article 366(12) of the Constitution.
After examining the licence agreements, the Tribunal came to the conclusion that the right to use a copyright was totally different from the right to use the program embedded in a cassette/CD. What the assessee had acquired was only a copy of the copyrighted articles, that is, software, whereas the copyright remained with the owner, that is, the foreign parties. No right was granted to the assessee to utilise the copyright of the computer program. The assessee had merely purchased a copy of the copyrighted article, namely, a computer program which was called "software". Therefore, the remittance made by the Indian company for purchase of software was not an income in India, hence, no tax was to be deducted in India under Section 195 of the Act.
This reasoning was followed in, among others, the Samsung Electronics, Motorola, Ericsson and Nokia cases, where DTAAs with the US, France and Sweden became the subject matter of detailed interpretation.
The ruling can have far-reaching effect, and the prices of software products can come down substantially. That, of course, presupposes that the Revenue will not challenge these orders of the Tribunal before the High Courts concerned. If the Revenue accepts these orders, it can be a bonanza for software service providers.
(The author is a former Chief Commissioner of Income-Tax.)