Case summary, Income Tax

Payments made for the purchase of the software: Scope of the definition of the term ‘Royalty’ as per India-USA tax treaty.

Sandvik Machining Solution vs. ACIT, Pune

Outcome: In favour of Assessee


  • The Assessee is a company incorporated in Sweden, received payments for the Information Technology support services rendered by it to an Indian entity.
  • The Assessing Officer opined that the payment received was taxable as ‘Royalty’ as per section 9(1)(vi) of the Act, as well as the Article 12(3) of the tax treaty between India and Sweden.

Key Points

  • ‘Royalty’ may also be taxed in the contracting state in which it arises.
  • Royalties’ is a payment of any kind received as a consideration: for the use of, or the right to use, any copyright of literary, artistic or scientific work’ etc. The expression for the use of, or the right to use, any copyright’ has also been used in Article 12 of the tax treaty between India and the USA.
  • The Hon’ble Delhi High Court in the case of Infrasoft held that what was transferred was not copyright or right to use copyright but a limited right to use copyrighted material, which did not give rise to any royalty income.
  • It further observed that to be taxable as royalty income covered by Article 12 of the tax treaty, the income of Assessee should be generated by “use of or right to use of” any copyright and a License granted to licensee permitting him to download computer programme and storing it in the computer for his own use is only incidental to facility extended to the licensee to make use of the copyrighted product for his internal business purpose.
  • Finding that there was no transfer of any right in respect of copyright by Assessee and it was a case of mere transfer of a copyrighted article whilst copyright remained with the owner, the Hon’ble High Court held that the payment was for a copyrighted article and represented purchase price of an article. Hence, the same could not be considered as ‘Royalty’ in the hands of the recipient under the tax treaty.
  • In the present case, it was observed that the Assessee transferred a limited right. There was no transfer of copyright or use of any copyright. As against the requirement of para 3 of the Article 12 for royalty income to be generated by use or right to use of any copyright etc., what in the extant case had happened is that the Assessee simply permitted the Indian Company (SAPL) to use the software for its limited internal business purpose only. No further right was granted to the SAPL to deal with the copyright of the software. As there is no transfer of any right in respect of the copyright by the Assessee to SAPL, going by the definition of the term Royalties’ given in Article 12 (3), the consideration so received could not have been construed as Royalties’ under the tax treaty.
  • It was essential to mention that unlike the insertion of Explanation 4 to section 9(1)(vi) engulfing consideration for use of software in any form within the ambit of Royalty’, there was no corresponding amendment in the tax treaty and hence, the tax treaty, in the absence of the applicability of section 90(2A) to the year under consideration, would not automatically imbibe the changes made in the Act. If the provisions of a tax treaty are more beneficial to the Assessee then those would apply in supersession of the provisions of the Act. It was, therefore, concluded that the sum of Rs 1.48 crores and odd could not be construed as `Royalties’ in the hands of the Assessee as per the mandate of Article 12 of the tax treaty.

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