‘Royalty’, is typically the sum of money paid to the proprietor or Licensor of Intellectual Property (IP) Rights for the benefits derived, or sought to be derived, by the user (the Licensee) through the exercise of such rights. Royalties may be paid for the use of copyright, patent, trademark, industrial design, procedural knowledge or a combination of them. However, the term has also a much wider application and can cover mining royalties, performance of art royalties, etc.
Black’s Law Dictionary defines “royalty” as “compensation for the use of property, usually copyrighted material or natural resource, expressed as a percentage of receipts from using the property or as an account per unit produced”. As generally understood, royalty is most often associated with the fee paid to a patentee for the use of a patent or the money owed to an author for each copy of a book sold.
Explanation 2 of Section 9(1)(vi) of the Income Tax Act provides the definition of Royalty. Royalty refers to consideration received for the transfer of rights, imparting information, use of intellectual property, imparting technical or scientific knowledge, use of industrial or scientific equipment (However, amounts referred to in section 44BB of the Income Tax Act are excluded from the definition of royalty), transfer of copyright, and services in connection with intellectual property.
Royalty is generally a consideration received by a person – a creator or an innovator for allowing his work of art or scientific invention to be used commercially. The developed country levy tax on royalty based upon residence of the inventor, the place where it is developed, the place of the royalty agreement, or where trademarks, copyrights and other intangible rights are registered or transferable. While the developing countries levy tax on royalty where it is used or in the source country.
Within the provisions of the Income Tax Act lies the concept of Tax Deducted at Source (TDS), a visionary mechanism ensuring transparency and accountability in financial transactions. TDS is applicable to both residents and non-residents, shaping a harmonious financial ecosystem.
The 3 explanations has been added by Finance Act, 2012 in S-9(1)(vi) of the Income Tax Act:
Explanation 4: Clarified that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred.
Explanation 5: Clarified that the royalty includes and has always included consideration in respect of any right, property or information, whether or not a) the possession or control of such right, property or information is with the payer; b) such right, property or information is used directly by the payer; c) the location of such right, property or information is in India.
Explanation 6: Clarified that the expression “process” includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, and optic fibre or by any other similar technology, whether or not such process is secret.
Under section 9(1)(vi) of Income Tax Act, royalty payable by a person, who is a resident in India, to a non-resident , shall be deemed to accrue or arise in India , unless it falls under the following two exceptions : –
Royalty payable by a one non-resident to another non-resident shall be deemed to accrue or arise in India only when any of the following conditions are satisfied : –
Taxable Royalties
The considerations defined as Royalty in the Income Tax Act, 1961 Section 9, as stated above are taxable under the head “Income from profits and gains of business” or “Income from Other Sources” as per the provisions in Section 115A of the Income Tax Act, 1961.
Differentiating Royalty and FTS for Computing ALP
While upholding the order of ITAT in MAGNETI MARELLI POWERTRAIN INDIA PVT. LTD. vs DEPUTY COMMISSIONER OF INCOME TAX, the division bench of the Delhi High Court held that royalty and technical assistance fee did not form part of a composite transaction and have to be treated as two separate transactions for the purpose of benchmarking and computing arm’s-length price under the provisions of the Income Tax Act, 1961. While giving a partial relief to the appellant-assessee, while computing arm’s length price in respect of transaction relating to ”technical assistance fee, Transactional Net Margin Method can be applied.
Now lets analyse various judgments published in taxscan.in related to royalties under the Income Tax Act, 1961.
The Two-member bench of Bangalore Income Tax Appellate Tribunal (ITAT) held that the receipt of Interconnect Utility Charges (IUC) charges cannot be taxed as Royalty under Article 12 India- Japan DTAA.
It was observed that various service providers in India entered into agreement with assessee for international carriage and connectivity services against which interconnectivity charges are received by the assessee. Further On perusal of the agreement between the assessee and the end users it is noted that the installation and operation of sophisticated equipment are with the view to earn income by allowing the users to avail the benefits of such equipment or facility and does not tantamount to granting the use or the right to use the equipment or process so as to be considered as royalty within the definition of “royalty” as contained in clause 3 of Article 12 of India-Japan DTAA.
