2016 (12) TMI 48 - AT - Income Tax

Sale of software - chargeable to tax under Article 7 of DTAA as business income of the assessee OR not under Article 12 as Royalty - Held that - On identical set of facts, respectfully following the decision of the coordinate bench of the ITAT in the assessee s own case for A.Ys. 07-08, 08-09 and 09-10, we hold that for A.Ys. 11-12 and 12-13, the sale of software by the assessee is the sale of standard software which is chargeable to tax under Article 7 of DTAA as business income of the assessee and not under Article 12 as Royalty . Allowance of tds credit - action of grossing up of the receipts for the purpose of computation of income - Held that - Both the issues are set aside to the file of the AO with the direction to grant the credit of TDS, if found in accordance with the law and also to re-compute the gross receipts for the purpose of taxation.

Summary

Issues:
1. Whether the consideration received by the assessee falls under the category of royalty under the Income Tax Act and the India-Finland Double Taxation Avoidance Agreement (DTAA) for AY 2011-12 and AY 2012-13.

Analysis:
For AY 2011-12, the core issue was whether the consideration received by the assessee constituted royalty income under the Act and the DTAA. The AO had previously held that the assessee's receipts were taxable as royalty income. However, the assessee contended that the sale of software should be treated as business income under Article 7 of the DTAA, not as royalty. The ITAT, following its earlier decision in the assessee's case, held that the sale of software was business income, not royalty, for both AYs 11-12 and 12-13.

In the detailed grounds of appeal, the assessee challenged various aspects of the AO's orders, including the classification of receipts as royalty, application of retrospective amendments, TDS credit disallowance, and tax rate computation. The ITAT allowed the appeals on the grounds related to the classification of software sale as business income, directing the AO to grant TDS credit and re-compute gross receipts for taxation purposes.

The ITAT noted that there was no change in the factual matrix or business model from earlier years, and the issue had been settled in favor of the assessee in previous ITAT decisions. Therefore, the ITAT held that the sale of software by the assessee should be treated as business income under the DTAA, not as royalty income. The AO's reliance on earlier years' assessments was deemed appropriate, and the appeals were partly allowed, with certain issues remanded to the AO for reconsideration.

In conclusion, the ITAT ruled that the sale of software by the assessee was business income under the DTAA, not royalty income. The appeals were partly allowed, with directions to grant TDS credit and re-compute gross receipts for taxation purposes. Other grounds of appeal were dismissed as consequential.