2016 (7) TMI 1135 - AT - Income Tax

Taxability of sale of software as Royalty - consideration received on sale of computer software programme i.e. C D Rom as business income OR Royalty Income - P.E. in India - Held that - DIT vs M/s Nokia Networks, reported in (2012 (9) TMI 409 - DELHI HIGH COURT) concluded that, when assessee supplies the software which is incorporated on CD, it has applied only a tangible property and payment made for acquiring such a property cannot be regarded as payment by way of royalty. We uphold the order of the CIT(A) that the payment received by the assessee for sums does not amount to royalty within the meaning of Article 12(4) of Indo-Netherland DTAA and accordingly, the same is not taxable in India. Since, admittedly, the assessee has no PE in India; therefore, same cannot be taxed as business income under Article 7. - Decided in favour of assessee

Issues Involved:
1. Taxability of sale of software as "Royalty" under both the Income Tax Act and the India-Netherlands DTAA.
2. Interpretation of the term "Royalty" under the Income Tax Act and the India-Netherlands DTAA.
3. Application of retrospective amendments to the definition of "Royalty" in the context of the DTAA.

Issue-wise Detailed Analysis:

1. Taxability of Sale of Software as "Royalty":
The primary issue in these appeals is whether the consideration received from the sale of computer software by the assessee in India should be treated as "Royalty" or as business income. The assessee, a non-resident company registered in the Netherlands, entered into a 'Distribution Agreement' with its Indian subsidiary for the supply of software. The software was sold as "off the shelf" products, and the assessee did not have a permanent establishment (PE) in India. The Assessing Officer (AO) treated the payment received by the assessee for the sale of software as "Royalty" under both the Income Tax Act and the India-Netherlands DTAA. However, the CIT(A) held that the payment received by the assessee emanated only from the sale of a copyrighted article and therefore, it does not amount to "Royalty" within the meaning of Article 12(4) of the India-Netherlands DTAA. The Tribunal upheld the CIT(A)'s decision, stating that the consideration received by the assessee for the sale of software in India cannot be taxed as "Royalty."

2. Interpretation of the Term "Royalty":
The AO examined various legal aspects and concluded that the payment received by the assessee for the sale of software is "Royalty" under the Income Tax Act and the India-Netherlands DTAA. However, the CIT(A) and the Tribunal held that the payment received by the assessee is for the sale of a copyrighted article and not for the use of or the right to use any copyright. The Tribunal emphasized that the definition of "Royalty" in Article 12(4) of the DTAA is more restrictive than under the Income Tax Act. The Tribunal also noted that the definition of "copyright" under the Copyright Act, 1957, does not include the right to use the copyright. Therefore, the payment received by the assessee is not for the use of or the right to use any copyright and does not amount to "Royalty."

3. Application of Retrospective Amendments:
The AO argued that the retrospective amendment to the definition of "Royalty" under section 9(1)(vi) of the Income Tax Act should be read into the DTAA. However, the Tribunal rejected this argument, stating that the retrospective amendment brought into the statute cannot be read into the DTAA unless there is a corresponding amendment in the treaty. The Tribunal emphasized that a treaty between two sovereign nations cannot be unilaterally altered by one country. Therefore, the amended definition of "Royalty" under the Income Tax Act does not apply to the DTAA.

Conclusion:
The Tribunal held that the payment received by the assessee for the sale of software in India does not amount to "Royalty" under the India-Netherlands DTAA and is not taxable in India. The Tribunal also rejected the application of the retrospective amendment to the definition of "Royalty" under the Income Tax Act to the DTAA. Therefore, the appeals of the revenue were dismissed, and the appeals of the assessee were allowed.

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