The Mumbai bench of the Income Tax Appellate Tribunal ( ITAT ) held that ALP Adjustment is not permissible on a notional amount of royalty paid by an overseas subsidiary and confirmed the CIT(A)’s action in deleting the addition made on account of waiver of royalty received from two subsidiaries.
The two-member Bench comprising Prashant Maharishi (Accountant Member) and Sandeep Singh Karhail (Judicial Member) observed that considering the financial position of subsidiaries located in Bangladesh and Sri Lanka, the assessee agreed to waive part of the royalty and thereby credited 1% of the royalty amount to the P&L account instead of 3% as per the agreement. The Bench observed that the Coordinate bench in assessee’s own case deleted a similar addition by holding that when only 1% Royalty is payable by overseas subsidiaries, AO has no authority to make an addition of balance 2% Royalty waived by the parties, which is nothing but a notional income considered taxable by the AO in assessee’s hands.
The Bangalore Income Tax Appellate Tribunal ( ITAT ) Bench held that the payment made by Google India to the assessee does not fall under the category of royalty or Fees for Technical Services (FTS). The case centered around Google Ireland ( Assessee ) receiving payments from Google India for marketing and distribution rights related to the AdWords program.
It was noted that, unless a non-resident entity involved in online advertising has a Permanent Establishment (PE) in India, the income generated from such activities cannot be taxed in India as per the relevant Double Taxation Avoidance Agreement ( DTAA ). However, the tribunal bench of Accountant Member Laxmi Prasad Sahu and Vice President Geroge George K held that the payments made by Google Ireland Limited to the assessee cannot be taxed in the hands of the assessee as royalty.
In a recent ruling, the Delhi bench of the Income Tax Appellate Tribunal ( ITAT ) ruled that the sale of software products does not constitute royalty income and is not taxable under Article 12 of India- Japan Double Taxation Avoidance Agreement ( DTAA ).
The two member bench of the tribunal comprising Dr.B.R.R Kumar ( Accountant member ) and Anubhav Sharma ( Judicial member ) observed that the CIT (A) had fallen in error in making the deletion. It was observed that “After the judgement of Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited vs CIT (supra), the issue with regard to taxability of the income from the sale of Software licenses subscription, stands settled and same is followed by ld. CIT(A), so there is no infirmity in the impugned orders, requiring interference.”
The Income Tax Appellate Tribunal ( ITAT ), Delhi bench ruled that income from the hotel related services provided to Indian hotels is not royalty/Fee including service ( FIS ) under Article 12 of the India USA Double Taxation Avoidance Agreements ( DTAA ).
The tribunal observed that the issue in dispute is squarely covered in favour of the assessee by the decision of the Tribunal and Jurisdictional High Court. Therefore the bench comparising Astha Chandra ( Judicial Member ) and Shamim Yahya, ( Accountant Member ) held that income from the hotel related services provided to Indian hotels are not covered royalty/Fee including service ( FIS ) under Article 12 of the India USA Double Taxation Avoidance Agreements ( DTAA ).
The Bangalore bench of the Income Tax Appellate Tribunal ( ITAT ) ruled that the interconnect usage payments received by a foreign company from an Indian telecom operator should not be classified as ‘Royalty’.
According to the ITAT, the order of the co-ordinate Bench of the Tribunal in the case of PCCW Global Ltd v. ACIT is directly applicable to the facts of the assessee since the said case also relates to Hong Kong – non-treaty country. In light of the aforesaid judicial pronouncements, the tribunal viewed that “the amount received by assessee company from the Indian telecom operator for interconnect usage is not chargeable to tax as “royalty”.”
The two-member bench, consisting of Chandra Poojari ( Accountant member ) and George George K ( Vice President ), determined that the amount received by the assessee company from the Indian telecom operator for interconnect usage did not meet the criteria for taxation as “royalty”. Accordingly, the ruling was made in favor of the assessee, resulting in a partial allowance of the appeal.
The Bangalore bench of Income Tax Appellate Tribunal ( ITAT ) recently held that receipts from sale of online videos to Indian clients is not taxable as royalty under India – USA DTAA.
