2018 (5) TMI 1807 - AT - Income Tax

Characterizing of receipts relating to sale of software - Royalty as been brought to tax @ 10% in view of the India-Ireland DTAA as well as under the provision of Section 9(1)(vii) - payment for the use of or right to use any copyright of various nature which connotes an exclusive right to use any copyright in an article which is in the nature of the terms defined therein - taxation in view of India-Ireland DTAA - Held that - In the present case it is quite ostensible that no use or right to use of a copyright in the software has been ever divested either to the distributors or to the end users. Even for the sake of argument it is accepted that copyright has been transferred then requirement of law is that assignments of the copyrights has to be complied with as provided in sections 18 identify such work; specify right assign; the duration of the assignment and the territorial extent of the assignment. In none of the agreements it can be seen that there is any kind of assignment of copyright. In view of the OECD commentary also such a consideration received on the sale of copyrighted software product without any kind of transfer or assigning of fully or partially copyright therein to the end user does not amount to royalty. Such guideline of OECD can well be taken note of since the treaty which is subject matter of consideration is India-Ireland treaty which is based on OECD Model Convention therefore the interpretation of the term royalty as given in the OECD Model Convention have some pervasive value. In any case we have already held that in terms of Section 14 of the Copyright Act none of the rights enshrined therein have been parted with the assessee in favour of the assessee or the end customer inasmuch as they can enjoy the right in the same manner in which the assessee can; and no such specific right concerning the use of copyright have been conferred by the assessee to these persons or end user. Assessee has not been given any of the authority to do any of the act as contemplated in various sub clauses of Section 14. Thus under the Indian copyright Act also there is no passing of any kind of right to use by the assessee to the Indian distributor. The Hon ble Delhi High Court in the case of DIT vs. Infrasoft 2013 (11) TMI 1382 - DELHI HIGH COURT have threadbare discussed this issue in the context of India-US DTAA which has by and large the same definition to come to a conclusion that mere transfer of right to use copy righted material i.e. software program cannot be taxed as royalty in terms of Article 12(3). The Hon ble High Court has also held that amendment in the domestic law even from retrospective effect cannot be rad into the treaty - payment taxed in India - Thus we hold that the nature of payment as received by the assessee from sale of Adobe Software products cannot be characterized as royalty and therefore the same is outside the purview of taxation in view of India-Ireland DTAA. Since admittedly assessee does not have a PE in India therefore such an income cannot be taxed as business income under Article 7 and further it is also not the case of the Revenue that such a payment is to be taxed as business income. - Decided in favour of assessee.

Summary

Issues Involved:
1. Characterization of receipts from the sale of software as "Royalty."
2. Taxability under India-Ireland DTAA and Indian Income Tax Act.
3. Definition and scope of "Royalty" under the DTAA and Indian law.
4. Interpretation of copyright and its transfer.
5. Impact of retrospective amendments to the Indian Income Tax Act on DTAA.

Issue-wise Detailed Analysis:

1. Characterization of Receipts from Sale of Software as "Royalty":
The primary issue was whether the receipts from the sale of software by an Irish company to Indian distributors should be characterized as "Royalty" and taxed accordingly. The Assessing Officer (AO) and the Dispute Resolution Panel (DRP) characterized the receipts as "Royalty" under Section 9(1)(vi) of the Income Tax Act and the India-Ireland Double Taxation Avoidance Agreement (DTAA). The AO argued that software is licensed, not sold, and the payment is for the use of the copyright, thus qualifying as "Royalty."

2. Taxability under India-Ireland DTAA and Indian Income Tax Act:
The assessee contended that the payments do not fall under the definition of "Royalty" as per Article 12 of the India-Ireland DTAA. The assessee argued that the payment was for acquiring the right to use the software product itself, not the copyright in the product. The AO, however, maintained that the payments were for the use of the copyright and should be taxed as "Royalty."

3. Definition and Scope of "Royalty" under the DTAA and Indian Law:
The AO referred to the definition of "Royalty" from the India-US treaty and held that the payments received from licensing software qualified as "Royalty." The DRP also upheld this view, noting that the software is licensed, not sold, and the license includes the right to use the software, thus falling under the definition of "Royalty." The assessee argued that the payments were for the sale of a copyrighted article and not for the use of the copyright itself.

4. Interpretation of Copyright and Its Transfer:
The assessee argued that the software distribution agreement did not grant any rights in the copyright to the Indian distributors or end-users. The agreements explicitly prohibited duplicating, reverse engineering, selling, or licensing the software products. The AO and DRP, however, interpreted the agreements as granting the right to use the software, thus qualifying the payments as "Royalty."

5. Impact of Retrospective Amendments to the Indian Income Tax Act on DTAA:
The AO and DRP considered the retrospective amendments to Section 9(1)(vi) of the Income Tax Act, which expanded the definition of "Royalty" to include payments for the use of software. The assessee argued that these amendments could not override the provisions of the DTAA, which should prevail in case of conflict.

Decision:
The Tribunal held that the payments received by the assessee from the sale of software products could not be characterized as "Royalty" under the India-Ireland DTAA. The Tribunal emphasized that the agreements did not transfer any rights in the copyright to the Indian distributors or end-users. The payments were for the sale of copyrighted articles, not for the use of the copyright itself. The Tribunal also noted that the retrospective amendments to the Indian Income Tax Act could not be read into the DTAA. Consequently, the payments were not taxable as "Royalty" in India, and the appeal of the assessee was allowed. The Tribunal also held that the issue of credit for taxes withheld by the Indian distributors became purely academic since the payments were not taxable in India.