2022 (7) TMI 1456 - HC - Income Tax

Taxability of foreign income in India - Royalty receipt - income earned from distributing of computer software in India - DTAA between India and USA - HELD THAT - As considering the fact that the issue in dispute is squarely covered in favour of the assessee by the decision of Hon ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt. Ltd. 2021 (3) TMI 138 - SUPREME COURT amounts received from sale/supply of software licences and associated services are not taxable as royalty/FIS. Accordingly, he deleted the addition. Decided in favour of assessee.

Summary

Issues:
1. Whether income earned from distributing computer software in India constitutes royalty under Section 9(1)(vi) of the Act?
2. Whether the income earned is taxable as royalty under the Double Taxation Avoidance Agreement between India and the United States of America?
3. Whether interest under Section 234B is chargeable?

Analysis:
1. The High Court considered the issue of whether the income earned by the Appellant from distributing computer software in India should be classified as royalty under Section 9(1)(vi) of the Act. The Court referred to the Supreme Court's judgment in Engineering Analysis Centre of Excellence Private Limited vs. Commissioner of Income Tax, where it categorized cases involving the purchase and distribution of computer software. The Court concluded that the amounts paid by resident Indian end-users/distributors to non-resident software manufacturers/suppliers do not constitute royalty for the use of copyright in the software. This decision applied to all categories of cases outlined by the Supreme Court.

2. The Court also examined whether the income earned was taxable as royalty under the Double Taxation Avoidance Agreement between India and the United States of America. The Court held that the payments made by resident Indian end-users/distributors to non-resident software manufacturers/suppliers, for the resale/use of software through EULAs/distribution agreements, did not give rise to any income taxable in India. Consequently, persons referred to in Section 195 of the Income Tax Act were not liable to deduct any TDS under Section 195.

3. Lastly, the Court addressed the issue of whether interest under Section 234B was chargeable. The judgment did not provide specific details on this issue, but it can be inferred that the Court's decision on the classification of income as royalty would impact the applicability of interest under Section 234B. The Court allowed the present appeal in line with the Supreme Court's judgment and directed the listing of other connected appeals for expedited hearing.

In conclusion, the High Court's judgment clarified the classification of income from distributing computer software in India, ruling that such income does not constitute royalty under the relevant provisions. The decision provided significant guidance on the tax treatment of software transactions involving resident Indian entities and non-resident suppliers, aligning with the principles established by the Supreme Court in a similar case.