2017 (3) TMI 1748 - AT - Income Tax

Royalty receipts - consideration received by the assessee for software licensed / sublicensed - assessee argued that the assessee company sells software to Indian companies for their use and not for resale - CIT-A took the view that software itself is a secret process which is used in data processing and in as such the payment is made for using such process and the payment is in the nature of royalty and alternatively also held that software is a scientific equipment and the payment received being for use of such equipment would be construed as royalty - DTAA between India and USA - HELD THAT - Respectfully following the legal position as determined by Hon ble Delhi High Court in Infrasoft Ltd. 2013 (11) TMI 1382 - DELHI HIGH COURT and Reliance Industries Ltd 2016 (6) TMI 96 - ITAT MUMBAI we are of the opinion that the assessee has transferred the copyrighted article/ material which does not give rise to any royalty income as held by ld CIT(A) in the impugned order. VARs constituted a PE of the appellant in India - assessee submits that the CIT (A) not adjudicated the ground of appeal raised before him. It was further argued in alternative that M/s Satyam and Compaq are well established company in the field of software services and question of their dependent upon the assessee does not arise - HELD THAT - CIT(A) has not adjudicate the ground of appeal despite specific ground of appeal raised by assessee. Hence, we deem it appropriate to restore this ground of appeal to the file of ld CIT(A) to decide the issue afresh in accordance with law. Penalty levied u/s 271(1)(c) - HELD THAT - We have granted full relief to the assessee as holding that consideration received for software licence/sublicence is not royalty. As in the quantum assessment, the treatment of the income has been reversed; consequently the disallowance in the assessment order is deleted. Thus, the appeal filed by Revenue even on merit left no merit for further consideration. Because, as the order on the basis of which the penalty was levied has been set-aside by us. Even otherwise the penalty was levied by AO on account of different treatment besides claimed by the assessee. It is the settled law that mere disallowance of claim which is based on bonafide belief cannot be a basis for levy of penalty. There is no specific allegation or finding by AO the that assessee has intentionally and deliberately furnished the inaccurate particular or concealed the income. Hence, appeal filed by the Revenue is dismissed.

Summary

Issues Involved:
1. Treatment of consideration received for software licensed/sublicensed as royalty.
2. Non-deduction of tax at source by Satyam Computer Services Ltd and Agrotech Food Ltd.
3. Determination of whether Value Added Resellers (VARs) constituted a Permanent Establishment (PE) of the appellant in India.
4. Deletion of penalty levied under section 271(1)(c) of the Income Tax Act.

Detailed Analysis:

1. Treatment of consideration received for software licensed/sublicensed as royalty:
The Assessee argued that the consideration received for software licenses should not be treated as royalty but as business income. The Assessing Officer (AO) and Commissioner of Income Tax (Appeals) [CIT(A)] treated the income as royalty based on the view that the software constitutes a "secret process" and its usage involves a payment for such process. The AO also considered the software as scientific equipment, thus categorizing the payment as royalty. The Tribunal, however, referenced the Delhi High Court's decision in *Infrasoft Ltd.*, which held that the transfer of a copyrighted article does not constitute royalty. The Tribunal concluded that the payments received by the assessee for software licenses were for copyrighted articles and not for the use of a copyright, thus not constituting royalty. Consequently, the Tribunal allowed the appeal on this ground.

2. Non-deduction of tax at source by Satyam Computer Services Ltd and Agrotech Food Ltd:
The Assessee contended that Satyam Computer Services Ltd and Agrotech Food Ltd had not deducted tax at source, and the Department had accepted this situation without initiating any action against them. The Tribunal did not specifically address this issue in detail but focused on the broader context of the royalty treatment and the nature of the transactions.

3. Determination of whether VARs constituted a Permanent Establishment (PE) of the appellant in India:
The Assessee argued that the Value Added Resellers (VARs), such as Satyam Computer Services Ltd and Compaq Computer (India) Pvt. Ltd., did not constitute a Permanent Establishment (PE) in India. The CIT(A) did not adjudicate this specific ground. The Tribunal restored this issue to the file of the CIT(A) for fresh adjudication, emphasizing the need for a detailed examination of whether the VARs could be considered dependent agents or PEs under the existing legal framework.

4. Deletion of penalty levied under section 271(1)(c) of the Income Tax Act:
The AO had levied a penalty under section 271(1)(c) on the grounds of concealment and furnishing inaccurate particulars of income. The CIT(A) deleted the penalty, holding that the Assessee had a bona fide belief that the income was not taxable and had disclosed all relevant facts. The Tribunal upheld the CIT(A)'s decision, noting that the primary basis for the penalty was the interpretation of law rather than any deliberate concealment or furnishing of inaccurate particulars. Moreover, since the Tribunal had already ruled in favor of the Assessee on the quantum assessment, the basis for the penalty no longer existed. The appeal by the Revenue against the deletion of the penalty was dismissed.

Conclusion:
The Tribunal allowed the appeals filed by the Assessee for AY 2002-03 and AY 2004-05, determining that the consideration received for software licenses did not constitute royalty. The issue of whether VARs constituted a PE was remanded to the CIT(A) for fresh adjudication. The appeal by the Revenue against the deletion of the penalty under section 271(1)(c) was dismissed.