Amount Received Under Distribution Agreement Of Computer Software Not 'Royalty' If No Right To Transfer Copyright: Delhi High Court
Parina Katyal
10 March 2022 8:54 AM IST
The Delhi High Court has ruled that an amount received under a distribution agreement with respect to a computer software did not amount to 'royalty' under the Income Tax Act, 1961, if the agreement does not create a right to transfer the copyright with respect to it. The Bench, consisting of Justices Manmohan and Sudhir Kumar Jain, had observed that in view of the Supreme Court...
The Delhi High Court has ruled that an amount received under a distribution agreement with respect to a computer software did not amount to 'royalty' under the Income Tax Act, 1961, if the agreement does not create a right to transfer the copyright with respect to it.
The Bench, consisting of Justices Manmohan and Sudhir Kumar Jain, had observed that in view of the Supreme Court ruling in the case of Engineering Analysis Centre of Excellence Private Limited versus the Commissioner of Income Tax (2021), the said issue was no longer res integra.
The ITAT had ruled that the licensing of software products of Microsoft by the assessee Gracemac Corporation in India was not taxable as royalty under Section 9(1)(vi) of the Income Tax Act, 1961 read with the India-US Double Taxation Avoidance Agreement (DTAA). The revenue authorities had filed an appeal under Section 260A of the Act before the High Court against the order of the ITAT.
The counsel for the revenue department before the High Court submitted that the distribution model adopted by Gracemac Corporation involved making multiple copies of the software and involved a transfer of copyright, therefore the consideration received by Gracemac Corporation was taxable as royalty under the Act.
Section 9(1) (vi) of the Income Tax Act, 1961 provides that income from royalty payable by a resident shall be deemed to accrue or arise in India, except where the royalty is payable in respect of any right, property or information for the purposes of a business or profession carried on by such person outside India. Explanation 4 to Section 9 (1) (vi) provides that transfer of rights in respect of any right, property or information includes transfer of rights to use a computer software (including granting of a licence), irrespective of the medium through which such right was transferred.
The High Court observed that the Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited versus the Commissioner of Income Tax (2021) had held that when an amount was paid by a resident to a non-resident software manufacturer or distributor under a distribution agreement for the resale or use of a computer software, the amount so received did not constitute a royalty payment, therefore a TDS was not required to be deducted on the same under Section 195 of the Act. The High Court also placed reliance on its judgment in the case of EYGBS (India) Private Limited versus Joint Commissioner of Income Tax (2021), where in the High Court on similar facts had ruled that when an agreement authorised the end-user to have access to and make use of the licenced software over which the licensee had no exclusive rights, no copyright was created and therefore, the payment received could not be termed as 'royalty' under Income Tax Act.
The High Court ruled that since the issue of law raised in the appeal had been conclusively decided in favour of Gracemac Corporation by the Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd., no substantial question of law arose for consideration in the present appeal.
The High Court therefore dismissed the appeal.
Case Title: Commissioner Of Income Tax (International Taxation)-2 Versus Gracemac Corporation
Citation: 2022 LiveLaw (Del) 184
Counsel For The Revenue: Mr.Sanjay Kumar, Advocate
Counsel For The Assessee: Mr.Nageshwar Rao And Ms.Deepika Agarwal, Advocates
