2023 (12) TMI 1300 - AT - Income Tax

Accrual of income in India - Addition of receipts from sale of software support services as Royalty income - HELD THAT - Similar issue came for consideration before this Tribunal in assessee s own case for the assessment year 2006-07 2021 (11) TMI 1023 - ITAT BANGALORE by virtue of Article 12(3) of the DTAA, royalties are payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary work includes a computer program or software. It was held that the regarding the expression use of or the right to use , the position would be the same under explanation 2(v) of section 9(1)(vi) because there must be, under the licence granted or sales made, a transfer of any rights contained in sections 14(a) or 14(b) of the Copyright Act. Since the end-user only gets the right to use computer software under a non-exclusive licence, ensuring the owner continues to retain ownership under section 14(b) of the Copyright Act read with sub-section 14(a) (i)-(vii), payments for computer software sold/licenced on a CD/other physical media cannot be classed as a royalty. The terms of the licence in the present case does not grant any proprietory interest on the licencee and there is no parting of any copy right in favour of the licencee. It is non-exclusive non-tranferrable licence merely enabling the use of the copy righted product and does not create any interest in copy right and therefore the payment for such licence would not be in the nature of royalty as defined in DTAA. We therefore hold that the sum in question cannot be brought to tax as royalty. Recharacterizing the maintenance support services income as fee for technical services - HELD THAT - As discussed earlier, similar issue came for consideration before this Tribunal in assessee s own case in assessment year 2006-07 2021 (11) TMI 1023 - ITAT BANGALORE on the question whether the sums in question can be taxed as FTS, we agree with the submissions made by the learned counsel for the Assessee set out in paragraph-18 19 of this order and hold that the sums in question cannot be brought to tax as FTS. Assessee appeal allowed.

Summary

Issues Involved:
1. Addition of receipts from the sale of software and support services as royalty income.
2. Recharacterizing maintenance and support services income as fee for technical services.
3. Charging of interest under sections 234A and 234B of the Income Tax Act.

Summary:

1. Addition of Receipts from Sale of Software & Support Services as Royalty Income:
The assessee argued that its income from India is exempt as it only transfers a right to use the software and hardware without transferring the copyright itself. The assessee relied on the Supreme Court ruling in Engineering Analysis Centre of Excellence Pvt. Ltd. The AO treated the income as royalty, but the Tribunal referred to its own earlier decision (ITA No.363/Bang/2017) and the Supreme Court judgment, which clarified that licensing software for use without transferring copyright does not constitute royalty. Consequently, the Tribunal allowed the assessee's ground, ruling that the sum in question cannot be taxed as royalty.

2. Recharacterizing Maintenance & Support Services Income as Fee for Technical Services:
The assessee contended that the support services provided do not make available any technical knowledge, skill, or know-how to the service recipients, and thus do not qualify as Fee for Technical Services (FTS) under the India-UK DTAA. The Tribunal, referring to its earlier decision and the definition of FTS in the DTAA, agreed with the assessee that the services rendered do not fulfill the 'make available' clause and thus cannot be taxed as FTS. This ground was allowed in favor of the assessee.

3. Charging of Interest Under Sections 234A & 234B:
The grounds related to the charging of interest under sections 234A and 234B were acknowledged as mandatory and did not require adjudication.

Conclusion:
The appeal of the assessee was allowed, and the stay petition was dismissed as infructuous. The Tribunal's order was pronounced on 13th Dec, 2023.