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2018 (5) TMI 1861 - AT - Income Tax


Issues Involved:
1. Classification of income from software licensing as 'royalty' or 'business income'.
2. Applicability of 'education cess' over and above the tax rate stipulated in the Indo-German DTAA.

Detailed Analysis:

Issue 1: Classification of Income from Software Licensing

Background Facts:
The assessee, a German company, licensed its software to two Indian entities, Robert Bosch Engineering & Business Solutions Ltd. (RBI) and Tata Consultancy Services Ltd. (TCSL). The principal issue is whether the income from these licenses qualifies as 'royalty' under the Income Tax Act, 1961 and the Indo-German Double Tax Avoidance Agreement (DTAA), or as 'business income'.

Assessee's Argument:
The assessee contends that the income should be classified as 'business income' since it does not have a Permanent Establishment (PE) in India. It argues that the software licensing does not involve the transfer of any copyright rights but merely a limited right to use the software for internal business purposes. The software provided is an off-the-shelf product, and the licensees do not have rights to reverse engineer, modify, or commercially exploit the software.

Revenue's Argument:
The Revenue argues that the licensing agreements grant extensive rights to the licensees, including the right to develop, configure, and adapt the software for use in products that can be sold or sublicensed. This, according to the Revenue, qualifies as 'royalty' income under the Income Tax Act and the DTAA.

Legal Provisions:
- Domestic Law: Section 9(1)(vi) of the Income Tax Act defines 'royalty' to include payments for the use or right to use any copyright, patent, trademark, or similar property.
- Indo-German DTAA: Article 12 defines 'royalties' as payments for the use of or the right to use any copyright, patent, trademark, or similar property.

Judgment:
The Tribunal analyzed the licensing agreements and the nature of the rights granted. It referred to the decision of the Hon'ble jurisdictional High Court in DIT v. Infrasoft Ltd., which distinguishes between 'copyright rights' and 'copyrighted articles'. The Tribunal concluded that the licenses granted by the assessee allowed the development of derivative works, which implies a transfer of intellectual property rights. Therefore, the income qualifies as 'royalty' under both the Income Tax Act and the DTAA.

Specific Findings:
- The software 'EB Guide Studio' is used as a platform for developing Human Machine Interface (HMI) models, which are derivative works.
- The licensing agreements grant rights to develop, configure, and adapt the software, which goes beyond mere internal use.
- The income from RBI qualifies as 'royalty'. For TCSL, the matter is remanded back to the Assessing Officer for a decision based on the specific agreement.

Issue 2: Applicability of 'Education Cess'

Assessee's Argument:
The assessee argued that 'education cess' should not be charged over and above the tax rate stipulated in the Indo-German DTAA. It cited decisions from other tribunal cases where 'education cess' was considered a 'surcharge' and not part of the agreed tax rate.

Revenue's Argument:
The Revenue did not present any contrary decisions.

Judgment:
The Tribunal accepted the assessee's plea, directing that 'education cess' or any other 'surcharge' should not be imposed, and the tax rate as per the DTAA should apply.

Conclusion:
The appeal is partly allowed. The income from RBI is classified as 'royalty', and the matter regarding TCSL is remanded back for further examination. The 'education cess' is not applicable over the DTAA tax rate.

 

 

 

 

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