Payment received for sale of copyright article does not amount to royalty under the India – USA tax treaty

Payment received for sale of copyright article does not amount to royalty under the India – USA tax treaty

Court : Mumbai bench of the Income-tax Appellate Tribunal

Brief : Recently, the Mumbai bench of the Income-tax Appellate Tribunal held that the payment received by the taxpayer company towards the sale of copyright article does not amount to royalty within the provisions of Article 12(3) of the India-USA tax treaty (tax treaty).

Citation : DDIT v. Alcatel USA International Marketing Inc [2010-TII-123-ITAT-MUM-INTL]

Facts of the case

The taxpayer, a tax resident of USA, was marketing and selling Alcatel products to customers outside USA. The taxpayer supplied software under the Subscriber Data Note (SDN) network software agreement to Reliance Infocomm Ltd (RIL) for the purpose of telecommunication network of RIL.

• The Agreements clearly mentioned that

The taxpayer grants a perpetual, irrevocable, non-exclusive, unrestricted right to Reliance for the use of Software within Reliance’s network. However, title to the copyright in software remains with the taxpayer.

Reliance shall not transfer, assign, sublicense or outsource the license without the written permission of the taxpayer except where it is required for its own network.

Reliance shall not use the software for commercial time sharing with non-affiliate third parties, rental, lease and sub-licensing to non affiliate third parties and service-bureau purposes.

• The taxpayer company received consideration of INR 167.26 million for the supply of the said software. The software supplied by the taxpayer company to RIL creates a database to store subscriber profiles and other information, e.g. customer phone number, calling plan, etc and make this information available to different network element requesting it.

• The AO treated the consideration received by the taxpayer as royalty taxable in India.

Taxpayer’s contentions

• The taxpayer contended that the consideration received for the supply of software was not taxable in India as the same was in the nature of business profit and not royalty and in the absence of PE of taxpayer in India the consideration received was not taxable in India.

Tribunal’s ruling

• The Tribunal observed that identical issue has been dealt by Delhi Tribunal in taxpayer’s own case for assessment year 2003-04. The Delhi Tribunal after relying on the decision of the Delhi Special Bench in the case of Motorola Inc. Ericsson Radio Systems AB and Nokia Corporation v. DCIT [2005] 96 TTJ 1 (Del) (SB) held that the transaction under consideration cannot be considered as royalty under the provisions of Act or under the tax treaty.

• The Tribunal, after examining the relevant clauses of the agreement between the taxpayer and RIL and the provisions of the Act and the tax treaty, held that payment received by the taxpayer company towards the sale of copyright article does not amount to royalty within the meaning of Article 12(3) of the DTAA between India and USA