Further, 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. would fall within the meaning of ‘process’ as mentioned in ‘Explanation 2’ to the definition of ‘royalty’ under the Act. 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. 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 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. Accordingly, the assessee had entered into software distribution agreements with resellers in India who would buy shrink wrapped software from the assessee, and in turn sell the same to the customers in India. It was observed by the A.O, that the software was sold by the assessee through distributors/resellers to the end-users in India. In the present case, during the course of the assessment proceedings it was observed by the A.O that the shrink-wrap application software developed and sold by the assessee was called “SolidWorks”, and was used for 3D modeling.
The issue under consideration is whether the contention of AO is correct in holding that the income from sale of shrink-wrapped software is taxable in India as a royalty? Dassault Systems Solid Works Corporation Vs DCIT (ITAT Mumbai)