IT Act| Consideration Earned By Foreign Company From Indian Branch For Providing Access To SAP System Is Not Royalty: Bombay HC

While dismissing the appeal filed by the Revenue Department (Appellant) and explaining the meaning of royalty under the Income Tax Act, 1961, the Bombay High Court held that transfer of right in respect of copyright is a sine qua non for applicability of Section 9(1)(vi) Explanation 2(v) of the 1961 Act.

The Division Bench of Justice K R Shriram and Justice Firdosh P Pooniwalla therefore observed that the consideration received by a foreign counterpart from its Indian branch for providing access to the SAP system hosted by the Indian branch, cannot be held as royalty.

Advocate Suresh Kumar appeared for the Appellant (Revenue Department), whereas Senior Advocate Percy Pardiwalla appeared for the Respondent (Assessee).

After considering the submission, the Bench observed that the concerned receipts cannot be subject to tax as royalty for varied reasons such as:

(i) the sum cannot be charged to tax as ‘equipment royalty’ under Section 9(1)(vi) Explanation 2 as the relevant clause (iva) was inserted in Explanation 2 by Finance Act 2001, thus, not applicable to the relevant AY i.e. 1999-2000;

(ii) the receipts cannot be held to be process royalty under Section 9(1)(vi) Explanation 2 (i)/(ii)/(iii), absent the transfer of right in respect of a process etc., imparting of any information concerning the working of or use of any process etc. or allowing usage of any process etc;

(iii) the consideration is not covered under Section 9(1)(vi) Explanation 2 (v) and transfer of a right in respect of a copyright is a sine qua non for applicability of Section 9(1)(vi) Explanation 2(v);

(iv) Section 9(1)(vi) Explanations 4 and 5 do not apply to the present case as no right, property or information was transferred by the Assessee to Colgate Palmolive India while granting access to the SAP system.

Hence, the Bench clarified that said receipts are Assessee's business profit but not taxable in India as the Assessee has no Permanent Establishment in India.

Therefore, the High Court concluded that the sum of USD 11,80,500 received by Colgate Palmolive's Malaysian arm (Assessee) from Colgate Palmolive India for providing access to the SAP system hosted by the Assessee cannot be held as royalty under the provisions of the Act.

Cause Title: Commissioner of Income Tax v. Colgate Palmolive Marketing SDN BHD

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