2016 (5) TMI 955 - AT - Income Tax

Receipts from transfer of shrink wrapped software - whether amount to business income or royalty under section 9(1) (vi) and DTAA - Held that - Terms and conditions of software license in the decision before honorable Delhi high court in Director of Income Tax Versus Infrasoft Ltd. 2013 (11) TMI 1382 - DELHI HIGH COURT and in the impugned case before us. We found them similar to the issue decided by honourabel Delhi High court. They are similar as to non-exclusive, non-transferable and user restrictions of the software i.e. the software has to be used in accordance with the Agreement, all the intellectual property rights in the form of patent, copyright, trademark etc. are the property of the seller only and at no point of time same has been transferred to either the buyer/ customer, the rights acquired in relation to the copyright are limited to those necessary to enable the user to operate the program, for example, where the transferee is granted limited rights to reproduce the program. The Agreement categorically restricts the user to copy, publish, display, disclose, modify, merge etc. the software except for archival purposes and not allowed to exploit the computer software commercially. On identical facts and circumstances, honourable Delhi high court has held that what is transferred is neither the copyright in the software nor the use of the copyright in the software, but what is transferred is the right to use the copyrighted material or article, which is clearly distinct from the rights in a copyright. The right that is transferred is not a right to use the copyright but is only limited to the right to use the copyrighted material and the same does not give rise to any royalty income and would be chargeable to tax as business income. Therefore respectfully following the decision of Honourable Delhi high court we hold that that consideration received by the assessee on sale of software is not chargeable to tax as royalty such as equipment royalty, process royalty etc. Under Article 12 of DTAA but as business income under article 7 of the INDO Finland DTAA. - Decided in favour of assessee.

Issues Involved:
1. Validity of the assessment orders under section 143(3) read with section 144C of the Income-tax Act, 1961.
2. Classification of receipts from the sale of "standard software" as royalty under section 9(1)(vi) of the Income-tax Act and Article 13(3) of the Double Taxation Avoidance Agreement (DTAA) between India and Finland.
3. Classification of ancillary services provided along with the sale of software as fees for technical services under Article 13(4) of the DTAA.
4. Non-allowance of TDS credit.
5. Incorrect application of conversion rates.
6. Incorrect application of tax rates under section 115A of the Act.
7. Levying of interest under sections 234A and 234B of the Act.

Issue-Wise Detailed Analysis:

1. Validity of the Assessment Orders:
The assessee challenged the validity of the assessment orders passed under section 143(3) read with section 144C of the Income-tax Act, 1961. The Tribunal noted that the facts, assessment orders, and orders of the Dispute Resolution Panel (DRP) for all the assessment years (2007-08, 2008-09, and 2009-10) were similar. The Tribunal decided to first address the appeal for the assessment year 2007-08 and then follow the same reasoning for the subsequent years.

2. Classification of Receipts from Sale of "Standard Software" as Royalty:
The primary issue was whether the receipts from the sale of "standard software" should be classified as royalty under section 9(1)(vi) of the Income-tax Act and Article 13(3) of the DTAA between India and Finland. The Tribunal analyzed the nature of the software and the agreements involved. The software was found to be "standard software" used for specific purposes in the telecom industry. The Tribunal referred to the decision of the Delhi High Court in the case of DIT vs. Infrasoft Ltd, which held that receipts from the transfer of shrink-wrapped software are not taxable as royalty. The Tribunal concluded that the consideration received by the assessee on the sale of software is not chargeable to tax as royalty but as business income under Article 7 of the DTAA.

3. Classification of Ancillary Services as Fees for Technical Services:
The assessee contended that the ancillary services provided along with the sale of software were inextricably linked to the sale of software and should not be classified as fees for technical services under Article 13(4) of the DTAA. The Tribunal agreed with the assessee's contention, noting that the services were ancillary and subsidiary to the sale of software and thus fell within the exclusion clause of Article 13(5)(a) of the DTAA.

4. Non-allowance of TDS Credit:
The assessee argued that the TDS credit was not allowed despite the payments being received on a net-of-tax basis. The Tribunal set aside this issue to the Assessing Officer (AO) with a direction to grant credit for TDS if found in accordance with the law.

5. Incorrect Application of Conversion Rates:
The assessee contended that the AO applied incorrect conversion rates on the grossed-up amount of USD receipts. The Tribunal did not specifically address this issue in detail but implied that it would be consequential to the main issues decided.

6. Incorrect Application of Tax Rates under Section 115A:
The assessee argued that the AO applied a tax rate of 15% on all receipts without considering the agreements entered with Vodafone Essar and Idea Cellular, which were post-June 2005 and should be taxed at 10% under section 115A of the Act. The Tribunal did not specifically address this issue in detail but implied that it would be consequential to the main issues decided.

7. Levying of Interest under Sections 234A and 234B:
The assessee challenged the levy of interest under sections 234A and 234B of the Act. The Tribunal did not specifically address this issue in detail but implied that it would be consequential to the main issues decided.

Conclusion:
The Tribunal allowed the appeals of the assessee for all three assessment years (2007-08, 2008-09, and 2009-10) by holding that the receipts from the sale of software are not chargeable to tax as royalty but as business income under Article 7 of the DTAA. The issue of non-allowance of TDS credit was set aside to the AO for verification and granting of credit if found in accordance with the law. Other consequential issues were dismissed. The Tribunal's decision was based on the principles laid down by the Delhi High Court in the case of DIT vs. Infrasoft Ltd and other relevant judicial precedents.

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