It was observed by the tribunal that payment made for viewing the videos on the database cannot be termed as consideration for use or right to use any industrial, commercial or scientific equipment. After observing the submissions of both parties the two-member bench Of Laxmi Prasad Sahu, ( Accountant member ) and Beena Pillai, ( Judicial Member ) held that subscription revenue received by the assessee is not taxable as ‘Royalty’ in the hands of the assessee under Article 12 of the India-USA DTAA.
In a recent verdict, the Delhi High Court held that subscribing to a legal database should not be construed as a transfer of copyright, The Division Bench, comprising Justice Yashwant Varma and Justice Purshaindra Kumar Kaurav, made this observation while addressing an appeal by the Income Tax Department related to the subscription fees of LexisNexis, a legal database.
It was observed that, “As we examine the nature of the transaction between an Indian subscriber and the assessee, it becomes manifest and apparent that it neither comprises of a transfer of copyright nor does it include a transfer of a right to apply technology and other related aspects which are spoken of in Article 12(4)(b) of the DTAA.” It was thus held that, “We thus find no justification to interfere with the view as expressed by the Tribunal. The appeal fails and shall consequently stand dismissed on the aforesaid terms.”
In a recent decision, the Income Tax Appellate Tribunal ( ITAT ) in Mumbai shed light on the nature of royalty payments concerning the usage of brand names or trade names under a trademark license agreement, as per Section 9(1) (vi) of the India-Turkey Tax Treaty.
The tribunal, consisting of Gagan Goyal ( Accountant Member ) and Vikas Aswathy ( Judicial Member ), observed precedents, including the case of Global Cricket Corporation PTE Ltd., which deliberated on the taxability of payments received from sponsors for the use of Event marks and sign ages. The tribunal concluded that such payments do not fall under the category of royalty as per section 9(1)(vi) of the India-Turkey Tax Treaty.
In a major ruling the Delhi bench of the Income Tax Appellate Tribunal ( ITAT ) observed that entire receipt of Indian rupee ( INR ) received from different entities not taxable as royalty.
The tribunal of Dr, B.R.R Kumar ( Accountant member ) and Kul Bharat ( Judicial member ) allowed the assessee’s claim by holding that the receipts in question could not be taxed as “royalty”. For the same reasons herein also we hold that the entire receipt of INR 119, 88, 54,215/- received from different India entities could not be taxed as royalty. Accordingly, authorities below in taxing the receipts as “royalty” are set aside and the grounds of appeal taken by the assessee are allowed.
The Delhi bench of the Income Tax Appellate Tribunal ( ITAT) observed that the amount received as per Article 12(3) of India- United State of America (USA) Double Taxation Avoidance Agreement (DTAA)., not royalty u/s 9(1) (vi) of Income Tax Act, 1961.
The bench considered the arguments presented by both sides and examined the evidence on record. As previously discussed, the assessee functions as a global decimal administrator appointed by the mobile industry to provide unique identification numbers known as IMEI or TAC for tracking mobile devices. As highlighted by the learned counsel for the assessee, this entity was the sole provider of these numbers worldwide. Moreover, reiterating its non-profit status, the assessee enjoys tax exemption in the USA.
The New Delhi Bench of the Income Tax Appellate Tribunal ( ITAT ) ruled that “Live Rights” are not “copyright”, any payments made are not taxable as royalty. The question before the Tribunal is as to, whether the right to broadcast “Live events” is not “copyright” and payment made there to is “Royalty” under section 9(1)(vi) or not?
A Two-Member Bench comprising Saktijit Dey, Vice President and Dr. B. R. R. Kumar, Accountant Member observed that “We hold that broadcasting “Live events” does not amount to a work in which copyright subsists, meaning thereby right to broadcast live events i.e ., “Live Rights” , is not “copyright” and therefore any payment made thereto can’t be said to be chargeable to tax as royalty under Section 9(1)(vi).”
The Mumbai bench of the Income Tax Appellate Tribunal ( ITAT ) provided relief to Bajaj Auto by allowing a deduction under Section 80-O of the Income Tax Act, 1961 for the royalty fee received, recognizing it as pertaining to drawing, design, invention, patent, and trademark.
The two member bench of the tribunal comprising Aby T varkey ( Judicial member ) and Amarjith singh ( Account member ) observed that Assessment Year 1998-99, where the decision favored by the assessee. The bench noted that, in accordance with the agreement, the assessee granted a license for the assembly of its scooter models. The assessee permitted this process and provided the necessary drawings, subsequently receiving a technical know-how fee.
