Payments made for purchase of software: Scope of definition of the term ‘Royalty’ as per India-USA tax treaty
- The Assessee was engaged in the activities of hardware sale, software licensing, professional services, implementation services and maintenance services. Out of the revenues received, the Assessee had offered to tax only receipts on account of professional services in the tax return filed by it to be taxed at the rate of 15% in terms of Article 12 of the tax treaty between India and USA. All the receipts were not offered to tax by the Assessee.
- Considering the past history of the Assessee and taking a leaf out of the past assessment orders, the Assessing Officer treated the Revenue earned from supply of software as ‘royalty’.
- Reliance was placed on the decision of the Delhi High Court in Assessee’s own case, wherein it was concluded that there was no transfer of any right in respect of copyright by the Assessee and it was a case of mere transfer of a copyrighted article. The payment was for a copyrighted article and represented the purchase price of an article. Hence, the payment for the same was not in the nature of royalty under Article 12 of the tax treaty. The receipts constituted business receipts in the hands of the Assessee and was to be assessed as business income subject to Assessee having business connection/ permanent establishment in India.
- With there being no change in the factual matrix in assessment year under consideration as compared to earlier years, which had also been accepted by the income tax authorities, it was inferred that receipts would constitute business receipts and is to be assessed as such, subject to the Assessee having business connection/ permanent establishment in India.