( This article is contributed by Megha Mishra. Megha is a final year Charted Accountant Student and is also working as an analyst at PriceWaterHouseCoopers. Needless to state that the views expressed here are personal)
Payment made for the use of software has been, for sometime now an area of ambiguity and has attracted a lot of controversy. There are various judicial precedents which have held time and again, that the payment made for purchase of “off- the- shelf” software is not a payment for ‘royalty’. However, in a recent ruling in M/s Gracemac Corporation v. ADIT, the Delhi ITAT has held that consideration for the sale/ purchase of “off-the-shelf” software is treated as Royalty.
This ruling in Gracemac is a significant departure from the position laid down by the Indian courts in several cases like Tata Consultancy Services , Motorola Inc, Sonata Information Technology v ACIT, and others, wherein a distinction was drawn between ‘copyright’ and ‘ copyrighted article’. However, in Gracemac, the ITAT held that the term ‘copyrighted article’ has not been defined either in the Income Tax Act, 1961 or under the copyright Act, 1957; the term ‘copyrighted article’ had originated in the US Regulations and then found its way into the OECD commentary. Further, the ITAT observed that the term ‘copyrighted article’ was independently defined only for the sake of drawing out a meaning for the same; hence there was/is no need in importing the expression’ copyrighted article’ for the interpretation of the term ‘royalty’. Alternatively, the Tribunal also stated that as per the definition of the term ‘royalty’ in section 9(1)(vi) of the Income Tax Act,1961, a copyright subsists in a computer programme and therefore any sale of software amounts to ‘royalty’.
However, in my opinion, when a license to use the generalized software is issued by the owner to the end user, the payment made for the same should not be treated as a ‘royalty’, since the end user does not get the right to commercially exploit the said software. Thus, as also held in various judicial precedents, the sale of ‘off-the-shelf’ software should be treated as sale of an article and not as royalty.