Payment for shrink wrapped software/ off-the-shelf software amounts to ‘royalty’

CIT v. Synopsys International Old Ltd(Karnataka High Court) - Payment for shrink wrapped software/off-the­ shelf software amounts to ‘royalty’ within the meaning of Section 9(1)(vi) of the Income-tax Act, 1961 as well as under Article 12 of the India-Ireland tax treaty.

The Parliament by the Finance Act, 2010, has substituted the Explanation to Section 9 of the Act which gives a clear intention of the Legislature insofar as the liability of tax under this provision is concerned. By the Explanation, the Legislature have declared that for the purpose of Section 9 of the Act which deals with income deemed to accrue or arise in India, under Section 9(1)(v), (vi) and (vii) of the Act, such income shall be included in the total income of the non-resident, whether or not   the non-resident has a residence or place of business or business connection in India; and   the non-resident has rendered services in India. Therefore, the object is to levy tax on the income of a non-resident, if it has accrued or arisen in India and one such income is the income from ‘royalty’.

In the tax treaty, the term ‘royalty’ means payment of any kind received as a consideration for the use or the right to use any copyright of literary, artistic or scientific work. Therefore, under the tax treaty, it is sufficient if the consideration is received for use of or the right to use any copyright. Further the High Court also held that, in terms of the tax treaty, the consideration paid for the use or right to use the said confidential information in the form of computer programme software itself constitutes ‘royalty’ and attracts tax.  Therefore, the consideration is taxable as ‘royalty’ both under the Act as well as the tax treaty.