In Re Millennium IT Software Ltd (AAR)

License fee for Software, even if “copyrighted article”, taxable as “royalty”

The applicant was the developer of software. It granted a non-exclusive and non-transferable license to an Indian company to use the software without any sub-licensing rights. The licensee was not allowed to modify the software programme and could make copies only for its own use. The applicant filed an application for advance ruling in which it claimed, relying on Dassault Systems 322 ITR 125 (AAR) and Tata Consultancy Services 271 ITR 401 (SC), that the transaction involved the use/ right to use of a “copyrighted article” but not the “copyright” itself and so the license fees were not assessable to tax as “royalty” u/s 9(1)(vi) of the Act & Article 12 of the India-Sri Lanka DTAA. HELD rejecting the applicant’s plea:

S. 9(1)(vi) & Article 12 define the term “royalty” to include any payment for the use of, or the right to use, a “copyright” of scientific work. Software programmes are a “copyright” and are protected under the Copyright Act, 1957. As the software programme is a “copyright”, any payment received for transferring the right to use it is “royalty” as defined in the Act. The argument that there is a distinction between a “copyright” and a “copyrighted article” is not acceptable because there is no such distinction made either in the Income-tax Act or the Copyright Act. The use of software involves the use of the copyright; the software cannot be divorced from the copyright itself. Accordingly, even a fee for the use of a “copyrighted article” is assessable as “royalty”. (Microsoft/Gracemac 42 SOT 550 (Del) followed; Dassault Systems 322 ITR 125 (AAR) not followed; Tata Consultancy 271 ITR 401 (SC) distinguished)