‘Royalty‟ liable to be taxed in India under the provisions of the Income Tax Act, 1961 and the India-UK DTAA: Delhi HC

Issue  

Petitions filed to challenge the order dated 10.08.2016 of the Authority for Advance Rulings (Income Tax), New Delhi. 

Facts  

• EYGSL (UK)‟ is a limited liability company engaged in providing technology and other support services and software licenses to member firms of the EY network in various countries all over the world. 
• The Petitioner – EYGSL (UK) has entered into contracts with various third-party vendors for the procurement of various software. It has also entered into a contract with EY member firms to provide support services and/or deliverables. 
• The EYGBS (India) Private Limited is an Indian company engaged in providing back-office support and data processing services. It has entered into an agreement with the EYGSL (UK) whereby it receives, right to benefit from the Deliverables and/or Services‟ from EYGSL (UK). 

Findings  

In the view of this court, income tax payable in India and a foreign country. Importantly, as is now reflected by explanation 4 to section 90 of the Income Tax Act and under Article 3(2) of the DTAA, the definition of the term “royalties” shall have the meaning assigned to it by the DTAA, meaning thereby that the expression “royalty”, when occurring in section 9 of the Income Tax Act, has to be construed with reference to Article 12 of the DTAA. 

Thus, by virtue of Article 12(3) of the DTAA, royalties are payments of any kind received as consideration for “the use of, or the right to use, any copyright” of a literary work, which includes a computer programme or software.  

Therefore, the amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India, as a result of which the persons referred to in section 195 of the Income Tax Act were not liable to deduct any TDS under section 195 of the Income Tax Act. 

Judgement  

Delhi HC held that the Impugned Rulings dated 10.08.2016 passed by the learned AAR are set aside and the payment received by EYGSL (UK) for providing access to computer software to its member firms of EY Network located in India, that is, EYGBS (India), does not amount to ‘royalty‟ liable to be taxed in India under the provisions of the Income Tax Act, 1961 and the India-UK DTAA. 

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