2019 (12) TMI 1315 - AT - Income Tax

Royalty - Payments received by the assessee for sale of specialized software and maintenance and support services (including upgrades) - proposed to tax the same at 10% as per clause 2 of Article 12 of the India-Finland tax treaty - HELD THAT - End user customers by entering into a maintenance agreement could access and download the updates offered by the assessee. As the payments received by the assessee towards distribution of sub-releases and main releases were also for a right to provide a copyrighted article i.e software updates, which was akin to the amounts received for distribution of the specialized off-the-shelf software products, and not for any right to use the copyright embedded in the said copyrighted article (i.e software products), therefore, the same too in our considered view cannot be construed as royalty‟ income, and would be the business income‟ of the assessee. On a similar footing, we find, that as per the distributors agreements, it was the responsibility of the distributors to resolve the end user customers queries. In case, the distributors would require assistance on issues as regards functionalities, trouble shooting and verifying error situations, the assessee would provide the same. The aforesaid queries would be resolved via e-mails or telephone calls by the employees of the assessee based in Finland. In our considered view, as the payments received by the assessee from rendering of the maintenance and support services does not fall within the scope and gamut of the definition of royalty‟ in Article 12 of the India-Finland tax treaty, therefore, the payments received by the assessee for providing such support services cannot be held as royalty‟ in the hands of the assessee. Amount received by the assessee from its distributors for sale of specialized software and maintenance and support services (including upgrades) cannot be held as being in the nature of royalty‟ as per Article 12 of the India-Finland tax treaty. Grounds of appeal allowed in terms of our aforesaid observations. Levy of interest u/s 234A - HELD THAT - Levy of interest u/s 234B has been challenged. As the calculation of the interest liabilities would be consequential to the determining of the tax liability of the assessee, if any, therefore, the same is being restored to the file of the A.O

Issues Involved:

1. Invalid service of notice under Section 143(2) of the Act.
2. Time-barring assessment proceedings.
3. Taxability of receipt from the sale of 'off-the-shelf' software as 'Royalty' under Section 9(1)(vi) of the Act and Article 13 of the India-Finland Tax Treaty.
4. Taxability of receipt from maintenance and support services (including upgrades) as 'Royalty' under Section 9(1)(vi) of the Act and Article 13 of the India-Finland Tax Treaty.
5. Interest under Section 234A and 234B of the Act.
6. Penalty proceedings under Section 271(1)(c) of the Act.

Detailed Analysis:

1. Invalid Service of Notice Under Section 143(2) of the Act:

The appellant did not press this ground of appeal, and thus it was dismissed as not pressed.

2. Time-Barring Assessment Proceedings:

The appellant contended that the draft assessment order was barred by limitation, arguing that the order of withdrawal from the Authority of Advance Ruling (AAR) was received by the tax authorities on 24/02/2015. However, the AO and DRP concluded that the order was received on 30/08/2016, making the draft assessment order validly framed up to 31/10/2016. The Tribunal upheld this conclusion, noting that the appellant failed to substantiate the earlier receipt date.

3. Taxability of Receipt from Sale of 'Off-the-Shelf' Software as 'Royalty':

The appellant argued that the payments received for the sale of off-the-shelf software were not 'royalty' but sales revenue, as the distributors were granted the right to distribute the copyrighted article, not the copyright itself. The AO and DRP treated these payments as 'royalty' under Section 9(1)(vi) of the Act and Article 13 of the India-Finland Tax Treaty. The Tribunal, however, found that the software provided was for resale/distribution without transferring the right to use the copyright, thus the payments were sales revenue and not 'royalty'. The Tribunal relied on precedents and the nature of the agreements to support this conclusion.

4. Taxability of Receipt from Maintenance and Support Services (Including Upgrades) as 'Royalty':

The appellant contended that payments for maintenance and support services (including upgrades) were not for the transfer of any right in the copyright of the article. The AO and DRP considered these payments as 'royalty' under Section 9(1)(vi) of the Act and Article 13 of the India-Finland Tax Treaty. The Tribunal disagreed, stating that the payments were for providing a copyrighted article (software updates) and not for the right to use the copyright, thus not 'royalty'. The Tribunal emphasized the nature of the services and the agreements, concluding that these payments were business income.

5. Interest Under Section 234A and 234B of the Act:

The appellant challenged the computation of interest under Sections 234A and 234B. The Tribunal noted that the calculation of interest liabilities would be consequential to the determination of the tax liability and restored this issue to the AO for recalculation.

6. Penalty Proceedings Under Section 271(1)(c) of the Act:

The appellant contested the initiation of penalty proceedings under Section 271(1)(c). The Tribunal found this grievance premature and dismissed it.

Separate Judgments:

The Tribunal's conclusions and decisions were consistent across both assessment years (2010-11 and 2011-12), applying the same reasoning and legal principles to both appeals.

Conclusion:

The Tribunal partly allowed the appeals, holding that the receipts from the sale of software and maintenance/support services were not 'royalty' but business income, and remanded the interest computation issue to the AO. The penalty proceedings issue was dismissed as premature.

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