In the case of Reliance Communications Ltd, Mumbai bench of Income Tax Appellate Tribunal (ITAT) laid down certain guidelines for taxation of royalty payments to non-residents and held that payment for acquiring the copy of the software for the copyrighted article cannot be considered as royalty.
Assessee Company in the present case M/s Reliance Communication Ltd engaged in the business of telecommunication and the other entities of the company were also connected with the wireless telecommunication network in India. For that purpose, they entered into various contracts with non-resident-entities and made certain payments for the purchase of software.
The assessee requested to the Assessing Officer (AO) to allow them to make payments to non-residents without deducting tax at source. However, the AO.s held that payments made by them to the non-residents were taxable in India, that they should deduct tax at source before making such payments. Accordingly, the assessees deducted the taxes.
Thereafter the assessee approached the First Appellate Authority. After considering various contracts and clauses entered by the assessee the authority noticed that the assessees did not own any rights for transferring the software licenses, that they were not having the power to decode the machine code of the software nor did they had the power to make copies of software, that they had obtained only the right to use the software for their business purpose and obtained no other rights in the Software, that the assessee had acquired the hardware and software simultaneously, that they did not acquire any right of duplication of software except for its own use. Therefore, the payment made by them for acquiring the copy of the software did not amount to royalty within the definition under Article 12(3)of the Double Tax Avoidance Agreement. Finally, the appeal filed by the assessee was allowed by holding the fact that there was no obligation on part of the assessees to deduct tax at source for the payments made to the non-resident entities.
After considering the facts and circumstances of the case, the Tribunal bench consisting Judicial Member Ravish Sood and Accountant Member Rajendra observed that the term ‘royalty’, used in commercial and business world frequently, is understood to be a compensation/consideration paid to an Owner for the use of his intellectual property like patents, copyrighted works, franchises or natural resources and a royalty payment is made by those who wish to make use of it for the purposes of generating revenue or other such desirable activities.
The bench further, laid down the following guidelines to solve the knotty problem of taxation of royalty payments to the non-residents.
Confirming the order of the first appellate authority, the division bench further observed that “the consideration paid by the assessee to the suppliers for acquiring copy of software was not for the ‘use of copyright or transfer of right to use of copyright’ the payment was made for the ‘copyrighted article’ and that the payments made by the assessee to the vendors of software cannot be taxed as royalty”.
