2022 (8) TMI 1497 - AT - Income Tax

Income deemed to accrue or arise in India - revenue earned by the appellant from supply of software as royalty - scope of Double Taxation Avoidance Agreement ( DTAA ) between India and United Kingdom - distinction between the acquisition of a copyright right and a copyrighted article - AO held that the payments received by the assessee for supply of software is taxable as royalty on account of being a payment for grant of a copyright as well as payment received for allowing the use of the process inherent in the software - CIT(A) confirmed addition stating that Payment under software license agreement represents consideration for transfer of all or any right (including granting of license) in respect of copyright and other intellectual property rights and Copy of software supplied by the Appellant did not amount to sale but it is license to use the software. HELD THAT - The issue of royalty or not on software has been examined by the Hon ble High Court in case of Nokia Networks OY 2012 (9) TMI 409 - DELHI HIGH COURT where in it was held that supply of software is not royalty despite the amendments made by Finance Act 2012 to section 9(1)(vi) of the Act. It has been observed that though Explanation 4 was added to section 9(1)(vi) by the Finance Act 2012 with retrospective effect to provide that all consideration for user of software shall be assessable as royalty , the definition in the DTAA has been left unchanged. Following the decision in case of Siemens AG 2008 (11) TMI 74 - BOMBAY HIGH COURT it was held that amendments cannot be read into the treaty. Once assessee has opted to be assessed by the DTAA, the consideration cannot be assessed as royalty despite the retrospective amendments to the Act. The right to reproduce and the right to use computer software are distinct and separate rights, the former amounting to parting with copyright and the latter, in the context of non-exclusive EULAs, not being so. At this juncture, we have examined the written submission of the ld. DR and find that it would not make any material difference to the fact that the buyer of the software in the instant case also has the user right only. The buyer has no right to re-sale the product and it still remained a copyrighted article which the buyer cannot alter modified, reproduced i.e. own will unless authorized. And such authorization has been given to re-supply to BSNL for their use, at the same time, keeping the all other rights with the assessee. Holding thus, the Hon ble Supreme Court 2021 (3) TMI 138 - SUPREME COURT decided the issue in favour of the taxpayer and laid down that the payments made by resident Indian end-users/distributors to non-resident computer software manufacture/suppliers as consideration for use/resale of shrink-wrapped software does not amount to payment for royalty for the use of copyright in the computer software considering the definition of royalty under the DTAAs. Hence, keeping in view the judgment of Hon ble Apex Court, we hereby allow the appeal of the assessee on merits.

Issues Involved:
1. Taxability of revenue from the supply of software as "royalty" under Section 9(1)(vi) of the Income Tax Act, 1961.
2. Taxability of revenue from the supply of software as "royalty" under Article 13 of the Double Taxation Avoidance Agreement (DTAA) between India and the United Kingdom.
3. Taxability of revenue from 'maintenance services' as "royalty and fee for technical services" under Section 9(1)(vi)/(vii) of the Income Tax Act, 1961.
4. Taxability of revenue from 'maintenance services' as "royalty and fee for technical services" under Article 13 of the DTAA between India and the United Kingdom.
5. Levy of interest under Section 234B of the Income Tax Act, 1961.

Detailed Analysis:

1. Taxability of Revenue from the Supply of Software as "Royalty" under Section 9(1)(vi) of the Income Tax Act, 1961:
The primary issue to be adjudicated was whether the payment received by the assessee for the supply of software is taxable as royalty. The assessee argued that the revenue earned from software supply should not be classified as "royalty" since it only grants a non-exclusive, personal, and non-transferable right to use the software, without transferring any copyright. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] held that the payments received were for the grant of a copyright and hence taxable as "royalty". The Tribunal, relying on the Hon'ble Supreme Court's judgment in Engineering Analysis Centre of Excellence Private Limited vs. CIT, concluded that the payments made by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers for the use/resale of shrink-wrapped software do not amount to payment for royalty for the use of copyright in the computer software. Therefore, the appeal of the assessee was allowed on this ground.

2. Taxability of Revenue from the Supply of Software as "Royalty" under Article 13 of the DTAA between India and the United Kingdom:
The assessee contended that the revenue from the supply of software should not be taxed as "royalty" under Article 13 of the DTAA between India and the United Kingdom. The Tribunal noted that the definition of "royalty" under the DTAA has not been amended to include such payments. Following the precedent set by the Hon'ble High Court in the case of Nokia Networks OY, the Tribunal held that the consideration cannot be assessed as "royalty" despite the retrospective amendments to the Income Tax Act. Thus, the appeal was allowed on this ground as well.

3. Taxability of Revenue from 'Maintenance Services' as "Royalty and Fee for Technical Services" under Section 9(1)(vi)/(vii) of the Income Tax Act, 1961:
The assessee argued that the revenue earned from maintenance services should not be classified as "royalty and fee for technical services". The AO and CIT(A) had classified these payments as "royalty and fee for technical services". The Tribunal, however, did not find sufficient grounds to uphold this classification, considering the nature of the services and the agreements in place. Consequently, the appeal was allowed on this ground.

4. Taxability of Revenue from 'Maintenance Services' as "Royalty and Fee for Technical Services" under Article 13 of the DTAA between India and the United Kingdom:
Similar to the third issue, the assessee contended that the revenue from maintenance services should not be taxed as "royalty and fee for technical services" under Article 13 of the DTAA. The Tribunal, aligning with its findings on the previous issues and the interpretation of the DTAA, allowed the appeal on this ground as well.

5. Levy of Interest under Section 234B of the Income Tax Act, 1961:
The assessee challenged the levy of interest under Section 234B. The Tribunal, in light of its findings that the revenue from the supply of software and maintenance services should not be classified as "royalty" or "fee for technical services", held that the levy of interest under Section 234B was not justified. Therefore, the appeal was allowed on this ground too.

Conclusion:
The Tribunal allowed the appeal of the assessee on all grounds, concluding that the payments received for the supply of software and maintenance services do not constitute "royalty" or "fee for technical services" under the Income Tax Act, 1961, or the DTAA between India and the United Kingdom. Consequently, the levy of interest under Section 234B was also deemed unjustified. The order was pronounced in the open court on 01/08/2022.

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