Is payment for computer software royalty?

FOREIGN ENTERPRISES

When an Indian resident imports computer software and makes payment to the foreign supplier for the same, is the consideration received by the foreign entity taxable in India ? What is the nature of such consideration? Can it be treated as royalty? Or the same is simply a sale consideration which is not liable to tax in India?

The aforesaid questions have recently been considered by ITAT, Bangalore in case of Samsung Electronics 276 ITR 1 (AT).The assessee imported software products from USA, France and Sweden.

According to the assessee, the imported software products, namely, Telelogic Tau TTCN Suite, are readily available software in the market. Hence, payment made to the foreign companies cannot be treated as royalty.

It was submitted that internationally, as well as in India, "software", which in legal parlance is known as "computer programme", is covered under the broad category of "literary, artistic or scientific work" which is a copyright.

The copyright laws of different countries also recognize a computer programme to be the subject matter of copyright. Therefore, according to the department the consideration paid by the assessee for import of software product was in the nature of royalty under section 9 (1)(vi) of the Act.

According to the assessee royalty in respect of a subject matter of a copyright includes only the payments for the use, i.e. exploitation of the copyright of such literary/artistic or scientific work.

Therefore, in order to consider an amount to be "royalty", the right of the person in possession of the subject matter of a copy right should be to utilize such copyright in the manner which are otherwise protected by the respective copyright law in favour of the owner of the copyright.

The use of copyright of a copyrighted work is different from use of such work. The acquisition of a product wherein the subject matter of copyright is embedded, without right to exploit the copyright, does not amount to use or right to use the copyright of such literary/artistic/scientific, i.e. copyright work.

The assessee had imported branded off-the shelf software from different suppliers in USA, Sweden and France.

According to the Income-tax Officer the payment made by the assessee company to the foreign companies for purchase of software is to be treated as royalty under section (1)(vi) of the Income-tax Act read with the Double Taxation Avoidance Agreement of relevant countries.

The case of the assessee is that it had purchased copyrighted articles or goods. Right to use any copyright was not transferred in its favour.

The Tribunal observed:
"On a perusal of the agreement between the parties, we are of the view that in the present case also what the assessee had acquired is only a copy of the copyrighted articles, ie software, whereas the copyright remains with the owner, ie, foreign parties. Right to use of a copyright is totally different from right to use the programme embedded in a cassette or CD or it may be a software.

In this case, the assessee had acquired a ready made off-the-shell computer programme for being used in its business. No right was granted to the assessee to utilize the copyright of the computer programme. The assessee had merely purchased a copy of the copy righted article, namely, a computer programme which is called "software".

We are of the view that the finding recorded by the authorities below cannot be sustained. Accordingly, we hold that the remittance made by the appellant for purchase of software is not an income in India".

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