2021 (9) TMI 1337 - AT - Income Tax

Income Accrued in India - revenue received by the assessee from supply of software - taxability in India as royalty/s 9(l)(vi) of the Income Tax Act, as well as Article 13(3) of the India - France DTAA - HELD THAT - As decided in Alcatel Lucent International France 2021 (7) TMI 829 - ITAT DELHI the amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India, as a result of which the persons referred to in section 195 of the Income Tax Act were not liable to deduct any TDS under section 195 - Decided in favour of assessee.

Summary

Issues Involved:
Appeals by Revenue against CIT(A) orders for assessment years 2012-13, 2013-14 & 2014-15 regarding taxability of revenue received from software supply as royalty under ITA and DTAA.

Analysis:

Issue 1: Taxability of revenue from software supply as royalty
The primary issue revolved around whether revenue received by the assessee from software supply should be considered taxable in India as royalty under Section 9(l)(vi) of the Income Tax Act and Article 13(3) of the India-France DTAA. The CIT(A) had deleted the addition made by the AO, which the Revenue challenged. The Tribunal referred to past decisions where it was held that supply of embedded software did not constitute royalty under Section 9(l)(vi) as it was part of the hardware supplied, and the software did not have an independent existence. The Tribunal also cited the Supreme Court's judgment in TATA Consultancy Service Vs. State of Andhra Pradesh, emphasizing that software incorporated on media qualifies as goods. The High Court and Supreme Court upheld decisions favoring the assessee, concluding that the consideration for software supply did not amount to royalty under the ITA or DTAA.

Issue 2: Impact of clarificatory amendments on taxability
The Revenue contended that the CIT(A) erred in not considering Explanation 5 and 6 to Section 9(l)(vi), inserted by clarificatory amendments with retrospective effect. However, the Tribunal, in line with previous rulings, maintained that the supply of software along with hardware did not attract royalty taxation, emphasizing the integrated nature of the software with the hardware.

Issue 3: Adequacy of compensation and application of precedent
The Revenue argued that the CIT(A) wrongly considered the adequacy of compensation of another entity while determining the assessee's income and misapplied the ratio of a specific case. However, the Tribunal, following established decisions, upheld that the software supply was an integral part of the GSM system and not subject to separate royalty taxation, dismissing the Revenue's contentions.

In conclusion, the Tribunal dismissed all appeals by the Revenue, upholding the CIT(A)'s orders based on established legal precedents and the non-taxability of revenue from software supply as royalty. The decisions were in line with past judgments by the High Court and Supreme Court, emphasizing the integrated nature of software with hardware and its classification as goods.