In a recent case, the Delhi High Court, while upholding the order of the Income Tax Appellate Tribunal ( ITAT ), held that payment received from the sale/supply of software is not royalty under Article 12(3) of the India-Singapore Double Taxation Avoidance Agreement ( DTAA ).
Having regard to the findings of fact and the enunciation of law by the Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT, the court observed that there was no need to interfere in the above decision of the ITAT. Therefore, a division bench of Justice Rajiv Shakdher and Justice Girish Kathpalia held that payment received from the sale/supply of software is not royalty under Article 12(3) of the India-Singapore DTAA.
In a major relief to Hyatt International Southwest Asia, the Delhi High Court ruled that the use of trademark incidental to advertisement is business income and not Royalty and fees for technical services (FTS).
A Division Bench comprising Justices Vibhu Bakhru and Amit Mahajan observed that “It is relevant to note that the Assessee had contended before the authorities that the amount received under SOSA was Fees for Technical Services (FTS). We are unable to accept the same. This is also inconsistent with the submissions advanced before this Court. The fee received is not fees for technical services but in consideration for wide range of services as discussed above. Since, the Assessee is in the business of providing such services for management of Hotels, the income is required to be classified as income from business.”
The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) observed that the sponsorship amount paid by M/s. Indian Oil Corporation Ltd (IOCL) to Global Cricket Corporation is not royalty.
A Two-Member Bench comprising Gagan Goyal, Accountant Member and Vikas Aswathy, Judicial Member observed that “Whereas, the facts in case of present assessee are identical to the facts in the case of Hero MotorCrop (supra). Thus, in light of decision of the Co-ordinate Bench as referred above, we have no hesitation in holding that the payments made by the assessee to GCC are not in the nature of Royalty as defined under the provisions of the Act or Article-12(3) of India- Singapore DTAA. Consequently, the assessee succeeds on ground No.1 to 6 of the appeal.”
The Delhi High Court has held that income received by GoDaddy.Com as consideration for providing domain name registration services amounts to ‘Royalty’ under section 9(1)(vi) of the Income Tax Act, 1961.
A division bench of Justice Rajiv Shakdher and Justice Girish Kathpalia observed that “the respondent/assessee before us has succeeded in the appeals, the penalty imposed in the instant appeal cannot be sustained. Therefore, the impugned order, in our opinion, requires no interference.” Consequently, the application filed for condonation of delay is rendered inefficacious and is, thereby, closed.
The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) held that the payments from the SET Satellite (Singapore) Pte Ltd are not taxable as royalty under Article 12(2) of the India-Singapore Treaty.
The Bench observed that the assessee was eligible to claim the benefit of the India-Singapore treaty the payment from SET Satellite (Singapore) Pte. Ltd. is not taxable as ‘royalty’ under Article 12(2) of the India-Singapore treaty and the payments from the Broadcasting Corporation of India and Prasar Bharati All India Radio are to be treated as ‘royalties’ and 50% of the payment received from LG, Hero Honda, and Hutchison for the use of trademarks, trade names, and copy rights are to be taxable as ‘royalties’ under Article 12 and clause (3)(a) of the India-Singapore treaty.
The Delhi bench of the Income Tax Appellate Tribunal (ITAT) held that the licensing of the software products of Microsoft in India by HP Services is not taxable in India as royalty under Section 9(1)(vi) of the Income Tax Act, 1961 and Article 12 of Indo US DTAA.
The Two-member bench comprising of Saktijit Dey (Vice-President) and N.K. Billaiya (Accountant Member) referring to the above mentioned case and the assessee’s own case held that the amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software.
The Delhi bench of the Income Tax Appellate Tribunal (ITAT) held that the consideration paid by the assessee outside India for the candidate’s report does not fall within the purview of royalty under Article 13 of India-UK DTAA.
