A royalty is a usage-based payment made by one party to another for the right to ongoing use of an asset, sometimes an intellectual property (IP). Royalties are typically agreed upon as a percentage of gross or net revenues derived from the use of an asset or a fixed price per unit sold of an item of such, but there are also other modes and metrics of compensation.

This article is all about a recent ruling and a discussion on royalty from income tax point of view.License agreement for allowing the use of the software would not be royalty under DTAA.

Recently Delhi high Court upheld the order of the Tribunal that amount received by the assessee under the license agreement for allowing the use of software would not be royalty under DTAA.

TAXATION ISSUES

Royalty Payment

1)      Income from royalty shall be deemed to accrue or arise in India, if it is payable by the Government.

2)      Income  from royalty payable by a person who is resident in India. But if it payable in respect of any right, property or information used or services utilized for the purpose of a business or profession carried on by such person outside India not to be deemed to accrue or arise in India.

3)      Income from royalty payable by a non resident person in respect of any right, property or information used or services utilized for the purpose of a business or profession carried on by such person in India, is deemed to accrue or arise in India.

Royalty as consists of lump sum payment by a resident for computer software supplied by a non resident manufacturer along with computer shall not be covered by this clause.

As per section 9(1)(vi), any income by way of royalty in respect of any right, property or information is deemed to accrue arise in India. The term “royalty” means consideration for transfer of all or any right in respect of certain rights, property or information. There have been conflicting court rulings on the interpretation of the definition of royalty, on account of which there was a need to resolve the following issues:

Does consideration for use of computer software constitute royalty?

1)      Is it necessary that the right, property or information has to be used directly by the payer?

2)      Is it necessary that the right, property or information has to be located in India or control or possession of it has to be with the payer?

3)      What is the meaning of the term “process”?

Royalty means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head Capital gain for:

1)      The transfer of all or any rights (including the granting of a license) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property;

2)      The imparting of any information concerning the working of, or the use of, a patent, invention, model, design

3)      The use of any patent, invention, model, design, secret formula or process of similar property

4)      The imparting of any information concerning technical, industrial, commercial etc.

5)      The use or right to use any industrial, commercial or scientific equipment but not including the amounts referred.

6)      The transfer of all any rights (including the granting of a license) in respect of copyright literary, artistic or scientific work including films or video tapes or use in coneection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films.

Example:

KTV Ltd. Hong Kong based company engaged in producing entertainment program. It broadcasts its programmes globally including India. It transmits the program through satellite. Comment whether the income of Rs. 2Lakhs of Xltd is taxable in India.

Ans:  Under the amended definition of royalty payment for any process is to be considered as royalty and process shall include transmission by satellite whether for uploading or downloading. As KTV is a company carrying out activities in India, the payment to X Ltd shall constitute royalty.

As the process has been utilized for a business activity in India, whether the non resident has a place of business in India or not. Royalty shall constitute as income deemed to accrue or arise in India.

FACTS OF THE CASE

IT/ILT : Delhi High Court upheld the order of the Tribunal that amount received by the assessee under the license agreement for allowing the use of the software would not be royalty under the DTAA

• It held that what was transferred was neither the copyright in the software nor the use of the copyright in the software, but what was transferred was the right to use the copyrighted material or article which was distinguishable from the rights in a copyright.

• It further held that the right that was transferred was not a right to use the copyright but was only limited to the right to use the copyrighted material and the same would not give rise to any royalty income and would be business income.

• The Delhi High Court expressed its disagreement with the decision of the High Court in the case of CIT v. Samsung Electronics Co. Ltd. [2011] 203 Taxman 477 (Kar.) that right to make a copy of the software and storing the same in the hard disk of the designated computer and taking backup would amount to copyright work.

So License agreement for allowing the use of the software would not be royalty under DTAA

 

For reading the judgment please go to the link provide below.

Click here to read the judgement.

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