2013 (8) TMI 752 - AT - Income Tax

Royalty income - sale of Microsoft software products to the Indian distributors selling/licensing of software through independent distributors to the end users under the End User License Agreement (EULA). MS Corp is the sole owner of intellectual property rights vested in Microsoft software. It has granted exclusive license to manufacture and distribute Microsoft products to one of its wholly owned subsidiaries, M/s Gracemac (now merged with MOL Corporation), which, in turn, granted similar non-exclusive rights to its wholly owned subsidiaries, Microsoft Operations Pte.Ltd., Singapore (MO Singapore) to manufacture Microsoft products in Singapore and distribute such products in Asia (excluding non-English language products in China and Taiwan). The assessee has been appointed as a distributor of Microsoft products in India by MO Singapore. Held that - MRSC reproduced certain software products and distributed the same through chain of distributors in India. Therefore, the very appointment of distributors by MRSC in India, had business connection in India. But, MRSC cannot be taxed again on the same income by way of royalty for exploitation of same rights which had been assessed in the hands of Gracemac, otherwise it would result in double taxation -Decision in the case of Gracemac Corpn. and Microsoft Corpn. Versus ADIT 2010 (10) TMI 583 - ITAT, DELHI followed. Decided in favor of Assessee. Penalty for concealment u/s 271(1)(c) of the Income Tax Act Held that - As income has not been held to be assessable in the hands of the assessee, no justification in levy of penalty, therefore, the order of the CIT (A) deleting the penalty is upheld on the ground that as the income itself is not assessable in the hands of the assessee, there is no question of levy of penalty.

Summary

Issues Involved:
1. Taxability of revenue earned from the sale of Microsoft software products to Indian distributors as royalty under Section 9(1)(vi) of the Income-tax Act, 1961.
2. Initiation of penalty proceedings under Section 271(1)(c) of the Act.
3. Levy of interest under Section 234B of the Act.

Issue-wise Detailed Analysis:

1. Taxability of Revenue as Royalty:
The primary issue revolves around whether the revenue earned by the assessee from the sale of Microsoft software products to Indian distributors should be taxed as royalty under Section 9(1)(vi) of the Income-tax Act, 1961. The assessee, Microsoft Regional Sales Corporation (MRSC), a US-based company, contended that the revenue was business income and not taxable in India due to the absence of a permanent establishment (PE) in India. The Dispute Resolution Panel (DRP) and the Assessing Officer (AO) held that the payments made by Indian distributors were towards the use of copyright and not for the purchase of a copyrighted article, thus classifying it as royalty under Section 9(1)(vi).

The Tribunal, referencing its previous decisions for the assessment years 2002-03 to 2008-09, found that the facts were identical and decided in favor of the assessee. The Tribunal noted that the revenue earned from licensing Microsoft products was considered royalty but was taxable in the hands of M/s Gracemac Corporation, not MRSC. This decision was based on the principle that taxing the same income in the hands of MRSC would result in double taxation.

2. Initiation of Penalty Proceedings under Section 271(1)(c):
The assessee challenged the initiation of penalty proceedings under Section 271(1)(c) of the Act. The Tribunal deemed this issue premature and did not require adjudication at this stage, thus rejecting the ground as such.

3. Levy of Interest under Section 234B:
The assessee also questioned the levy of interest under Section 234B of the Act. The Tribunal held that the charging of interest under this section is consequential in nature and did not require separate adjudication.

Conclusion:
The Tribunal concluded that the revenue from the sale of Microsoft software products to Indian distributors constitutes royalty but is not assessable in the hands of MRSC as it has already been held taxable in the hands of M/s Gracemac Corporation. The appeal of the assessee was partly allowed, rejecting the grounds related to penalty proceedings and interest levy as either premature or consequential.