2013 (8) TMI 952 - AT - Income Tax

Re-assessment u/s 147 r.w.s 148 - Period of limitation - Royalty - Article 12(3) DTAA with USA - The assessee is a foreign company incorporated in USA and is also a tax resident of US. Assessee contended that re assessment was made merely on the change of opinion of AO. - HELD THAT - Nothing is there on record even to suggest that the A.O made any inquiry whether the said receipt was taxable in the hands of the assessee under the normal provision of the Act and particularly u/s 9(1)(iv) of the Act as well as under Article 12 of the DTAA between India and USA - He initiated re-assessment proceeding within limitation period as mentioned in Section 147. Royalty - HELD THAT - The agreement is for the Licence or Sub-Licence for use of certain software rights as described in Exhibit A of the agreement. There is a clause for payment of fees and the fees are provided in schedule B. Relying on the judgement of Hon ble Karnataka High Court in the case of Samsung Electronics co. Ltd. oths 2011 (10) TMI 195 - KARNATAKA HIGH COURT payment made by the respondents to the non-resident supplier amounts to royalty and is rightly brought to tax in India. The assessee is not entitled to get the immunity of the DTAA between India and USA. When the decision of the Hon ble High Court of Karnataka is available then it is not necessary for the Tribunal to show more wisdom unless some contrary decision on the issue of another High Court or the Supreme Court has been brought to our notice. In our opinion all the decisions relied upon by the assessee are not helpful to decide the nature of payment received by the assessee in present case which is described as licence fee but in fact it is the royalty only.

Summary

Issues Involved:
1. Legality and validity of the re-assessment proceedings initiated under Section 147 of the Income-tax Act, 1961.
2. Taxability of license fees received from group companies as "royalty" under Section 9(1)(vi) of the Income-tax Act, 1961, and Article 12 of the Double Taxation Avoidance Agreement (DTAA) between India and the USA.

Detailed Analysis:

1. Legality and Validity of Re-assessment Proceedings:
The assessee challenged the re-assessment proceedings initiated under Section 147 of the Income-tax Act, 1961, for the assessment year 2004-05. The original assessment was completed under Section 143(3) of the Act. The Assessing Officer (A.O.) issued a notice under Section 148 within four years from the end of the assessment year, citing that the issue of taxability of license fees was not examined during the original assessment. The assessee argued that the re-assessment was based on a mere change of opinion, relying on various judicial precedents, including CIT Vs. Kelvinator of India Ltd. The A.O. and the Dispute Resolution Panel (DRP) rejected the assessee's objections, stating that the original assessment did not consider the issue in detail, and hence, there was no change of opinion. The Tribunal upheld the re-assessment proceedings, noting that the original assessment order was cryptic and did not address the crucial issue of taxability of license fees.

2. Taxability of License Fees as "Royalty":
The core issue was whether the license fees received for facilitating the grant of user rights in off-the-shelf software from Cummins India Ltd. (CIL) and Cummins Diesel Sales & Services (India) Ltd. (CDSS) were taxable as "royalty" under Section 9(1)(vi) of the Income-tax Act and Article 12 of the DTAA between India and the USA. The A.O. treated the license fees as "royalty," taxable in India, as the agreements indicated that the payments were for the use of software rights. The assessee contended that the payments were for the use of copyrighted software, not the copyright itself, and hence, should not be classified as "royalty."

The Tribunal examined the agreements between the assessee and Oracle, and between the assessee and its Indian subsidiaries. It noted that the software provided was for internal use, and the assessee had the non-exclusive right to use the software, which was not for commercial exploitation. The Tribunal referred to the Karnataka High Court's decision in Samsung Electronics Co. Ltd., which held that payments for the right to use software amounted to "royalty" under both the Income-tax Act and the DTAA. The Tribunal concluded that the license fees received by the assessee were indeed "royalty" and taxable in India, rejecting the assessee's reliance on other judicial precedents that were distinguishable on facts.

Conclusion:
The Tribunal dismissed the appeals, upholding the re-assessment proceedings and confirming the taxability of the license fees as "royalty" under both the Income-tax Act and the DTAA between India and the USA. The Tribunal relied on the Karnataka High Court's decision in Samsung Electronics Co. Ltd., emphasizing that the payments for the right to use software constituted "royalty," and thus, were taxable in India.