The Two-member bench comprising of G.S. Pannu (President) and Astha Chandra (Judicial member) held that the assessee only gets a copyrighted article to use the product for its internal business purpose and not any right in any copyright to exploit the same for commercial reasons so as to constitute the payment received in consideration thereof as royalty in terms of Article 13 of the India UK DTAA. Therefore, the consideration paid by the assessee to Symbiotics Ltd. UK for the provision of the candidate’s reports do not fall within the purview of royalty under Article 13 of the India-UK DTAA. And the disallowance of the payment of Rs. 1,03,45,058/- made to Symbiotics Ltd. UK under Section 40(a)(i) of the Income Tax Act for non-deduction of tax at source was deleted. The appeal of the assessee was allowed.
The Mumbai Bench of Income Tax Appellate Tribunal (ITAT) has deleted the Transfer Pricing (TP) adjustment by the Transfer Pricing Officer (TPO) towards the payment of royalty on technology paid to the Cadbury Adams USA LLC, and Cadbury Enterprises Pte Ltd.
The two-member Bench of Vikas Awasthy (Judicial Member) and Padmavathy S. (Accountant Member) observed that the co-ordinate bench in assessee’s own case for A.Y. 2009-10 (supra) had considered the issue of payment of royalty on technology to Cadbury Adams USA LLC, to Cadbury Enterprises Pte Ltd and Cadbury Schweppes Asia Pacific Pte Limited (now merged with Cadbury Enterprises Pte Ltd). The Bench held that the payment of royalty to Cadbury Adams USA (CAUSA) was at arm‟s length holding that the royalty payment on trademark usage was within the arms‟ length and did not call for any adjustment.
The Delhi bench of the Income Tax Appellate Tribunal held that Payments made in consideration of architectural design could not be classified as royalty under Article 12(3) of India Singapore Double Tax Avoidance Agreement (DTAA).
The two-member bench consisting of G.S. Pannu (president) and Astha Chandra (Judicial member) after considering the facts of the assessee’s case in the light of the decisions in the case of Gera Developments P. Ltd. and Devi Ashmore India Ltd. held that payments made to the assessee in consideration of architectural design services could not be classified as royalty under Article 12(3) of India Singapore DTAA. Hence, the tribunal did not find any reason to interfere with the findings of the CIT(A) and the appeal was dismissed.
Dismissing a Special Leave Petition (SLP), the Supreme Court of India upheld the legality of the Engineering Analysis case in the matter of taxability of the royalty paid to foreign companies.
A Two Judge Bench of the Supreme Court comprising Justices BV Nagarathna and Prashant Kumar Mishra observed that “if once a judgment is passed by a Court following another judgment and subsequently the latter judgment is overruled on a question of law, it cannot have an effect of reopening or reviving the former judgment passed following the over ruled judgment nor can the same be reviewed.”
“In view of the above, we hold that as on today the judgment of a Three Judge Bench of this Court in Engineering Analysis Centre of Excellence Private Limited vs. Commissioner of Income Tax and Another is holding the field and therefore the said judgment would have to be followed in the instant case. In view of the above, the special leave petition stands dismissed” the Bench held.
In a significant case, the Delhi High Court has held that the subscription amount received from subscribers of e-journals cannot be treated as royalty. The revenue challenged the order passed by the Income Tax Appellate Tribunal concerning Assessment Year (AY) 2013-14. Via the impugned order, the Tribunal has partly allowed the appeal preferred by Springer Nature Customer Services Centre GMBH the respondent/assessee.
The division bench of Justice Rajiv Shakdher and Justice Girish Kathpalia has observed that “the subscription amount cannot be treated as royalty, having regard to the fact that there is nothing on record to suggest that the respondent/assessee has granted the right in respect of copyright to the concerned subscribers of the e-journals. All that the respondent/assessee did was to sell the copyrighted publication to the concerned entities, without conferring any copyright in the said material.”
The Delhi bench of the Income Tax Appellate Tribunal (ITAT) held that amount paid for resale of computer software through End User License Agreement doesn’t amount to deduction in Tax under Section 195 of the Income Tax Act, 1961. The Assessing Officer was of the opinion that as per the provisions of Section 9(1)(vi) of the Income-tax Act consideration for software constitutes Royalty under the Act and such royalty is taxable in India.
The amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India, as a result of which the persons referred to in Section 195 of the Income Tax Act were not liable to deduct any TDS under Section 195 of the Income Tax Act. The two-bench member comprising of Saktijit Dey (Judicial member) and N.K Billaiya (Accountant member) followed the decision of the Supreme Court and the Assessing Officer was directed to delete the impugned addition.
