Aspect Software Inc v. ADIT

INCOME TAX ACT, 1961

--Income deemed toa ccrue or arise--Under section 9(1)(vi)Revenue earned from supply of software, whether 'royalty'--Aspect Software Inc ('Aspect US or the assessee') was a corporation incorporated in Delaware State, USA. The appellant was engaged in the business of provision of hardware, software and rendering of support services that enabled call centre companies, to better manage customer interactions via voice, email, web and fax. The assessee derived its revenue primarily from supply of 'contact solutions', software license and provision of services including, installation, maintenance and professional services. The assessee had also provided installation/ implementation and maintenance of the supplied hardware and software. The AO held that the assessee has a Permanent Establishment in India in the form of Fixed Place, Installation as well as Dependent agent under Article 5 of the Tax Treaty. ACC, the Indian subsidiary of assessee, was held to be PE of the assessee in India. He held that the revenue from supply of hardware was taxable as per Article 7 read with Article 5 of the Double Taxation Avoidance Agreement between India and USA 'the Tax Treaty'). The AO attributed to PE in India 15% of the revenues earned by Aspect US from software licensing. He further held that revenues earned from supply of software and support services are taxable as 'Royalty'/Fees for Included Services ('FIS') under the Act and as per Article 12 of the Tax Treaty on gross basis @ 15%. Revenue earned from supply of software was taxed as 'Royalty' under the Act and the Tax Treaty. The assessee sold contact solutions to the customers in India which was combination of software and compatible hardware that enables the customer of Aspect US to answer customer request, log in complaints and route communications. The software and hardware both are integral parts of the solutions which the assessee sells to the customers and channel partners in India. While the hardware is sold, the software is licensed. With respect to software, the customer is granted partial rights permitting the use of software for internal use. The Assessee submitted before the AO that the revenue received from sale of software embedded with hardware was not taxable in the hands of the assessee as royalty under the provisions of the Act or under the Tax Treaty. The assessee contended that the payment for software was for a copyrighted article and not for the copyright right and hence, it was not taxable under Article 12 of the Tax Treaty. The submissions made by the assessee were not found acceptable by the AO. The AO considered the definition of 'royalty' under section 9(1)(vi) as well as in Article 12(3) of the Tax Treaty and came to the conclusion that the amount received by the assessee from licensing of software qualified to be royalty, as per the said definitions. The DRP confirmed the action of the AO and held that the customer was getting a right to use the software, which could be used for internal operations in business of the customer. The nature of software is far from being 'shrink wrapped software'. Hence, the said software falls within the ambit of section 9(1)(vi) and the Tax Treaty. Held: The consideration received by the assessee for supply of product along with license of software to End, user was not royalty under Article 12 of the Tax Treaty. Even where the software is separately licensed without supply of hardware to the end users (i.e. eight out of 63 customers), Tribunal was of the view that the terms of license agreement were similar to the facts of Infrasoft Ltd. (Supra). Accordingly, it was that there was no transfer of any right in respect of copyright by the assessee and it was a case of mere transfer of a copyrighted article. The payment was for a copyrighted article and represented the purchase price of an article. Hence, the payment for the same was not in the nature of royalty under article 12 of the Tax Treaty. The receipts would constitute business receipts in the hands of the assessee and was to be assessed as business income subject to assessee having business connection/ PE in India.