Facts
Citrix Systems Asia Pacific Pty. Limited (the Applicant), a company incorporated in Australia, is engaged in the business of providing software services which help in virtualization, networking and application delivery. The Applicant entered into non- exclusive agreements with independent Indian distributors for the distribution and sale of its software and hardware products in India.
The arrangement provided that the hardware products be shipped to the distributors who in turn would supply them to re-sellers and end-user customers. As regards the software no physical deliveries of the products are made to the distributors, but the end-user customer was required to download the software from the server of the Applicant. However, the distributors were invoiced for the software, and who in turn invoiced the resellers/ end customers.
The distributors also facilitated the sale of Citrix Subscription Advantage Programme, a package of support services which included product version updates, the subscription advantage news and update and secure portal access.
Issues before the AAR
Whether the payments received by the Applicant from the distributor for sale of software products and Citrix Subscription Advantage Program was in the nature of “royalty‟ as defined in Section 9(1)(vi) of the Income-tax Act, 1961 (“the Act”) and/or under Article 12 of India-Australia tax treaty (“DTAA”) and therefore subject to withholding tax under section 195 of the Act?
Observations and Ruling of the AAR
The expression „copyright‟ has been defined in the Copyright Act to mean the exclusive right to do or authorize doing of any of the acts referred to therein in respect of a work or any substantial part thereof. Additionally, in case of a computer programme, the copyright would include the right to sell or give on commercial rental or offer for sale or for commercial rental, any copy of the computer programme.
The owner of a copyright can grant an exclusive license to another to exploit the copyright or he can also grant a mere licence limited in point of right, limited in point of user, limited in point of duration. A lawful possessor of a computer programme (which can be an assignee, an exclusive licensee or a licensee of the program) has also got a right absolute or limited to use the copyright.
On a software being assigned or licensed for use, there is involved an assignment of the right to use the embedded copyright in the software or a license to use the embedded copyright, the Intellectual Property Right (IPR) in the software. Such software cannot be divorced from the IPR of the creator of the software embedded therein.
Software is nothing but a programme and other operating information used by a computer and so the sale or licensing of software for use passes to the grantee a copyright as defined in the Copyright Act. Thus, the sale or licensing of the software involves the grant of a right to use the copyright in the software. Thus when software is transferred or licensed for use, it takes within it the copyright embedded in the software.
Royalty under the Act has been defined as consideration for the transfer of all or any rights (including the grant of license) in respect of any copyright. The words „including the grant of license’ indicate an expansive definition and should be understood simpliciter, as the grant of a license.
Royalty under DTAA refers to payments made as consideration for the use of or right to use of any copyright, patent, etc. which could be construed to be wider than the one contained in the Act as it includes consideration for the use of a copyright in addition to the consideration paid for the right to use a copyright.
The distinction sought to be made between a copyright and copyrighted article appears to be illusory as when a copyrighted article is permitted or licensed to be used for a fee, the permission involves not only the physical or electronic manifestation of a programme, but also the use of or the right to use the copyright embedded therein.
Further the Copyright Act, the Act or the DTAA do not use the expression „copyrighted article‟, which could have been used if the intention was as claimed by the applicant.
The practice in Canada, the USA and other developed countries, allowing the use of protected software for a consideration by way of a contract was to treat the income as royalty and has also been stated in the commentary by Klaus Vogel.
The sale or licensing for use of copyrighted software amounts to the grant of a right to use a copyright.
Conclusion
The AAR held that the payments received by the Applicant from the distributor for sale of the software product or in respect of Citrix Subscription Advantage Programme are in the nature of royalty as defined in the Act as well as under the DTAA. The AAR also observed that there being divergence in views on the question at the different legislative levels, an authoritative pronouncement by the Supreme Court could settle this controversy.
Source: Citrix Systems Asia Pacific Pty.Limited (AAR No.822 of 2009 dated 6 February, 2012)
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