If right transferred is not copyright or the right to use copyright but a limited right to use the copyrighted material, it does not give rise to royalty income

Whether the consideration received by the Assessee on grant of licences for use of software is royalty within the meaning of Article 12(3) of the Double Taxation Avoidance Agreement between India and the United States of America

Whether the consideration received by the Assessee on grant of licences for use of software is royalty within the meaning of Article 12(3) of the Double Taxation Avoidance Agreement between India and the United States of America, was the question that arose for consideration before the Delhi High Court. Assessee, in the instant case, is an international software marketing and development company. The holding company is based in US. The Assessee Company had opened a branch office in India which imported the package in the form of floppy disks/ CDs depending based on the requirements of their customers and was also to undertake installation of software and training to users. In the assesssment order Assessing Officer (AO) taxed the receipts on sale of licensing of software as “royalty”, which arose before the Court as point of adjudication. The following was held by the Court in view of the submissions and records of Assessee and the department: • To qualify as royalty payment, there has to be a transfer of all or any rights (including the granting of any licence) in respect of copyright of a literary, artistic or scientific work. • The consideration amount paid by the Licensee can be treated as royalty, the licensee must establish after making the payment, licensee has obtained all or any of the copyright rights of such literary work. • It was clarified that Copyright is distinct from the material object, copyrighted. Copyright is an intangible incorporeal right in the nature of a privilege, quite independent of any material substance, such as a manuscript. Just because one has the copyrighted article, it does not follow that one has also the copyright in it. It does not amount to transfer of all or any right including licence in respect of copyright. • Copyright or even right to use copyright is distinguishable from sale consideration paid for “copyrighted” article. This sale consideration is for purchase of goods and is not royalty. • Grant of license, in the instant matter, enables licensee to operate the program. Rights transferred are specific to the nature of computer programs. Copying the program on the computer’s hard drive or random access memory (RAM) or making an archival copy is an essential step in utilizing the program. Therefore, rights in relation to these acts of copying, where they do nothing more than to enable the effective operation of the program by the user, should be disregarded in analyzing the character of the transaction for tax purposes. Payments in these types of transactions would be dealt with as business income in accordance with Article 7 of the treaty. • There is a clear distinction between royalty paid on transfer of copyright rights and consideration for transfer of copyrighted articles. Right to use a copyrighted article or product with the owner retaining his copyright, is not the same thing as transferring or assigning rights in relation to the copyright. The enjoyment of some or all the rights which the copyright owner has is necessary to invoke the royalty definition. A non-exclusive and non-transferable licence enabling the use of a copyrighted product cannot be construed as an authority to enjoy any or all of the enumerated rights ingrained in Article 12 of DTAA. • Where the purpose of the licence or the transaction is only to restrict use of the copyrighted product for internal business purpose, no copyright or right to use copyright is transferred to any extent. • Mere authorization or enabling a customer to have the benefit of data or instructions contained therein without any further right to deal with them independently does not, amount to transfer of rights in relation to copyright or conferment of the right of using the copyright. • The transfer of rights in or over copyright or the conferment of the right of use of copyright implies that the transferee/licensee should acquire rights either in entirety or partially co-extensive with the owner/ transferor. • The license granted to the licensee permitting him to download the computer programme and storing it in the computer for his own use is only incidental to the facility extended to the licensee to make use of the copyrighted product for his internal business purpose. Beyond this the licensee has no right to deal with the product unlike owner of the product. • Payment is for a copyrighted article represents the purchase price of an article and not the royalty either under the Income Tax Act or under the DTAA. • Licensees are not allowed to exploit the computer software commercially. They acquire only the copy righted software under licence agreement. • Licensee is prohibited from copying, decompiling, de-assembling, or reverse engineering the software without the written consent of Assessee. The licence agreement between the Assessee Company and its customers provides that all copyrights and intellectual property rights in the software and copies made by the licensee are owned by Assessee and only it has the power to grant licence rights for use of the software and in the event of termination of the agreement for whatever reasons, the licencee is to return the software including supporting information and licence authorization device. Director of Income Tax vs. Infrasoft Ltd. [22.11.2013, Delhi HC]