2017 (7) TMI 766 - AT - Income Tax

Addition treating sale of Standard Software in the nature of Royalty - Held that - As decided in assessee s own case for A.Ys. 2007-08, 2008-09 and 2009-10 sale of software by the assessee is a 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

Summary

Issues Involved:
1. Whether the consideration received by the assessee from its licensors amounted to royalty under Section 9(1)(vi) and Article 12 of the Indo-Finland Double Taxation Avoidance Agreement (DTAA).

Issue-Wise Detailed Analysis:

1. Nature of Consideration Received by Assessee:
The primary issue is whether the consideration received by the assessee from its licensors amounted to royalty under Section 9(1)(vi) of the Income Tax Act, 1961, and Article 12 of the Indo-Finland DTAA. The assessee, a Finnish software company, argued that its income should not be classified as royalty but as business income under Article 7 of the DTAA. The Assessing Officer (AO) had previously classified such income as royalty for the assessment years 2007-08, 2008-09, and 2009-10, and these orders were confirmed by the Dispute Resolution Panel (DRP). However, the Tribunal had set aside these orders, favoring the assessee.

2. Reliance on Previous Tribunal and High Court Decisions:
The Tribunal's decision for the assessment years 2007-08 to 2009-10, which favored the assessee, was heavily relied upon. The Tribunal had concluded that the sale of software by the assessee constituted the sale of standard software and should be taxed as business income under Article 7 of the DTAA, not as royalty under Article 12. The Hon'ble Delhi High Court had also dismissed the Revenue's appeals against these Tribunal decisions, affirming that the amounts paid to the assessee did not constitute royalty.

3. Revenue's Arguments:
The Revenue argued that the facts of the assessee's case contradicted the principles laid down in the Infrasoft decision by the Delhi High Court, which the Tribunal had relied upon. The Revenue highlighted specific contractual clauses indicating that the assessee allowed the exploitation of copyrights and other intellectual property rights, which they argued should be classified as royalty. However, the Tribunal noted that these clauses were standard and not applicable during the years under consideration.

4. Assessee's Counterarguments:
The assessee countered that the issue had already been settled by the Tribunal and the High Court in their favor for previous assessment years. They argued that the facts of the case had not changed, and therefore, the same legal principles should apply. The Tribunal agreed, noting that the AO had admitted there was no change in the business model or facts from previous years.

5. Tribunal's Conclusion:
The Tribunal concluded that the sale of software by the assessee was indeed the sale of standard software, taxable as business income under Article 7 of the DTAA. The Tribunal relied on its previous decisions and the High Court's affirmation of those decisions. The appeal by the Revenue was found to have no merits and was dismissed.

Final Judgment:
The Tribunal dismissed the Revenue's appeal, affirming that the sale of software by the assessee should be taxed as business income under Article 7 of the Indo-Finland DTAA, not as royalty under Article 12. The order was pronounced in the open court on 03.02.2017.