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2018 (5) TMI 1861 - AT - Income TaxTaxability of license fee as Royalty - license fee from RBI in respect of software EB Guide Studio - Income deemed to accrue or arise in India - whether the licensed product/s developed by using the assessee s software EB Guide Studio is a derivative program, or not? - HELD THAT - The parties have in the instant case themselves regarded the consideration (license fee) as royalty, implying a grant of right to use the Intellectual Property Rights (IPRs) embedded in the software inasmuch as it gets transmitted/embodied in the licensed products, with the user (RBI) being invoiced on the basis of the licensed products supplied. The decision in Infrasoft Ltd. 2013 (11) TMI 1382 - DELHI HIGH COURT , rather, on facts, supports the case of the Revenue. The license fee from RBI in respect of software EB Guide Studio earned by the assessee, in our view, in view of the fore-going, qualifies to be royalty. We have as yet considered only the said license fee there-from, from RBI. As regards the software licensed to TCSL, we do not find any specific agreement on record, nor was the same referred to during hearing. In fact, no specific arguments were advanced by the parties in relation thereto. We are therefore unable to issue any definite findings with regard to the license fee from TCSL. The matter therefore shall accordingly have to travel back to the file of the AO for a decision on merits consistent and in accordance with the findings/observations made herein, of-course after allowing the assessee a reasonable opportunity to state its case in the matter. We may though clarify that if the development agreement on record is also applicable to TCSL our findings would be equally applicable to the license fee from TCSL as well. AO shall proceed accordingly. We decide accordingly. Applicability of Education cess on DTAA rate - charged Education cess over and above the tax rate stipulated in the Indo-German DTAA, on the royalty income - HELD THAT - Education cess is only a surcharge is clarified by the relevant Finance Act itself. Further, that surcharge is only a tax, stands clarified by the Apex Court in CIT v. K. Srinivasan 1971 (11) TMI 2 - SUPREME COURT . We, accordingly, have no hesitation in, accepting the assessee s plea, directing the non-imposition of the education cess or any other surcharge , so that the tax rate per the DTAA only shall apply. See THE BOC GROUP LIMITED 2016 (1) TMI 414 - ITAT KOLKATA - We decide accordingly.
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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