Sale of Software- Whether Royalty

Determination of question raised above is crucial in the context that if sale of software is held not royalty then if non resident does not have any PE in India, no income can be said to accrue or arise in India u/s9 and hence non resident is not taxable in India.
But if sale of software  is held to be royalty, income shall be deemed to accrue or arise in India if payment is made by resident and software is used for the business or profession in India, even if non resident does not have PE in India



AAR has admitted in Para 37 of Ruling in case of  Citrix Systems Asia Pacific Pty. Ltd. (6-2-2012)


it could be stated that there is no clear unanimity of view on the question even in this Authority.
Held by AAR in above case:

Payment received by applicant, an Australian company, from its Indian distributor for sale of applicant's software product in India is royalty

Decisions upholding that sale of software is not royalty

Factset Research Systems Inc 7-7-2009
Facts of the case
The applicant, a non-resident company incorporated in the USA, maintains a ‘database’ which is located outside India and which contains the financial and economic information including fundamental data of a large number of companies worldwide. The customers of the applicant are mostly financial intermediaries and investment banks which have the need for such data. The databases contain the published information collated, stored and displayed in an organized manner by the applicant, though the information contained in the database is available in public domain. The applicant, through its database, enables its customers to retrieve this publicly available information within a shorter span of time and in a focused manner. The database maintains historical information and all the databases of the applicant are maintained at its datacenters in the USA. To access and view the applicant’s data, the customers need to download client interface software (similar to internet browser). The customers can subscribe to specific database as per their requirement and can view the data on their computer screens. The applicant enters into a Master Client License Agreement with its customers under which it grants limited, non-exclusive, non-transferable rights to its customers to use its databases, software tools, etc. The applicant states that it does not carry on its business operations in India and there is no agent in India acting on its behalf and having an authority to conclude the contracts. It receives subscription fees from its customers outside India.
Held that

The first question for consideration arises as to whether the amounts received by the applicant constitute consideration for the transfer of any rights in respect of the copyright or for the use or right to use any copyright of a literary/scientific work within meaning of clause (v ) of the Explanation (2 ) to section 9(1). [Para 8]

The expression ‘copyright’ is not defined in the Income-tax Act. It must be understood in accordance with the law governing copyright in India, viz., the Copyright Act, 1957. [Para 8.1]

Section 14 of the Copyright Act gives the meaning of copyright.

According to section 14(a) ‘copyright’ means the exclusive right subject to the Act, to do or to authorize the doing of certain acts in respect of a work or any substantial part thereof, in the case of a literary, dramatic or musical work, not being a computer programme. [Para 8.2]

By an inclusive definition in section 2(o ) of the Copyright Act, computer programmes and computer databases are included within the ambit of ‘literary work’. The database developed by the applicant can, therefore, be regarded as a literary work within the meaning of clause (v ) of the Explanation 2 to section 9(1)(vi) as well. Thus, computer database falls within the scope of ‘literary work’. [Para 8.3]

The applicant’s data base is a source of information on various commercial and financial matters of companies and similar entities. What the applicant does is to collect and collate the said information/data which is available in public domain and put them all in one place in a proper format so that the customer (licensee) can have easy and quick access to this publicly available information. The applicant has to bestow its effort, experience and expertise to present the information/data in a focused manner so as to facilitate easy and convenient reference to the user. For this purpose, the applicant is called upon to do collation, analysis, indexing and noting wherever necessary. These value additions are the products of the applicant’s efforts and skills and they are outside the public domain. In that sense, the data base is the intellectual property of the applicant and copyright attaches to it. However, the question is whether in making this centralized data available to the customer-licensee for a consideration, can it be said that any rights which the applicant has as a holder of copyright in database are being parted in favour of the customer. The answer must be in the negative. No proprietary right and no exclusive right, which the applicant has, has been made over to the customer. The copyright or the proprietary rights over the ‘literary work’ remains intact with the applicant, notwithstanding the fact that the right to view and make use of the data for internal purposes of the customer is conferred. Several restrictions are placed on the licensee so as to ensure that licensee cannot venture on a business of his own by distributing the data downloaded by it or providing access to others. The licensee has not been given the exclusive right to reproduce or adapt the work or to distribute the contents of data-base to others. The grant of license is only to authorize the licensee to have access to the copyrighted database rather than granting any rights in or over the copyright as such. The consideration paid is for a facility made available to the licensee. The license is a non-exclusive license. The term ‘exclusive license’ confers on the licensee and persons authorized by him, to the exclusion of all other persons, including the owner of the copyright, any right comprised in the copyright in a work. The expression ‘granting of license’ placed within brackets takes colour from the preceding expression ‘transfer of all or any rights’. It is not used in the wider sense of granting a mere permission to do a certain thing, nor does the grant of licence denude the owner of copy-rights all or any of his rights. A license granting some rights and entitlements attached to the copyright so as to enable the licensee to commercially exploit the limited rights conferred on him is what is contemplated by the expression ‘granting of license’ in clause (v) of the Explanation 2 to section 9(1)(vi). [Para 9]

