2022 (7) TMI 1460 - AT - Income Tax

Income taxable in India - taxability of receipts towards software and subscription - Royalty / Fees for Technical Services '- AO had held the receipt to be royalty and taxed it @10% on the gross basis as per Article 12 in India-Netherland treaty - HELD THAT - As decided in assessee own case 2022 (4) TMI 615 - ITAT DELHI in order dated 08.04.2022 issue of software royalty was recently adjudicated by the Hon ble Apex Court in the case of Engineering Analysis Center of Excellence Pvt. Ltd. 2021 (3) TMI 138 - SUPREME COURT as analyzed various aspects of the issue taking into consideration end user license, Copy Right Act, and provisions contained in DTAA and the Income Tax Act and has laid down the parameters to test whether the receipt from sale of software would tantamount to royalty or not. Therefore, in view of the above, the Assessing Officer is directed to carry out the necessary exercise in accordance with the directions issued by the Co-ordinate Bench in Assessment Year 2008-09 duly keeping in mind the ratio laid down by the Hon ble Apex Court in the case of Engineering Analysis Center of Excellence Pvt. Ltd. vs. CIT (supra) and adjudicate the issue accordingly after giving due and proper opportunity to the assessee to present its case. Private limitedas held consideration end user license, Copy Right Act, and provisions contained in DTAA and the Income Tax Act and has laid down the parameters to test whether the receipt from sale of software would tantamount to royalty or not. No substantial question of law arises for our consideration in the present appeal.

Summary

Issues:
1. Taxability of income from the sale of software as royalty or fees for technical services under the Double Taxation Avoidance Agreement between India and Netherlands for the assessment year 2017-18.

Analysis:
The appeal was filed by the assessee against the order of the DCIT, Circle-2(2)(2), New Delhi regarding the taxability of income from the sale of software and subscriptions under the India-Netherlands Double Taxation Avoidance Agreement. The assessee pressed ground nos. 3 & 4, challenging the classification of income as royalty or fees for technical services. The Tribunal considered the arguments and material submitted by both sides, including the paper book with five annexures. The assessee's counsel highlighted a previous favorable decision for the assessee in a similar case for AY 2014-15, which was acknowledged by the ld. CIT, DR without contesting the similarity of facts.

The Tribunal reviewed the earlier decision for AY 2014-15, where the issue of taxability of receipts towards software and subscription was adjudicated in favor of the assessee. The Tribunal observed that the AO had treated the receipts as royalty and taxed them under the India-Netherlands DTAA. The Tribunal referred to a Co-ordinate Bench decision for AY 2013-14, which directed the AO to verify if the facts of the case aligned with a specific High Court ruling. The Tribunal concluded that the issue was not covered by the High Court decision and directed the AO to reconsider the matter in light of the Apex Court's judgment in a related case.

Subsequently, the AO for AY 2013-14 accepted the income declared by the assessee without making any additions. Given the identical nature of the facts in the current year, the Tribunal held that no addition was necessary. Therefore, the Tribunal allowed the grounds of the assessee related to the taxability of income from the sale of software. The Tribunal also noted that grounds No. 5 and 6 were consequential and remanded them to the AO for consideration during the appeal effect order. Ultimately, the appeal was partly allowed by the Tribunal.

In conclusion, the Tribunal's decision in favor of the assessee was based on the precedent set by previous rulings and the directions given to the AO to reevaluate the taxability of the income in accordance with higher court judgments. The Tribunal's thorough analysis of the legal provisions and past decisions ensured a fair and reasoned outcome in the appeal.