Payment for software licensed to foreign HO and used by Indian branch with non-exclusive rights isn't 'royalty'

Where foreign Bank had obtained a license to use software and, subsequently, allowed its Indian branch to use such software, data processing cost reimbursed by Indian branch for use of such software could not be deemed as royalty if head office alone had exclusive right of license to use software.

Facts:

a)  The assessee-bank, incorporated in Belgium, was operating through a branch office in India.  It had acquired banking application software from an Indian company.

b)  Later on, when its branch was set up in India, it allowed the Indian branch to use the same software by making it accessible through server located at Belgium.

c)  In terms of agreement, the branch had to reimburse the cost of data processing for use of said software to the head office.

d)  The Assessing Officer opined that payment made by Indian branch amounted to ‘royalty’. Further, the CIT(A) reversed the order of AO. The aggrieved-revenue filed the instant appeal.

The Tribunal held in favour of assessee as under:

1)  As per the definition of 'royalty' provided in Article12(3)(a) of India-Belgium DTAA (‘treaty’), when the payment of any kind is received for 'use' of or 'the right to use' of any of the copy right of any item or for various terms used in the said article, then only it can be held as 'royalty';

2)  The character of payment towards royalty depends upon the independent 'use' or the 'right to use' of the computer software, which is a kind of copyright. In the instant case, the Branch did not have any independent right to use or control over such computer software installed in Belgium, but it simply sent the data to the Head Office for getting it processed;

3)  The Branch was only reimbursing the cost of processing of such data to the Head Office. Such reimbursement did not fall within the ambit of 'royalty'. To fall within its ambit, the Branch should have exclusive and independent use or right to use the software and for such usage, payment had to be made in consideration thereof;

4)  The character of the payment under the royalty transactions depends upon the rights that the transferee acquires in relation to the use and exploitation of the software programme;

5)   In the instant case, there was no such right which had been acquired by the Branch in relation to the usage of software, because the head office alone had the exclusive right to use the software. Thus, the reimbursement of the data processing cost to the Head Office did not fall within the ambit of definition of 'royalty' under article 12(3)(a) of treaty.  Accordingly, the conclusion drawn by the Commissioner (Appeals) was to be affirmed. – ADIT v. Antwerp Diamond Bank NV Engineering Centre [2014] 44 taxmann.com 175 (Mumbai - Trib.)