The revenue has argued relying on section 14(a )(i) and (vi ) of the Copyright Act that the rights specified therein are granted to the customers and, therefore, there is a transfer of rights in respect of the copyright. The expression ‘exclusive right’ in the opening part of section 14 is very important and it qualifies all the components of clause (a ). The applicant is not conferred with the exclusive right to reproduce the work (including the storing of it in electronic medium), as contemplated by sub-clause (i ) of section 14(a). The exclusive right remains with the applicant being the owner of the copyright and by permitting the customer to store and use the data in the computer for its internal business purpose; nothing is done to confer the exclusive right to the customer. Such access is provided to any person who subscribes, subject to limitations. The copyright of the applicant has not been assigned or otherwise transferred so as to enable the subscriber to have certain exclusive rights over the applicant’s works. [Para 9.1]

 In Dassault Systems K.K., In re [2010] 188 Taxman 223 (AAR - New Delhi), it was noticed that the core of the transaction in that case was to authorise the end-user to have access to and make use of the licensed software products over which the applicant had exclusive copyright without giving any scope for dealing with them any further. The reasoning or the line of reasoning in Factset on applicability of the Copyright Act, in this context, was followed


In Tata Consultancy Services v. State of Andhra Pradesh [2004] 271 ITR 401/141 Taxman 132, the Supreme Court had held that "a software programme may consist of various commands which enable the computer to perform a designated the task. The copyright in that programme may remain with the originator of the programme. But, the moment copies are made and marketed it becomes goods which are susceptible to sales-tax.


In  Ericsson A.B., New Delhi [2011] 16 taxmann.com 371 (Delhi) 23-12-2011, Delhi High Court held:
 In order to constitute 'royalty' as defined in Explanation 2 to section 9(1)(vi), what is contemplated is a payment that is dependent upon user of copyright and not a lump sum payment made for acquisition of a copyrighted article

18 taxmann.com 189 (Mumbai - Trib.) IN THE ITAT MUMBAI BENCH Solid Works 

Corporation(8-2-2012): Following the view expressed by Delhi High Court in the case of DIT v.Ericsson AB, New Delhi [2012] 204 Taxman 192 (Delhi) (and not following the contrary judgment of Karnataka High Court in CIT v. Samsung Electronics Co. Ltd. [2011] 203 Taxman 477 (Kar.), it was held that payment received by the assessee from resellers on sale of shrink wrap software is not 'Royalty' liable for taxation in India as per Article12(3) of Indo-US DTAA

Decisions upholding sale of software is royalty

In IMT Labs (India) (P.) Ltd., In re [2006] 287 ITR 450/157 Taxman 213 (AAR - New Delhi), Advance  Ruling Authority held that payments made by a resident to use the software developed by the non-resident on its server platform, was royalty.

 In Airports Authority of India, In re [2008] (304 ITR 216/172 Taxman 284 (AAR - New Delhi),  AAR holding that the ratio of the decision in Tata Consultancy Services (supra) cannot conclude the question, proceeded to observe that the OECD views are not binding, India being not a signatory to the convention and that there is no unanimity even among the member countries of OECD. This Authority held that income relatable to supply of documents and software under the contract there in question, was royalty as the documents and software were copyrights which had been given to the applicant therein for use. This Authority even went to the extent of stating that the provisions of the Income-tax Act and the DTAA were clear on the point and no reference to the Copyright Act appears to be necessary.

 In Millennium IT Software Ltd., In re [2011] 202 Taxman 501/14 taxmann.com 17 (AAR - N. Delhi) (AAR No.835 of 2009), AAR held that the payment made under the contract involved therein was royalty, based on the reasons contained therein supplementing the reasons we have given here

 Karnataka High Court in CIT v. Samsung Electronics Co. Ltd. [2011] 203 Taxman 477 

 When licence is granted to make use of software by making copy of same and store it in hard disk of designated computer and to take back-up copy of software, what is transferred is only right to use copy of software for internal business as per terms and conditions of agreement and payment made in that regard would constitute royalty as per section 9(1)(vi), read with article 12 of DTAA between India and USA