The Delhi Bench of Income Tax Act has held that the receipts from centralised service income by Radisson Hotels international would not be taxable as fees for technical services (FTS) or fees for included services (FIS) under Article Double Taxation Avoidance Agreement (DTAA).
The two-member Bench of G.S. Pannu, (President) and Saktijit Dey, (Judicial Member) held that the receipts from centralised service income are not taxable as FTS/FIS under Article 12(4)(a) of India-USA DTAA. The Bench further observed that, “Rather than centralised service income being ancillary and incidental to royalty income, in reality, it is a reverse situation. In such a scenario, it cannot be said that centralised service income, being ancillary and incidental to royalty income, would fall under Article 12(4)(a) of the Tax Treaty.”
The Pune Income Tax Appellate Tribunal ( ITAT ) has recently held that the right to use a trademark is royalty as per Indo- Netherland Double Taxation Avoidance Agreement (DTAA).
If this fact is read into the definition of royalty as per Article 12 of DTAA between India and Netherland which defines royalty means the payment of any kind received as consideration for the use of right to use, any copyright, patent, trademark, etc., therefore, as per the agreement with Softlayer when the assessee is using the trademark which is owned by Softlayer then that right to use the trademark will fall in the definition of royalty. After considering the contentions of the both parties the division bench of the ITAT comprising the Partha Sarathi Chaudhury, (Judicial Member) and G.D. Padmahshali, (Accountant Member) set aside the order of CIT(A) and remand the matter to the file of the A.O for re-adjudication as per law after complying with principles of natural justice.
The Income Tax Appellate Tribunal (ITAT), Chennai bench has held that the amount of royalty paid to the Holding Company for using the brand name, being a revenue expenditure, shall be deductible under the Income Tax Act, 1961.
A bench of Shri Mahavir Singh, Vice President and Shri G. Manjunatha, Accountant Member held that “In this view of the matter and consistent with the view taken by the co-ordinate bench in assessee’s own case for earlier assessment years, we are of the considered view that the assessee is entitled for deduction towards royalty payment to holding company for using brand name CRI and thus, we are inclined to uphold the findings of the Ld. CIT(A) and reject the ground taken by the Revenue.”
The Delhi bench of Income Tax Appellate Tribunal (ITAT) recently held that the payment received from freight /logistic support service could not be treated as Royalty Under Section 9(1)(Vii) of Income Tax, Act 1961 a and Article 12 of the Double Taxation Avoidance Agreement.
After considering the contentions of the both parties the division bench of the ITAT compraising G.S.Pannu, President & Saktijit Dey, Judicial Member observed that the issue between the assessee and the revenue starting from assessment year 2010-11. Furthermore they upheld the decision of Tribunal which was passed by in the year 2010-2011 that is “the amount received by the assessee from freight/logistic support services cannot be treated as FTS/FIS either under the Act or under treaty provisions”.The addition amount added by the AO was deleted and the appeal was allowed.
The Income Tax Appellate Tribunal ( ITAT ), Delhi Bench, has recently, while deciding the appeals filed before it, held that when there is no material to form ‘reason to believe’, re-assessment cannot be made by the income tax department.
However, with Ms. Sapna Bhatia, CIT (DR) though opposing the assessee’s contentions but failing to controvert assessee’s allegation that no notice under section 143(2) of the Act was ever issued to the assesse, the ITAT Bench consisting of Dr. B.R.R. Kumar, the Accountant Member and Saktijit Dey, the Judicial Member, observed as follows : “It is necessary to examine, whether the reopening of assessment under section 147 of the Act meets legal requirement. while examining the return of income filed by the assessee for assessment year 2001-02, the Assessing Officer was of the view that whether the issue of consideration received from sale of software is in the nature of royalty was not examined by the Assessing Officer in scrutiny assessment for assessment years 1998-99 and 1999-2000. Further, he found that similar issue was also involved in assessment year 2000-01, where the return filed by the assessee was processed under section 143(1) and the time limit prescribed for issuing of notice under section 143(2) of the Act has lapsed”.
