2017 (3) TMI 430 - AT - Income Tax

Royalties - payment to foreign companies towards purchase of certain software for its internal use in the business of the assessee - India-USA DTAA - P.E. in India - Held that - As decided in assessee s own case 2016 (6) TMI 96 - ITAT MUMBAI the payments made for purchase of standardized software cannot be considered to be a royalty with the meaning of provisions of sec. 9(1)(vi) as well as India-USA DTAA. The orders passed by Ld CIT(A) holding the above view are upheld and other orders passed by Ld CIT(A) and that of the assessing officer are set aside. - Decided in favour of assessee

Issues Involved:
1. Classification of payments for software purchases as "Royalties" under Section 9(1)(vi) of the Income Tax Act and India-USA DTAA.
2. Applicability of retrospective amendments made by the Finance Act, 2012 to the definition of "Royalties."
3. Interpretation of "Royalties" under DTAA versus the Income Tax Act.
4. Whether the payments made for standardized software constitute business income or royalties.

Detailed Analysis:

1. Classification of Payments for Software Purchases as "Royalties":
The core issue in these appeals was whether payments made by the assessee to foreign companies for purchasing software for internal use were taxable as "Royalties" under Section 9(1)(vi) of the Income Tax Act, read with the India-USA DTAA. The Assessing Officer (AO) had held that these payments qualified as royalties under the DTAA and directed the assessee to deduct tax at source. The assessee argued that the software was standardized and supplied on a non-exclusive basis, with no right to copy except for internal use, akin to shrink-wrapped software. The Tribunal referred to a previous decision in the assessee's own case, where it was held that payments for standardized software do not fall under the definition of royalties as provided in the DTAA.

2. Applicability of Retrospective Amendments by the Finance Act, 2012:
The Department argued that Explanations 4, 5, and 6, inserted by the Finance Act, 2012 to Section 9(1)(vi), should apply to these cases. These explanations expanded the definition of royalties to include payments for the use of computer software. However, the Tribunal noted that amendments to domestic law cannot be read into a treaty unless the treaty itself is amended. The Tribunal cited the Hon'ble Delhi High Court's decision in DIT vs. Nokia Networks OY, which held that amendments to the Income Tax Act do not affect the DTAA unless the treaty is amended jointly by both parties.

3. Interpretation of "Royalties" under DTAA versus the Income Tax Act:
The Tribunal emphasized that the definition of royalties under the DTAA is more restrictive and beneficial to the assessee compared to the broader definition under the Income Tax Act. The Tribunal referred to various High Court decisions, including the Hon'ble Delhi High Court in DIT vs. Infrasoft Ltd., which held that payments for the use of copyrighted software do not constitute royalties but are business income. The Tribunal further noted that the DTAA's definition of royalties does not specifically include computer software, unlike some other DTAAs, such as those with Malaysia and Kazakhstan.

4. Whether Payments for Standardized Software Constitute Business Income or Royalties:
The Tribunal concluded that payments for standardized software do not constitute royalties under the DTAA. The Tribunal referred to the Hon'ble Supreme Court's decision in Tata Consultancy Services vs. State of Andhra Pradesh, which held that software, whether customized or non-customized, is considered "goods." The Tribunal also noted that the Copyright Act, 1957, recognizes computer software as a literary work, but the use of such software for internal business purposes does not transfer any copyright. Therefore, the payments are for the purchase of a copyrighted product, not for the use of any copyright, and should be treated as business income.

Conclusion:
The Tribunal upheld the view that payments for standardized software do not qualify as royalties under the DTAA and should be treated as business income of the recipient. The appeals filed by the revenue were dismissed, and the appeals of the assessee were allowed. The Tribunal's decision aligns with the principle that the DTAA's provisions, being more beneficial to the assessee, prevail over the broader definitions under the Income Tax Act.

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