2022 (2) TMI 1292 - AT - Income Tax

Income deemed to accrue or arise in India - Royalty receipt - AO held payment falls under the term Royalty within the meaning of clause (iii) of explanation to Section 9(1) of the Income Tax Act, 1961 within the meaning of royalty as defined under Article 13 between India-Netherland treaty and taxed the receipt of Rs.1.83 crores @ 10% - HELD THAT - We find that this issue stands covered by the order of the Hon ble Supreme Court decision in Engineering Analysis Centre of Excellence Pvt. Ltd. 2021 (3) TMI 138 - SUPREME COURT amounts paid by resident Indian end-users/distributors to nonresident computer software manufacturers/suppliers, as consideration for the resale/use 226 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 of the Income Tax Act. - Decided in favour of assessee. Payment received on account of Information Communication Technology (ICT) service charges from Perfetti Van Melle India Pvt. Ltd. taxed as Fees for Technical Services under Article 12 of the India-Netherlands DTAA - HELD THAT - As decided in case of SCA Hygiene Products AB 2021 (1) TMI 323 - ITAT MUMBAI the person receiving the money as royalty, such as the actual seller of the software in this case, and the person providing service ancillary or subsidiary to the enjoyment of that right, must be the same. That's not the case here. In the present case, the payment received by the assessee has been held to be in the nature of reimbursement, which is outside the ambit of taxation. The person selling the SAP software is Be One Solution, Switzerland, whereas the person providing the services in question is the assessee. Article 12(4)(a) will not, therefore, come into play at all. In our considered view, therefore, the taxation under article 12 in the present case can come into play only when the make available clause is satisfied, but then the Assessing Officer's justification for the satisfaction of 'make available' clause, for the detailed reasons set out earlier in this paragraph, does not meet our judicial approval. In view of these discussions, as also bearing in mind the entirety of the case, we uphold the plea of the assessee on this point as well. Accordingly, we hold that the income on account of Information Technology Services is also not taxable under article 12 - Appeal of assessee allowed.

Summary

Issues Involved:
1. Assessment of income at INR 5,54,28,352/- against NIL returned income.
2. Taxation of reimbursement of SAP software and Microsoft license fees as Royalty.
3. Taxation of Information & Communication Technology (ICT) service charges as Fees for Technical Services (FTS).
4. Charging of interest under section 234B.
5. Initiation of penalty proceedings under section 270A.

Issue-wise Detailed Analysis:

1. Assessment of Income at INR 5,54,28,352/-:
The assessee contested the assessment of income at INR 5,54,28,352/- by the AO against NIL returned income. The AO had issued a show cause notice questioning the non-taxation of SAP software license fees, Microsoft license fees, and ICT service charges.

2. Taxation of Reimbursement of SAP Software and Microsoft License Fees as Royalty:
The assessee received INR 1,83,92,376/- as reimbursement for SAP software and Microsoft licenses. The AO taxed this amount as Royalty under section 9(1)(vi) of the Income Tax Act and Article 13 of the India-Netherlands DTAA, relying on the ITAT Delhi judgment in the case of Microsoft. The DRP upheld this decision, citing various judgments, including those of the Karnataka High Court, which concluded that payments for software licenses constitute Royalty as they involve the use of copyright.

However, the assessee relied on the Supreme Court judgment in Engineering Analysis Centre of Excellence Pvt. Ltd., which clarified that payments for software do not constitute Royalty if they do not create any interest or right in the use of copyright. The ITAT agreed with the assessee, stating that the DR’s attempt to distinguish the Supreme Court judgment did not hold, and thus, the amount received for software licenses was not taxable as Royalty.

3. Taxation of ICT Service Charges as Fees for Technical Services (FTS):
The assessee received INR 3,70,35,976/- for ICT services, which the AO taxed as FTS under Article 12 of the India-Netherlands DTAA. The AO and DRP held that these services made available technical knowledge, skill, and processes to the Indian entity, thus qualifying as FTS.

The ITAT referred to the Co-ordinate Bench of ITAT Mumbai in SCA Hygiene Products AB Vs. DCIT, which dealt with similar issues. The ITAT emphasized the "make available" clause, stating that for services to be taxed as FTS, they must enable the recipient to apply the technology independently in the future. The ITAT found that the services rendered by the assessee did not meet this criterion and thus could not be taxed as FTS.

4. Charging of Interest under Section 234B:
The AO charged interest under section 234B of the Act. However, since the primary issues regarding the taxation of software license fees and ICT service charges were resolved in favor of the assessee, the consequential interest under section 234B would also not be applicable.

5. Initiation of Penalty Proceedings under Section 270A:
The AO initiated penalty proceedings under section 270A. Given the favorable decisions on the primary issues, the initiation of penalty proceedings under section 270A would not stand.

Conclusion:
The ITAT allowed the appeal of the assessee on all grounds. The reimbursement for SAP software and Microsoft licenses was not taxable as Royalty, and the ICT service charges did not qualify as FTS under the India-Netherlands DTAA. Consequently, the charging of interest under section 234B and initiation of penalty proceedings under section 270A were also not upheld. The order was pronounced in the open court on 28/02/2022.