We are pleased to
release a Tax Alert which summarizes a recent ruling of the Hyderabad Income
Tax Appellate Tribunal (Tribunal) in the case of M/s Bartronics India Ltd.
(Taxpayer) on the issue of taxability of payment for right to use smart card
source code operating system for transport applications. This is examined under
the provisions of the India-Singapore Double Taxation Avoidance Agreement
(DTAA).
The Taxpayer made payments to certain Singapore-based entities (SingCos) for purchase of certain software on a non-exclusive and non-transferable basis for the Taxpayer to use in respect of its own business. These payments were made without withholding any tax at source. The Tribunal, having regard to the nature of rights provided for in the license agreement, concluded that the payment was for a readymade off–the-shelf computer program, that was akin to purchase of a product. Furthermore, this was meant to be only used internally by the Taxpayer. Therefore, the payment was not for use of or right to use a copyright right but, rather, for use of a copyrighted article. Having regard to the provisions of the DTAA, this should not be treated as royalty but as business income of SingCos, which was not taxable in the absence of its permanent establishment in India.
Classification of cross-border software payments as royalty or business profits is a contentious issue in India. This ruling succinctly brings out the distinction between a copyright right and copyrighted article. Though the transaction under consideration was for purchase of software, along with codes/ instructions, the Tribunal appreciated the fact that the Taxpayer was not permitted to independently deal with or exploit the code/software but was allowed to use it for its own internal business alone on a non-exclusive and non-transferable basis.
The Tribunal, in this decision, has reaffirmed the principle that a distinction between copyright right and copyrighted article should be made after ascertaining the nature of rights relating to use and exploitation of the copyright right that has been parted with by the owner in favor of the licensee. While analyzing the issue, the Tribunal has drawn support from various earlier rulings, including Motorola Inc, Ericsson A.B. and Dassault Systems K.K.
The Taxpayer made payments to certain Singapore-based entities (SingCos) for purchase of certain software on a non-exclusive and non-transferable basis for the Taxpayer to use in respect of its own business. These payments were made without withholding any tax at source. The Tribunal, having regard to the nature of rights provided for in the license agreement, concluded that the payment was for a readymade off–the-shelf computer program, that was akin to purchase of a product. Furthermore, this was meant to be only used internally by the Taxpayer. Therefore, the payment was not for use of or right to use a copyright right but, rather, for use of a copyrighted article. Having regard to the provisions of the DTAA, this should not be treated as royalty but as business income of SingCos, which was not taxable in the absence of its permanent establishment in India.
Classification of cross-border software payments as royalty or business profits is a contentious issue in India. This ruling succinctly brings out the distinction between a copyright right and copyrighted article. Though the transaction under consideration was for purchase of software, along with codes/ instructions, the Tribunal appreciated the fact that the Taxpayer was not permitted to independently deal with or exploit the code/software but was allowed to use it for its own internal business alone on a non-exclusive and non-transferable basis.
The Tribunal, in this decision, has reaffirmed the principle that a distinction between copyright right and copyrighted article should be made after ascertaining the nature of rights relating to use and exploitation of the copyright right that has been parted with by the owner in favor of the licensee. While analyzing the issue, the Tribunal has drawn support from various earlier rulings, including Motorola Inc, Ericsson A.B. and Dassault Systems K.K.
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