Consideration for online e-courses and information resources taxable as Royalty
SkillSoft Ireland Limited [‘the applicant’], a company incorporated in Irelandis engaged in the business of providing on demand e-learning course offerings, online information resources, flexible learning technologies and performance support solutions [‘products’]. The applicant entered into a reseller agreement with SkillSoft Software Services India Private Limited [‘SkillSoft India’]. Under this agreement, SkillSoft India had the right to license, market, promote, demonstrate and distribute products by providing online access to such products.
SkillSoft India bought the products from the applicant on a principal-to-principal basis and sold the same to Indian end users/customers in its own name. According to the applicant, it haddeveloped copyrighted products by using software and techniques, on several topics which were electronically stored on its server outside India.These products were licensed to Indian end users/customers under the master licence agreement between SkillSoft India and Indian end users. SkillSoft India granted to the Indian end users a non-exclusive, non-transferable license to use and to allow the applicable authorized audience to access and use products.The products consists of two components namely the course content and the software through which the course content is delivered to the end customer. Its e-learning platforms are not instructor driven and have no element of human interaction in the learning programs. The interaction is restricted to software enabled virtual interaction through text, images and graphics that are utilized to enhance the learning experience.
The question before the Authority for Advance Ruling [‘AAR] was whether payments received by the applicant on account of e-learning course offerings, online information resources, etc. is taxable as ‘royalty’under Article 12(3)(a) of the tax treaty?.
The AAR observed and ruled as under –
- The taxpayer argued that the payment received by the applicant is only in respect of a copyrighted article and no rights in the copyright are granted to the Indian end-users. The AAR referred to its own ruling in the case of Citrix Systems Asia Pacific Private Limited [343 ITR 1] wherein itconcluded that such distinction was illusory. The payments received from the distributor for sale of the software product were in the nature of royalty both within the meaning of Section 9(1)(vi) of the Income-tax Act, 1961 (the Act) and within the meaning of Article 12 of the relevant tax treaty.
- As regards thetreatment of computer programme and computer database as ‘literary work’ in terms of Article 12(3)(a) of the tax treaty, the AAR in the case of FactSethad held that the computer database fell within the scope of literary work and observed that by an inclusive definition in Section 2(o) of Copyright Act, 1957 computer programmes and computer databases were included within the ambit of literary work. SkillSoft products consist of the software through which the course content was delivered to the end customers who gained access to specially designed software for understanding of the content. Also, the applicant was marketing several copyrighted software containing simulation exercises, specially designed by them and are not available in public domain. Accordingly, the software and computer databases created by the applicant were included within the ambit of ‘literary work’ and thereforecovered under Article 12(3)(a) of the tax treaty.
- With regards to the grant of non-exclusive, non-transferable rights in the license the Karnataka High Court in the case of Synopsis International Old Limited [212 Taxman 454]had observed that the taxpayer had granted a non-exclusive and non-transferable license, without providing a right to sub-license, for the use of software and design technologies. In the present case also, the reseller agreement grants to the customer a non-exclusive, nontransferablelicense (without the right to sublicense). The High Court observed that merely because the words non-exclusive and non-transferrable are used in the license, it didnot take away software out of the definition of ‘copyright’. Further, even if it was not a transfer of exclusive right in the copyright, the right to use the confidential information embedded in the software in terms of the aforesaid license indicated that there was a transfer of certain rights which the owner of the copyright possessed in the said computer software/programme in respect of the copyright owned. It was not necessary that there should be a transfer of exclusive right in the copyright.In the present case also similar words were been used in the reseller agreement as well as the master license agreement. Therefore, irrespective of the use of the words like non-exclusive and non-transferable in the two agreements, there wasdefinitely a transfer of certain rights of which the applicant is the owner.
- The Karnataka High Court in the case of Synopsis held that under the tax treaty, to constitute royalty there need not be any transfer or any rights in respect of any copyrights, and it was sufficient if the consideration was received for the use of or the use to any copyright. In terms of the tax treaty, the consideration paid for the use or a right to use the said confidential information in the form of computer software programme itself constitutes royalty. Accordingly, the payment received by the applicant are in the nature of royalty under Article 12(3)(a) of the tax treaty.