2018 (10) TMI 1939 - AT - Income Tax

Income deemed to accrue or arise in India - nature of the payments received from licensing of manufacturing and distribution rights of Microsoft Operations Pte Ltd - taxable as royalty under the provisions of Section 9(1)(vi) of the Act or not? - HELD THAT - In the present case, it is noticed that the issue under consideration was also a subject matter of the assessee s appeal for the assessment years 2007-08 to 2010-11 2016 (9) TMI 1566 - ITAT DELHI wherein we set aside the whole issue to the file of the assessing officer to decide it afresh in accordance with the decision of the Hon ble Delhi High Court in case of DIT V Infrasoft Limited 2013 (11) TMI 1382 - DELHI HIGH COURT - Appeal of the assessee is allowed for statistical purposes.

Issues Involved:
1. Computation of total income.
2. Determination of income from licensing and distribution rights.
3. Tax on revenue as 'Royalty' under the India-US tax treaty.
4. Tax on revenue as 'Royalty' under the Income Tax Act, 1961.
5. Transfer of TDS credit.
6. Levying surcharge and education cess.
7. Initiation of penalty proceedings under section 271(1)(c).
8. Levying interest under section 234B.

Detailed Analysis:

1. Computation of Total Income:
The Assessee challenged the computation of total income by the AO at INR 27,79,45,07,738 against 'Nil' income reported in the return. The Tribunal noted that the only grievance relates to whether the payments received from licensing of manufacturing and distribution rights are taxable as "royalty" under Section 9(1)(vi) of the Act.

2. Determination of Income from Licensing and Distribution Rights:
The Assessee argued that the payments received from licensing of manufacturing and distribution rights to Microsoft Operations Pte Ltd. (MO) were INR 16,67,67,04,643 and not taxable as royalty. The Tribunal observed that the issue was previously decided in favor of the Assessee for assessment years 2007-08 to 2010-11, where the matter was restored to the AO for fresh adjudication.

3. Tax on Revenue as 'Royalty' under the India-US Tax Treaty:
The Tribunal examined whether the payments received by the Assessee are deemed to arise in India under Article 12(7) of the India-US tax treaty and whether revenue from the sale of software by MRSC is taxable in India under Article 12(2) and Article 12(3)(a). The Tribunal referred to the decision in DIT vs. Infrasoft Ltd., which held that the sale of software is a sale of "Copyrighted Article" and not "Copyright," and thus, not taxable as royalty under the India-US tax treaty in the absence of a PE in India.

4. Tax on Revenue as 'Royalty' under the Income Tax Act, 1961:
The Tribunal considered whether payments received from MO are taxable as 'Royalty' under Section 9(1)(vi) of the Act. The Tribunal noted that the AO and DRP had relied on the decision in Gracemac Corporation, which was not considered good law after the decision in DIT vs. Infrasoft Ltd. The Tribunal set aside the issue to the AO for fresh adjudication in light of the Delhi High Court's decision in Infrasoft Ltd.

5. Transfer of TDS Credit:
The Assessee contended that the AO erred in not transferring the TDS credit claimed by MRSC to MOLC. The Tribunal did not provide a specific ruling on this issue but implied that it should be addressed in the fresh adjudication by the AO.

6. Levying Surcharge and Education Cess:
The Tribunal did not specifically address the issue of levying surcharge and education cess on income assessed under the India-US Tax Treaty. The matter was to be considered in the fresh adjudication by the AO.

7. Initiation of Penalty Proceedings under Section 271(1)(c):
The Assessee argued that the AO erred in initiating penalty proceedings under Section 271(1)(c). The Tribunal did not provide a specific ruling on this issue, implying that it should be reconsidered in the fresh adjudication by the AO.

8. Levying Interest under Section 234B:
The Tribunal acknowledged the Assessee's contention that interest under Section 234B is not maintainable in law based on jurisdictional High Court decisions and other judicial precedents. The Tribunal implied that this issue should also be reconsidered in the fresh adjudication by the AO.

Conclusion:
The Tribunal set aside the entire issue to the AO for fresh adjudication, directing the AO to follow the Delhi High Court's decision in DIT vs. Infrasoft Ltd., which held that revenue from the sale of software is not taxable as royalty under the India-US tax treaty. The appeal was allowed for statistical purposes.

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