TMI Blog2011 (8) TMI 330X X X X Extracts X X X X X X X X Extracts X X X X ..... IT-II for the Respondent ORDER P. Madhavi Devi, Judicial Member 1. This is an appeal filed by the assessee and its directed against the order of the CIT(A)-IV, Bangalore, dated 30-11-2009 for the assessment year 2008-09. The assessee is aggrieved by the CIT(A) in considering the assessee as assessee is default u/s 201(1) of the Income-tax Act, 1961 on the ground that the assessee has failed to deduct tax at source u/s 195 of the Act on the payments made by it to ING Zurich for purchase of shrink wrapped software from outside India. The AO considered the said payment as royalty under the Act as well as the DTAA between India and Switzerland. 2. Brief facts of the case are that the assessee who is engaged in the business of banking in India had made certain remittances to M/s ING Vysya Bank N.V.Switzerland during the relevant financial year. From the perusal of the CA certificate, the AO noticed that such remittances were made towards purchase of software license and also that the assessee has not deducted tax at source on the said remittance under the plea that the payments are made toward purchase of software and the same are not liable to tax in India as per p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rating/technical manuals necessary for the installation, operation and use of such software but the ownership still vests with Oracle BV. He held that the transfer of limited right of use is different from transfer of ownership right and as such, the transaction in question cannot be regarded as a sale simplicitor and since the transaction involved sale of computer software, nature of payment received depends upon the nature of rights acquired by the transferee in regard to use and exploitation of the said software. He held that the rights in computer programme are a form of intellectual property and where there is an outright sale of software, consideration is for the transfer of such intellectual property and has to be treated as royalty. He held that in the instance case, the assessee has acquired only a limited right to use the Oracle Database Software while Oracle BV has retained its proprietary rights therein and therefore, the consideration paid for such limited right of user is only in the nature of royalty. He also relied upon the decision of the jurisdictional High Court in the case of CIT vs Samsung Electronics Co. Ltd.,(2009) (320 ITR 209) wherein it has been held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it cannot be said that there is any transfer of intellectual property. The licensed software has been developed by Oracle by use of intellectual property no doubt, but the product is only permitted to be used and operated and the assessee has no right to modify or transfer the said license. Thus, we are of the opinion, that there is no transfer of intellectual property. Now, the question to be considered is the nature of the payment whether it constitutes 'royalty' under the Indian Income Tax Act and the DTAA between India and Switzerland?. If it is in the nature of royalty then whether or not the royalty is taxable in India in the hands of the non-resident will depend upon the provisions of the IT Act and the relevant DTAA if any. The article on royalty in a treaty between two nations assumes significance since the assessee in view of the provision of sec.90(2) of the Indian Income Tax Act, has an option to opt for taxation either under the Indian Income- Tax Act or the Treaty whichever is more beneficial to it. Therefore, whenever royalty is paid to or received by a person who is a resident of another country with which there exists a treaty, then the definition of 'Royalty' as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause-v) refers to the transfer of all or any rights (including the granting of a license) in respect of any copyright, literary, artistic or scientific work including......'. Thus, the license to use the software developed by Oracle also falls under this category of property. Further, the payment of royalty can be periodical or a lumpsum consideration. Thus, it is clear that under the Indian Income-tax Act, the one time payment made by the assessee for obtaining license of 'Oracle Data Base software' is royalty and is taxable in India. 7. Let us now examine the definition of 'royalty' given in Article 12(3) of DTAA between India and Switzerland; " The terms 'royalties' as used in this Article means payments of any kind received as a consideration for the use of, Or the right to use, any copyright of a literary, artistic or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, any industrial commercial or scientific equipment or for information concerning ..... X X X X Extracts X X X X X X X X Extracts X X X X
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