2021 (8) TMI 1369 - AT - Income Tax

Income deemed to accrue or arise in India - receipt from Indian customer towards sale of software would constitute royalty within the meaning of section 9(1)(vi) of the Income-tax Act and Article 12 of the DTAA between India and USA - whether the receipts from Indian customers towards annual maintenance service, implementation and consultancy services can be brought to tax as fees for technical services? - HELD THAT - Issue in question is squarely covered in favour of the assessee by the judgment of Engineering Analysis Centre of Excellence P.Ltd. 2021 (3) TMI 138 - SUPREME COURT wherein it was categorically held that sale of software would not constitute royalty within the provisions of section 9(1)(vi) of the I.T.Act and Article 12(4)(a) of the DTAA between India and USA. Amounts received towards annual maintenance services, implementation and consultancy services, as stated that when the receipts on account of sale of software itself not included as royalty. Miscellaneous income on the same such as annual maintenance also cannot be brought to tax as fees for technical services. Thus we hold that the payment received by the assessee-company towards sale of software would not constitute royalty and cannot be brought to tax. Miscellaneous receipts on account of sale of software also cannot be brought to tax as fees for technical services. Appeal filed by the assessee is allowed.

Summary

Issues:
1. Whether the receipt from Indian customer towards sale of software would constitute royalty under section 9(1)(vi) of the Income-tax Act and Article 12 of the DTAA between India and USA.
2. Whether the receipts from Indian customers towards annual maintenance service, implementation, and consultancy services can be taxed as fees for technical services.

Analysis:

Issue 1:
The appeal was against the final assessment order under section 143(3) r.w.s. 144C(13) of the I.T.Act for the assessment year 2014-2015. The main contention was whether the receipts from the sale of software to Indian customers would amount to royalty as per section 9(1)(vi) of the Income-tax Act and Article 12 of the India-US DTAA. The Assessing Officer had initially treated the software sale receipts as royalty and taxed them accordingly. However, the assessee contended that the sale of software should not be considered royalty based on a judgment of the Hon'ble Apex Court in a similar case. The Tribunal agreed with the assessee, citing the Apex Court's decision, and held that the payment received for the sale of software did not constitute royalty and could not be taxed as such.

Issue 2:
The second aspect of the case involved determining whether the receipts from Indian customers for annual maintenance service, implementation, and consultancy services could be taxed as fees for technical services. The assessee argued that since the receipts from the sale of software were not considered royalty, the additional income from maintenance services should also not be taxed as fees for technical services. The Tribunal concurred with the assessee's argument, stating that if the software sale receipts were not considered royalty, then the miscellaneous income from related services could not be taxed as fees for technical services. Consequently, the Tribunal allowed the assessee's appeal, ruling in favor of the assessee on both the issues raised.

In conclusion, the Tribunal's decision in this case clarified the tax treatment of receipts from the sale of software and related services, providing a favorable outcome for the assessee based on legal precedents and interpretations of relevant tax laws and international agreements.