The Income Tax Appellate Tribunal (ITAT), Mumbai Bench, has recently, in an appeal filed before it, held that copyright license fee/ royalty distributed amongst the members of a company are not taxable at the hands of the company.
Hearing the opposing contentions of the parties and perusing the materials available on record, the Tribunal commented: “We have heard the rival submissions and perused the materials on record. It is observed that the assessee company is a mere step through entity, which collected royalties and licence fees on behalf of its members and distributed the said amount to the concerned member, after duly deducting the related expenses on actuals. It is pertinent to consider the submission of the assessee with regard to the method of accounting followed by the assessee company and how the receipts are accounted for.”
The Income Tax Appellate Tribunal (ITAT), Kolkata Bench held that payment made to non- resident not having permanent establishment in India not royalty.
In the appellate proceedings, the CIT(A) confirmed the order of the AO by holding that the payment made to the foreign company by the assessee falls within the meaning of Article 12 of DTAA between the India and Singapore and therefore liable for deduction of tax u/s 195 of the Act. A coram consisting of Rajpal Yadav, Vice-President and Rajesh Kumar, Accountant Member observed that “We set aside the order of ld. CIT(A) by holding that the payment made to non- resident recipient not having any permanent establishment in India and also that the services provided are not in the nature of royalty and fee for technical services. Accordingly we direct the AO to delete the demand.”
The Income Tax Appellate Tribunal (ITAT), Pune bench has held that the royalty expenses incurred by Mercedes Benz India to Daimler AG is deductible from the business income of the Company as the same constitute “revenue expenditure” under the provisions of the Income Tax Act, 1961.
A division bench of the Tribunal consists of Shri Inturi Rama Rao, AM and Shri Partha Sarathi Chaudhuri, JM observed that “from the above terms and conditions, it is clear that MB India’s rights under the agreement ends on termination of the agreement. It also evident that MB India has neither acquired any assets on an outright basis nor secured any enduring advantage. The benefit secured by MB India is essentially a license right to use the know-how for the period of the agreement and the royalty expenditure in this regard is therefore revenue in nature.”
The division bench of Madras High Court presided by Mr. Justice R. Mahadevan and Mr. Justice J. Sathya Narayana Prasad has upheld the exclusion of royalty income from business profits for calculation of deduction u/s 80HHC since the assessee fails to prove royalty income is related to export business.
The High Court by relying on Shiva Distilleries Ltd’s case has held that “there is no concrete material produced by the appellant/assessee to prove that the royalty income received from the subsidiary company, is related to export business, this court is of the view that the Tribunal has rightly directed the assessing officer to exclude the royalty income from the business profits for calculation of deduction under section 80HHC of the Act, which warrants no interference”.
The ITAT, Delhi bench has held that the royalty expenditure for the use of know-how can be treated as revenue expenditure for the purpose of the Income Tax Act, 1961.
After considering the arguments from both the sides, the Tribunal bench comprising Shri Kul Bharat, Judicial Member & Shri Pradip Kumar Kedia, Accountant Member has observed that a reading of the license agreement thus gives an impression that the assessee cannot sub-license the same to any third party and the licensor continues to exercise all pervasive domain over the ownership over the technical knowhow in exclusion to the licensee assessee. The assessee has been merely given a license to use the licensed information/technical know-how during the currency of license agreement.
The Delhi bench of the ITAT comprising Sh. R. K. Panda, Accountant Member & Sh. Anubhav Sharma, Judicial Member has held that the payment received on sale of software to India resellers/distributors is not in the nature of “Royalty” chargeable to tax u/s 9(1)(vi) of the Income Tax Act, 1961 and under Article 12 of the India-USA DTAA. The bench after considering the judicial precedents including the Tribunal order in the case of the assessee, held that “since the facts of the instant case are identical to the facts of the case decided by the Tribunal in assessee’s own case for the immediately preceding assessment year, therefore , respectfully following the decision of the Tribunal and in absence of any contrary material brought to our notice by the ld. CIT DR , we hold that the payment received by the assessee on sale of software to India resellers/distributors is not in the nature of “Royalty” chargeable to tax u/s 9(1)(vi) of the I.T. Act and under Article 12 of the India-USA DTAA. The ground nos. 2 to 8 of the assessee are accordingly allowed.”
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