In Velankani Mauritius vs. DDIT (ITAT Bangalore) the company supplied shrink-wrap licensed software to Infosys Technologies in India. The Indian tax authorities assessed the profits from the transaction as taxable royalties, rather than business profits which would not be subject to tax as Velankani did not have an Indian permanent establishment. The tax authority’s view was first confirmed by the tax court but has now been overruled on appeal; the appeal court held that the profits from the sale of shrink-wrap licensed software are not royalties.
The term “shrink-wrap licence” is shorthand for a software licence agreement which is physically enclosed in a package with software (on CD or DVD) and so cannot be accessed by the customer until after purchase.
The appeal court considered Motorola Inc vs. DCIT 95 ITD 269, where the Delhi Special Bench held that the key distinction was whether one was paying for a copyright, or simply for material that is protected by copyright. A payment for copyright is a royalty for Indian tax purposes, including double tax treaties. A payment for material protected by copyright could not be a royalty either under domestic law or for the purposes of double tax treaties.
Accordingly, the appeal court held that profits on sale of shrink-wrap licence software could not be taxed as a royalty either under Indian tax rules or under a double tax treaty.