2011 (11) TMI 887 - AT - Income Tax

Summary

Issues Involved:
1. Classification of proceeds from the sale of software as royalty income or business profits.

Detailed Analysis:

1. Classification of Proceeds from the Sale of Software as Royalty Income or Business Profits:

Factual Background:
The assessee, a non-resident company incorporated in the USA, filed its return for the assessment year 2007-2008, declaring an income of Rs. 1.76 crore. The assessee sold software to NIPL for resale, claiming the income as business income under Article 7 of the India-USA Tax treaty, asserting no tax liability in India due to the absence of a permanent establishment (PE).

Assessing Officer's Observations:
The AO noted that the assessee received Rs. 1.76 crore as royalty income from NIPL under a distribution agreement, which was accepted and taxed accordingly. Additionally, Rs. 58.29 lakh was received from NIPL for direct software sales, claimed as business income by the assessee. The AO, however, treated this amount as royalty income under Article 12(3) of the DTAA, leading to a total royalty income of Rs. 2.34 crore.

CIT(A)'s Findings:
The CIT(A) upheld the AO's decision, treating the amount collected for "intellectual value" as royalty and the amount for physical items like CDs and DVDs as business receipts, not taxable in India due to the absence of a PE.

Tribunal's Analysis:
The Tribunal examined whether the Rs. 58.29 lakh should be classified as royalty or business profits. If it is business profits, it cannot be taxed in India due to the absence of a PE. If it is royalty, it is taxable.

Legal Provisions:
- Section 9(1)(vi) of the Income-tax Act, 1961: Defines royalty and its tax implications.
- Explanation 2 to Section 9(1)(vi): Clarifies 'royalty' as consideration for the transfer of rights in respect of copyright, literary, artistic, or scientific work.
- Section 14 of the Copyright Act, 1957: Defines 'copyright' and the exclusive rights associated with it.
- Article 12 of the India-USA DTAA: Defines 'royalties' and their tax treatment.

Tribunal's Findings:
- Agreement A (Software License and Distribution Agreement): The assessee granted NIPL a non-exclusive license to duplicate and distribute software, resulting in Rs. 1.76 crore as royalty income.
- Agreement B (Novell Distributor Agreement): NIPL acquired software products from the assessee for resale without any right to duplicate or modify, resulting in Rs. 58.29 lakh.

The Tribunal emphasized the distinction between the transfer of copyright and the sale of copyrighted products. Under Agreement A, the transaction involved the transfer of rights to duplicate, qualifying as royalty. Under Agreement B, the transaction was a sale of copyrighted products, not involving any transfer of rights to duplicate, qualifying as business profits.

Supporting Case Law:
The Tribunal distinguished the present case from the ruling in Millennium IT Software Ltd., where the right to copy was granted, qualifying as royalty. In the present case, no such right was granted, making it a sale of copyrighted products.

Conclusion:
The Tribunal concluded that the Rs. 58.29 lakh received by the assessee was for the sale of copyrighted products, not for the transfer of copyright, thus qualifying as business profits. Given the absence of a PE, these profits are not taxable in India.

Final Decision:
The appeal was allowed, overturning the CIT(A)'s order and classifying the Rs. 58.29 lakh as business profits, not taxable in India due to the absence of a PE.

Order Pronouncement:
The order was pronounced on November 28, 2011.