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2016 (11) TMI 1651 - AT - Income Tax


Issues Involved:
1. Taxation of consideration received from the sale of software products under section 9(1)(vi) of the Income Tax Act, 1961.
2. Validity of assessment without issuing a draft assessment order as mandated under section 144C of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Taxation of Consideration Received from Sale of Software Products:

The primary issue in this appeal was whether the consideration received by the assessee from its subsidiary in India, Dassault Systems Private Limited (DSSPL), towards the sale of software products should be taxed as royalty income under section 9(1)(vi) of the Income Tax Act, 1961. The assessee argued that the software products were delivered directly to the end customers, and DSSPL acted only as a distributor without obtaining any right to copy or commercially exploit the software. The Assessing Officer, however, considered the amount received as royalty income, falling within the definition of 'Royalty' under Article 12 of the Double Taxation Avoidance Agreement (DTAA) between India and the USA.

The assessee's counsel relied on previous Tribunal orders in the assessee’s own case and other related cases, which held that such amounts were not in the nature of royalty. The Departmental Representative contended that the definition of royalty was broadened by Explanation 4 to Section 9(1)(vi) of the Act, introduced by the Finance Act, 2012 with retrospective effect from 01.06.1976, to include the transfer of copyrighted software, thereby making the payments received by the assessee from DSSPL liable to tax as royalty income.

The Tribunal, after considering the rival contentions and perusing the orders of the authorities below, noted that the payments received by the assessee from DSSPL were based on the same regional support agreements considered in earlier years by the Tribunal. The Tribunal reiterated its previous stance that the payments for software did not constitute royalty under the DTAA, as the definition of royalty in the DTAA had not changed despite the amendment to Section 9(1)(vi) of the Act. The Tribunal emphasized that an assessee could rely on the DTAA when it was more advantageous, and the definition of royalty under the DTAA should prevail over the amended definition in the Act.

The Tribunal relied on the Hon'ble Delhi High Court's judgment in the case of DIT vs. Infrasoft Ltd, which held that the amendment to Section 9(1)(vi) was not relevant when an assessee relied on the DTAA provisions. The Tribunal concluded that the receipts from DSSPL could not be considered as royalty and were not liable for taxation in India. Consequently, the addition made by the Assessing Officer was deleted.

2. Validity of Assessment Without Issuing Draft Assessment Order:

The assessee also raised an additional ground questioning the validity of the assessment done without first issuing a draft assessment order as mandated under section 144C of the Act. However, since the Tribunal decided the primary issue in favor of the assessee on merits, it deemed the additional ground as academic and did not find it necessary to adjudicate on this point.

Conclusion:

The appeal of the assessee was allowed, and the order pronounced on 30th November 2016 at Chennai held that the consideration received from DSSPL for the sale of software products was not taxable as royalty income under the provisions of the DTAA between India and the USA, thereby deleting the addition made by the Assessing Officer.

 

 

 

 

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