Velankani Mauritius vs. DDIT (ITAT Bangalore)

Profits from supply of ‘shrink-wrapped’ software is not ‘royalty’

The assessee, a Mauritius company, was engaged in supply of software. It supplied “off-the-shelf” “shrink-wrapped” software to Infosys Technologies and took the view that the profits there from was not taxable in India as it did not have a Permanent Establishment in India. The AO assessed the profits as royalty u/s 9(1)(vi) of the Act and this was confirmed by the CIT (A). On appeal by the assessee, HELD allowing the appeal:

(i) In CIT vs. Samsung Electronics 227 CTR 335 the Karnataka High Court has confined its decision to the issue of responsibility of the assessee u/s 195 in deducting tax at source before making remittances to non-residents. Even though the court held in favour of the Revenue on the application of the TDS provisions, the court made it clear in paragraph 78 that it has not examined the question of tax liability of the non-resident assessees in respect of the payments received from assesses in India.

(ii) On the question whether income from supply of software can be assessed as royalty, in Motorola Inc vs. DCIT 95 ITD 269, the Delhi Special Bench held that the crux of the issue was whether the payment was for a copyright or for a copyrighted article. If it was for a copyright, it had to be classified as ‘Royalty’ under the Act and the DTAA. If it was for a copyrighted article, then it only represented the purchase price of an article and could not be considered as Royalty either under the Act or under the DTAA. This principle was upheld by the AAR in Airports Authority of India and the ITAT in Sonata Software 6 SOT 700 and it was held that the payments partook the character of purchase and sale of goods; and as there is no PE in India, no income accrued or deemed to accrue or arise in India. Immense support can be drawn from Tata Consultancy Services v. State of AP 271 ITR 401 (SC) where it was held that though copyright in a software programme may remain with the originator of the programme, the moment copies are made and marketed, it becomes goods which are assessable to sales-tax. It was held that even intellectual property become “goods” once put to a media whether in the form of books or computer disks or cassettes. Accordingly, profits on sale of software cannot be assessed as royalty either under the Act or under the DTAA.