Bombay High Court: Foreign company’s earnings from Indian branch providing access to SAP, not Royalty

Bombay High Court: Foreign company’s earnings from Indian branch providing access to SAP, not Royalty

Defines the amount received by Colgate Palmolive's Malaysian arm from India under the IT Act provisions

The Bombay High Court has dismissed the appeal filed by the revenue department (appellant) and explained the meaning of ‘royalty’ under the Income Tax Act, 1961. It held that the transfer of right in copyright was a sine qua non for applicability of Section 9(1)(vi) Explanation 2(v) of the IT Act.

The Division Bench of Justice KR Shriram and Justice Firdosh P. Pooniwalla observed that the consideration received by a foreign counterpart from its Indian branch for providing access to Systems Applications and Products (SAP) hosted by the Indian branch, could not be held as royalty.

The Judges stated that the receipts could not be subject to tax as royalty for varied reasons, including:

1. 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;

2. The receipts cannot be held to be processed 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;

3. 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);

4. 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 SAP.

The Bench clarified that the receipts were the assessee's business profit, but not taxable in India, as the assessee had no permanent establishment in India.

The Court held that the sum of USD 11,80,500 received by Colgate Palmolive's Malaysian arm (assessee) from Colgate Palmolive India for providing access to SAP, hosted by the assessee, could not be held as royalty under the IT Act provisions.

While advocate Suresh Kumar appeared for the appellant, the respondent was represented by senior advocate Percy Pardiwalla.