2011 (11) TMI 132 - AT - Income Tax

Sale of Software - Business profit or Royalty - Article 5 of the India - USA treaty - assessee sold software product to NIPL - Neither NIPL nor its end users were permitted to copy the same and exploit such products for commercial purposes. The customers were bound to use such software only for their own business purpose. They did not have any right to make any further copies of the product. The end users were not entitled to copy or sell or otherwise transfer the software acquired from NIPL. - Held that - where consideration is only for the use of a copyrighted product and divorced from the right to copy the same, it, by no stretch of Imagination, can be construed as royalty for the obvious reason that the right to copy, which is sine qua non of copyright, is lacking. - Thus it takes the character of business profits. - since assessee does not have a permanent establishment in India and thus its business profit cannot be taxed in India. - Decided in favor of assessee.

Issues Involved:
1. Treatment of proceeds from the sale of software as royalty income.
2. Consideration of the amount received from the sale of software as business income or royalty income.
3. Interpretation of copyright and royalty under the Income-tax Act, 1961 and the Copyright Act, 1957.
4. Application of the Double Taxation Avoidance Agreement (DTAA) between India and the USA.
5. Consistency in the treatment of transactions by the Revenue authorities.

Issue-wise Detailed Analysis:

1. Treatment of proceeds from the sale of software as royalty income:
The assessee, a non-resident company, filed its return declaring income from the sale of software to NIPL for resale. The assessee claimed this income as business income, not taxable in India due to the absence of a permanent establishment under Article 5 of the India-USA DTAA. The Assessing Officer (AO) treated the proceeds from the sale of software as royalty income under Article 12(3) of the DTAA, considering it as payment for the transfer of copyright in the computer program. The Commissioner of Income-tax (Appeals) [CIT(A)] upheld this view, treating the amount collected from Indian parties towards "intellectual value" as royalty.

2. Consideration of the amount received from the sale of software as business income or royalty income:
The Tribunal had to decide whether the sum of Rs. 58.29 lakh was royalty or business profits. If considered business profits, it would not be taxable in India due to the absence of a permanent establishment. The Tribunal noted that the assessee had two types of transactions with NIPL:
- Agreement A: Granted a license to duplicate and distribute software, resulting in royalty income of Rs. 1.76 crore.
- Agreement B: Sold software products to NIPL for resale, which the assessee claimed as business income.

3. Interpretation of copyright and royalty under the Income-tax Act, 1961 and the Copyright Act, 1957:
The Tribunal examined the definition of "royalty" under Section 9(1)(vi) of the Income-tax Act and "copyright" under Section 14 of the Copyright Act, 1957. It concluded that royalty is consideration for the transfer of rights in respect of copyright, while the sale of copyrighted products without transferring the right to copy does not constitute royalty. The Tribunal distinguished between the transfer of copyright (Agreement A) and the sale of copyrighted products (Agreement B).

4. Application of the Double Taxation Avoidance Agreement (DTAA) between India and the USA:
The Tribunal referred to Article 12(3) of the DTAA, which defines royalties. It emphasized that payments for the use of or the right to use any copyright are considered royalties. Since the payment of Rs. 58.29 lakh was for the sale of copyrighted products without transferring the right to copy, it did not fall under the definition of royalties in the DTAA.

5. Consistency in the treatment of transactions by the Revenue authorities:
The Tribunal noted that NIPL's transactions were accepted by the Transfer Pricing Officer (TPO) and the AO as purchases and not as royalty. It highlighted that the Revenue cannot take a contrary stand in the hands of the payee (assessee) after accepting the nature of the transaction in the hands of the payer (NIPL).

Conclusion:
The Tribunal concluded that the amount of Rs. 58.29 lakh received by the assessee from NIPL was business income and not royalty. Since the assessee did not have a permanent establishment in India, the business profits could not be taxed in India. The appeal was allowed, and the order of the CIT(A) was overturned.

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