2005 (2) TMI 438 - ITAT BANGALORE-A

Double Taxation Relief - purchase of software - payment made to the foreign companies - Whether, the payment is royalty or not - HELD THAT:- According to the ITO (TDS), the payment made by the assessee-company to the foreign companies for purchase of software is to be treated as royalty u/s 9(1)(vi) of the IT Act read with section DTAA of relevant countries.

In view of the provisions of section 90(2) of the Act, we have to give preference to the definition as provided in the treaties. Apart from the provisions of the treaties, we have to consider the licence agreement entered into by the assessee with foreign companies which has been quoted at page 17 of the paper book filed by the revenue. It has been submitted by the revenue that under such an agreement, the developer of the software licences its intellectual property in the software in favour of the licensee. As a result of such agreement, the licensor of the software retains ownership over the copyright in the software and protects such copyright in the licence

On perusal of the agreement between the parties, we are of the view that in the present case also what the assessee had acquired is only a copy of the copyrighted articles i.e., software, whereas the copyright remains with the owner, i.e., foreign parties.

We find that the incorporeal right to software i.e., copyright remained with the owner and the same was not transferred to the assessee. We have also noticed the definition of 'royalty' in the DTAA, which has been quoted above. The primary condition for bringing within the definition of 'royalty' in DTAA is that the payments of any kind received as consideration for the use of or right to use any copyright of a literary, artistic or scientific work etc., Right to use of a copyright is totally different from right to use the programme embedded in a cassette or CD or it may be a software.

In this case, the assessee had acquired a ready made off the shelf computer programme for being used in its business. No right was granted to the assessee to utilize the copyright of the computer programme. The assessee had merely purchased a copy of the copyrighted article, namely, a computer programme which is called 'software'. Looking to the circumstances of the case and considering the fact that the definition of 'royalty' as provided in the treaties does not apply to the facts of the case. We are of the view that the finding recorded by the authorities below cannot be sustained. Accordingly, we hold that the remittance made by the appellant for purchase of software is not an income in India, hence, no tax is to be deducted in India under section 195 of the Income-tax Act, 1961. Since we have decided the issue on merit, therefore, we are not going into the technical objections raised on behalf of the assessee.

In the result, the appeals are allowed.