2015 (11) TMI 1529 - AT - Income Tax

Addition to royalty - non deduction of tds - DTAA between India and USA - Held that - The orders passed by AO in 2007-08 and 2008-09 have been placed wherein the AO accepted the contentions of ESI India that such payments cannot be treated as royalty and deleted the disallowance for non-deduction of tax at source under section 40(a)(i) of the Act. The assessee ESI US sold the software to ESI India and in the assessment of ESI India , it is the payments are treated as towards the purchase of software and not as payment towards Royalty. The principle needs to be applied consistently. In our view, in the hands of the Indian company, when it is not treated as Royalty, then, the same consideration should also be extended to the same transaction in the case of AE i.e. ESI US . In the present case, income towards sale of software to the Indian AE cannot be treated as Royalty . Hence, the addition made by the AO towards Royalty is deleted. - Decided in favour of assessee

Summary

Issues:
1. Whether the payment towards the sale of software products is to be considered as royalty for taxation purposes.
2. Whether the income of the assessee towards the sale of software products qualifies as royalty under the Income-tax Act and the Double Taxation Avoidance Agreement (DTAA) between India and the USA.

Analysis:

Issue 1:
The appeal was against the assessment order passed under sections 143(3) and 144C of the Income-tax Act for the Assessment Year (AY) 2011-12. The assessee, a US-based company, sold software products to its Indian group entity, ESI India, which further sold them to customers in India. The Assessing Officer treated the payment for software sales as royalty, resulting in an upward adjustment to the assessee's income. The Dispute Resolution Panel (DRP) observed a similar issue in a previous case involving ESI India and ESI US but rejected the assessee's objections. Subsequently, the final assessment order considered the software sale payment as royalty, albeit with a reduced surcharge rate.

Issue 2:
The assessee contended that the payments for software products should not be classified as royalty, citing a previous case where the AO accepted similar contentions for ESI India's assessment. The Tribunal noted the consistent treatment of such payments as non-royalty in ESI India's case and held that the same principle should apply to ESI US. As the Indian company's income from software sales was not considered royalty, the Tribunal ruled in favor of the assessee, deleting the addition made by the AO. The appeal was allowed, and the decision was pronounced on November 27, 2015.

This detailed analysis outlines the key issues addressed in the judgment, including the treatment of software sale payments as royalty for taxation purposes and the application of consistent principles across related entities. The Tribunal's decision to delete the addition to the assessee's income underscores the importance of uniformity in tax treatment and the impact of previous rulings on similar cases.