The Delhi Bench of the Income Tax Appellate Tribunal recently delivered a judgment in relation to the characterization of receipts from software licensing in the case of Infrasoft Limited, a branch of Infrasoft US. The company imports software from Infrasoft US, which it provides to its customers in India, after customizing it with specific limitations on the right to its use, copy, sale and sub-licensing.
The assessing officer held that the receipts from such software should be classified as royalty income, which is liable to taxation in India in accordance with the provisions of the India-UK Tax Treaty and the Income Tax Act, 1961.
Infrasoft Limited contended that software licensees were entitled to receive only a copy of the software, and that they did not acquire rights to exploit its copyright. Infrasoft Limited relied on Motorola Inc v DCIT and Samsung Electronics Co v ITO, where the tribunal had distinguished between the right to use a copyright and the right to use a copyrighted article. The receipts from the transfer of software, which was actually a copyrighted article with limited rights, did not amount to royalty, as the copyright remained with the licensor/company.
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The tax department, however, argued that in transactions such as these, the licensee is granted the rights to exploit the intellectual property in the software, and thus Infrasoft Limited’s receipts in these transactions should be seen as royalty income. The tax department also dismissed the cases relied upon by Infrasoft Limited, and recommendations by the Organization for Economic Cooperation and Development (OECD) with respect to the taxation of e-commerce transactions, on the grounds that these recommendations were non-binding in nature and that each country had adopted separate principles for the taxation of such income.
Relying strongly upon the cases of Motorola and Samsung Electronics, the tribunal allowed the appeal of Infrasoft Limited and held that the receipts from the transaction should be classified as business income and not royalty income under the provisions of the ITA, as the licensee would not acquire any rights in the intellectual property of such software.
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The legislative and regulatory update is compiled by Nishith Desai Associates, a Mumbaibased law firm that provides legal and tax counselling. The authors can be contacted at nishith@nishithdesai.com. Readers should not act on the basis of this information without seeking professional legal advice.
