The Income Tax Appellate Tribunal (ITAT), Mumbai has held that the sale receipts of shrink-wrap software are not “royalty” within the meaning of the Income Tax Act, 1961.
Facts of the case:
The assessee was aggrieved by the order of the Assessing Officer wherein it was observed that as per the ‘License and Subscription Service Agreement’, SolidWorks granted the end-user a non-exclusive non-transferable license to use the software and the printed or electronic documentation. He further observed that in lieu of the single-user license which entitled the end-user to use one copy of the software or a multiple user or network license, as the case may be, the end-user would pay license fees.
Interpretation of law:
According to him, the software was owned by SolidWorks, and the copyright, trademark, and proprietary rights were retained by it and not transferred to the end-user. He further held that the software was not goods or tangible property but was an intangible intellectual property, which being similar to a patent, invention, design, secret formula, etc. would fall within the meaning of ‘process’ as mentioned in ‘Explanation 2’ to the definition of ‘royalty’ under the Act.
Subsequently, the DRP upheld the sale receipts of software to be in the nature of ‘royalty, both under the India-USA tax treaty, as well under the Income Tax Act.
The Tribunal cited the order of the Mumbai ITAT wherein it was held that the receipts from the sale of Shrink-wrap software are not liable to tax in India accordingly, AO was directed to delete the addition so made on account of receipts for the sale of Shrink-wrap software.
“In the backdrop of our aforesaid observations, we are of the considered view that as the fact situation pertaining to the year under consideration had not witnessed any change as in comparison to the immediately preceding year, therefore, respectfully following the view taken by the Tribunal in the assesses own case for A.Y 2015-16 in ITA No. 7027/Mum/2018, dated 10.01.2020, we herein conclude that the addition made by the A.O by treating the sale receipts of shrink-wrap software as ‘royalty’ cannot be sustained, and is hereby vacated,” the Tribunal said.