2023 (2) TMI 1177 - HC - Income Tax

Income taxable in India - income earned from licensing/sale of software - taxability as royalty - Tribunal has ruled that neither income earned from licensing/sale of software products nor subscription fee earned for providing cloud services, could be construed as royalty - HELD THAT - As revenue, says that the proposed questions are covered by the judgment of Engineering Analysis Centre of Excellence (P.) Ltd. 2021 (3) TMI 138 - SUPREME COURT . We are also informed that a review petition has been filed which is pending consideration. Accordingly, the appeal is closed as no substantial question of law arises for our consideration.

Summary

Issues:
1. Interpretation of tax laws regarding the taxation of income from licensing/sale of software products.
2. Determination of whether subscription fees received for cloud services are taxable as royalty income.

Analysis:
1. The appeal in question pertains to the Assessment Year 2017-18 and challenges the order of the Income Tax Appellate Tribunal (Tribunal) dated 31.08.2022 in ITA 554/Del/2021. The key legal issues raised by the appellant/revenue revolve around the taxation of income derived from the licensing of software products by MOL Corporation in India. The appellant questions whether such income should be considered taxable as royalty under Section 9(1)(vi) of the Income Tax Act, 1961, in conjunction with Article 12 of the Indo-USA Double Taxation Avoidance Agreement (DTAA).

2. The appellant further contests the Tribunal's classification of income from the licensing of software as business income rather than royalty, based on the distinction between licensing a computer program as a copyrighted article versus a copyright itself. Additionally, the appellant challenges the taxability of subscription fees received for Cloud Services under the provisions of the Income Tax Act, 1961. The Tribunal's ruling, however, concluded that neither the income from licensing/sale of software products nor the subscription fees for cloud services should be treated as royalty income for tax purposes.

3. During the proceedings, Mr. Sanjay Kumar, senior standing counsel representing the appellant/revenue, argued that the questions raised in the appeal are addressed in a Supreme Court judgment in Engineering Analysis Centre of Excellence (P.) Ltd. v. CIT 432 ITR 471 (SC). It was also highlighted that a review petition related to the matter is currently pending before the court.

4. Consequently, the High Court, comprising Hon'ble Mr. Justice Rajiv Shakdher and Hon'ble Ms. Justice Tara Vitasta Ganju, dismissed the appeal on the grounds that no substantial question of law necessitated their consideration. However, the court noted that should the appellant succeed in the pending review petition, the parties involved would be bound by the decision reached in that proceeding. The judgment underscores the importance of legal precedent and ongoing legal proceedings in determining tax liabilities and clarifying the interpretation of relevant tax laws.