Royalty meaning – Section 9 of Income Tax Act
In order to understand the taxation of royalty, we need to first understand the royalty meaning under Section 9 of Income Tax Act .
As per Explanation 2 to clause (vi) of sub-section 1 of Section 9, the term ‘royalty’ means consideration including any lumpsum consideration
but excluding any consideration which would be the income of the recipient under the head ‘Capital Gains’ for : –
- the transfer of all or any rights including the granting of licence in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property;
- the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property.
- the use of any patent, invention, model, design, secret formula or process or trade mark or similar property;
- the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill;
- the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB;
- the rendering of any service in connection with the activities listed above.
Points to be considered for determining royalty meaning under Section 9 of Income Tax Act
- Royalty may be in form of lump-sum consideration.
- Consideration from transfer of any rights would not be deemed as royalty when such income is taxable as capital gains.
- The definition of ‘royalty’ is wide enough to cover both ` royalties as well as copyright
PAYMENT FOR COMPUTER SOFTWARE – EXPLANATION 4 TO CLAUSE (VI) of SUB-SECTION 1 OF SECTION 9 of INCOME TAX ACT for the purpose of meaning of royalty under Section 9 of Income Tax Act
- There were contrary view on Taxability of shrink-wrapped software wherein various Courts held it as royalty (on the reasoning that there was transfer of copyright embedded in software) but certain Courts had contrary views.
- Finance Act, 2012 amended the royalty definition, and inserted Explanation 4 with retrospective effect from June 1, 1976.
- Explanation 4 clarified that, transfer of all or any rights in respect of any right, property or information includes and has always included (i .e ., Explanation is applicable with retrospective effect) transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred .