Issue
Is a payment from the taxpayer to company X, for the surrender of data licensing rights, a 'royalty' for the purposes of paragraph (c) of the definition of 'royalty' or 'royalties' in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?
Decision
No. A payment from the taxpayer to company X, for the surrender of data licensing rights, is not a royalty for the purposes of paragraph (c) of the definition of 'royalty' or 'royalties' in subsection 6(1) of the ITAA 1936.
Facts
The taxpayer is an Australian resident company.
Y is the owner of the data licensing rights.
Company X and Y entered into a rights agreement under which company X was granted the data licensing rights.
Later, company X entered into a surrender agreement with the taxpayer under which company X agreed to surrender the data licensing rights for the payment of a fixed sum by the taxpayer to company X.
The taxpayer also entered into a license agreement with Y to acquire the data licensing rights. Y did not receive any payment from the taxpayer or from company X for entering into that agreement.
The data licensing rights acquired by the taxpayer from Y under the license agreement relate to the exclusive right to distribute any form of electronic catalogue containing information on the products to dealers worldwide.
Company X, Y and the taxpayer are unrelated and were dealing with each other on arms length terms.
Reasons for Decision
The definition of 'royalty' or 'royalties' in subsection 6(1) of the ITAA 1936 is an inclusive definition. This means that the definition of the term includes not only the types of payments listed in the definition, but also payments that are royalties within the ordinary meaning of the term.
The ordinary meaning of the term 'royalty' has been considered in many cases including Stanton v. Federal Commissioner of Taxation (1955) 92 CLR 630; (1955) 11 ATD 1; (1955) 6 AITR 216. In considering the essence of a royalty, the High Court said that: ... the modern applications of the term seem to fall under two heads, namely the payments which the grantees of monopolies such as patents and copyrights receive under licenses and payments which the owner of the soil obtains in respect of the taking of some special thing forming part of it or attached to it which he suffers to be taken.
Paragraph (c) of the definition of 'royalty' or 'royalties' in subsection 6(1) of the ITAA 1936 provides that the term 'royalty' includes any amount paid or credited, however described or computed, and whether the payment or credit is periodical or not, to the extent to which it is paid or credited, as the case may be, as consideration for the supply of scientific, technical, industrial or commercial knowledge or information.
It is considered that the payment to company X is not a payment 'for the supply of ..... commercial knowledge or information' for the purposes of paragraph (c) of the definition of 'royalty' or 'royalties' in subsection 6(1) of the ITAA 1936 because it was made to induce company X to surrender the data licensing rights which company X had obtained from Y.
Although the payment to company X and the surrender of the data licensing rights by company X made it possible for the taxpayer to acquire the data licensing rights from Y, the payment itself is not a royalty as it was not made to the owner of the data licensing rights to acquire those rights but was paid to a third party as compensation for the surrender of the rights company X had obtained from Y.
It is considered that there is a presumption in the definition of 'royalty' or 'royalties' in paragraph (c) of subsection 6(1) of the ITAA 1936 that a payment made as consideration 'for the supply of .... commercial knowledge or information' must be made to the owner of the commercial knowledge or information to constitute a royalty. This view is supported by the comments made by the High Court of Australia in Stanton v. Federal Commissioner of Taxation (1955) 92 CLR 630; (1955) 11 ATD 1; (1955) 6 AITR 216, viz: ...the payments which the grantees of monopolies such as patents and copyrights receive under licenses and payments which the owner of the soil obtains....
Further support for the above view is found in Taxation Ruling IT 2660, which discusses the ordinary meaning of 'royalty' and how that meaning is extended by the definition in subsection 6(1) of the ITAA 1936. For present purposes paragraph 10(b) of IT 2660 states that a common law royalty will have the following feature: The payment is made to the person who owns the right to confer that beneficial privilege or right - Barrett v. F. C. of T. (1968) 118 CLR 666; Sherritt Gordon Mines Ltd; Case H9 76 ATC 39; 20 CTBR (NS) Case 64. However, the payment would still be a royalty if paid to another person or otherwise applied or dealt with at the direction of the owner.
Y did not receive any part of the amount the taxpayer paid to company X for the surrender of the data licensing rights. Furthermore, the consideration was not paid to another person or otherwise applied or dealt with at the direction of Y. The entire payment remained with company X and no part of the payment passed to the owner of the data licensing rights, Y.
Accordingly, the payment made by the taxpayer to company X is not a royalty for the purposes of paragraph (c) of the definition of 'royalty' or 'royalties' in subsection 6(1) of the ITAA 1936.