ING Vysya Bank Ltd. vs The Deputy Director of Income Tax

 

In a recent judgment, the ITAT, Bangalore held has held that a payment made by an Indian company to a non-resident company in pursuance of a software agreement for the usage of ‘shrink wrapped software’ is in the nature of a royalty, and consequently the Indian company has to deduct tax at source under the Indian Income Tax Act.

ING Vysya Bank Ltd, India had filed an appeal against the order of the CIT (A)- IV, Bangalore, which held that the payment made by the assesse to ING Computer lease, Belgium (ICLB) for the use of Oracle software, which the latter was permitted to sub-lease pursuant to a lease agreement with Oracle Netherlands B.V.. The payment for the use was a one-time payment, and the assesse contended that it was a sale of intellectual property rights, and hence it did not have to deduct TDS. The authority contended that it was not a sale, but merely licensing of the software because ING was only permitted to use the software, and did not transfer any ownership rights, which remained with Oracle Netherlands B.V.

The Tribunal read Explanation ii of Section 9(1) of the Indian Income Tax Act, which defines ‘royalty’ and held that license for the use of software falls under two of the mentioned clauses, the first dealing with a license in relation to a patent, invention, model, design, secret formula or process or trademark, and the second dealing with a license in relation to a copyright. The India- Switzerland DTAA had a very similar clause under the definition of ‘royalty’ under Article 12, and consideration paid to use the software fell within the ambit of the definition. The Tribunal concluded that the fact whether it was a one-time payment was irrelevant, and what was necessary was the mode of rights that was vested in the transferee. In the present case, it was a royalty payment, since the ownership rights were still vested in Oracle Netherlands B.V.

In reaching such conclusion, the Tribunal has agreed to the position taken by the Delhi Bench of the Tax Tribunal in Microsoft Corporation vs. ADIT, and disagreed to the position taken by the Mumbai Bench in Deputy Director of Income Tax (International Taxation) v Reliance Industries Ltd. (The facts of the Mumbai judgment were very similar to the current one, it could not lease/sub-lease, etc. and was only entitled to use it. The Court still held that it was a sale of intellectual property rights, MANU/IU/0936/2010)

This leaves the debate about the treatment of consideration paid for the use of software as royalty open.

By Abhinav Harlalka (4th year, NUJS)