2017 (8) TMI 446 - AT - Income Tax

Income from supply of software and software maintenance/support services to the entities engaged in exploration of mineral oil - characterization of income - taxability as royalty - Indo-Canada Double Taxation Avoidance Agreement - taxable under the provisions of section 44D/44DA read with section 115A OR could be covered under the provisions of section 44BB of the Act - Held that - Respectfully following the above decision of the Tribunal in the case of Reliance Industries Limited (2016 (6) TMI 96 - ITAT MUMBAI) we hold that the receipt from sale of software by the assessee from outside India is not taxable as royalty in terms of the articles of the Double Taxation Avoidance Agreement between the India and the Canada. Income from software supply and software maintenance/support services etc. - should be taxed under section 44D/44DA of the Act or under section 44BB? - Held that - In the instant case, we observe that, the Assessing Officer himself has assessed the income from software maintenance/support services under the section 44BB of the Act, and now, it is contested before us that said income should fall under section 44D/44DA of the Act. In our considered opinion, once the Assessing Officer has accepted the taxability of income under section 44BB of the Act, he cannot be allowed to change the stand taken by him in the assessment order. Even otherwise, in view of the decision in the case of Oil and Natural Gas Corporation Limited v. CIT 2015 (7) TMI 91 - SUPREME COURT , if the substance of the contract/agreement is connected with the prospecting, extraction or production of mineral oil, the income has to be assessed under the provisions of section 44BB of the Act. In the case, the assessee supplied software and provided software maintenance/support services in respect of software supplied, which were to be utilised in exploration of mineral oil, and thus the relevant income from sale of software and software maintenance/support services has been rightly assessed under section 44BB of the Act. The amendment brought by the Finance Act, 2011 cannot be made effect from the retrospective effect as that it adversely affects the interest of the assessee. It is well settled law that an amendment to the taxing statute, if results in higher tax burden on the assessee then it is prospective in nature and not retrospective. We are not inclined to accept the contentions advanced on behalf of the Revenue, for the simple reason that the issue is squarely covered by the decision of the hon ble Delhi High Court in the case of DIT-II v. OHM Ltd. 2012 (12) TMI 422 - DELHI HIGH COURT . Assessment of income from sale of software to the entities engaged in exploration of mineral oil as taxable under section 44BB - Held that - We find that supply, installation etc. of software used for oil and gas exploration has been held as taxable under section 44BB of the Act. In the present case, the software maintenance/support services has already been accepted by the assessee as falling under section 44BB of the Act. Since the software maintenance/support services was carried in respect of the software sold by the assessee, both the activity of sale of software and software maintenance/support services are composite contract to be considered under section 44BB of the Act. In the instant case, the learned Commissioner of Income-tax (Appeals) has assessed the supply of software and software maintenance/support services as taxable under section 44BB of the Act. As in the case of CIT v. Halliburton Offshore Services Inc. 2007 (9) TMI 230 - UTTARAKHAND HIGH COURT held that the amount paid or payable whether in India or outside India have to be included for the purpose of computing global receipts under section 44BB of the Act - Decided against assessee.

Summary

Issues Involved:
1. Classification of income from the supply of software and maintenance/support services as royalty or business income.
2. Applicability of section 44BB vs. sections 44D/44DA for taxing income from software supply and related services.
3. Taxability of income from software supply under the Indo-Canada Double Taxation Avoidance Agreement (DTAA).
4. Chargeability of interest under section 234B of the Income-tax Act.

Detailed Analysis:

Issue 1: Classification of Income from Software Supply and Maintenance/Support Services
The primary question was whether the income from the supply of software and software maintenance/support services to entities engaged in the exploration of mineral oil should be classified as royalty under section 9(1)(vi) of the Income-tax Act and taxed under sections 44D/44DA, or whether it should fall under section 44BB.

The Assessing Officer (AO) treated the income from the sale of software as royalty, arguing that it involved the use of a process or trademark as per the definitions in clauses (iii) and (iv) of Explanation 2 to section 9(1)(vi). However, the Commissioner of Income-tax (Appeals) [CIT(A)] held that the transaction amounted to the sale of a copyrighted article, not a royalty, and thus should be taxed under section 44BB, considering its nexus with the exploration of mineral oils.

The Tribunal referred to several judgments, including DIT v. Nokia Networks OY, DIT v. Ericsson A. B., and DIT v. Infrasoft Ltd., which held that the sale of software is akin to the supply of a copyrighted article and does not constitute royalty. Thus, the Tribunal upheld that the income from the sale of software should not be treated as royalty but as business income.

Issue 2: Applicability of Section 44BB vs. Sections 44D/44DA
The second issue was whether the income from software supply and maintenance/support services should be taxed under section 44BB or sections 44D/44DA. The CIT(A) ruled that the receipts from the sale of software and related services were steps in aid for the exploration of mineral oils and thus taxable under section 44BB.

The Tribunal upheld this view, referencing the Supreme Court's decision in Oil and Natural Gas Corporation Ltd. v. CIT, which stated that activities connected inextricably with prospecting, extraction, or production of mineral oil should be taxed under section 44BB. The Tribunal also noted that the proviso to section 44BB, which excludes its application when sections 44D/44DA apply, was inserted with effect from April 1, 2011, and thus was not applicable to the assessment year in question (2009-10).

Issue 3: Taxability under Indo-Canada DTAA
The Tribunal found that the issue of whether the income from the supply of software was royalty under the DTAA was not examined by the AO or the CIT(A). The Tribunal ruled that the income from the sale of software by the assessee from outside India is not taxable as royalty under the DTAA between India and Canada, following the precedent set in the case of Reliance Industries Ltd.

Issue 4: Chargeability of Interest under Section 234B
The Tribunal addressed whether interest under section 234B was chargeable. Following the Delhi High Court's decision in DIT v. Jacabs Civil Incorporated, the Tribunal held that if the assessee had no role in deducting or collecting tax, the question of paying interest would not arise. However, if there was a default in making advance tax, the assessee would be liable to pay interest under section 234B. The Tribunal restored this issue to the AO for a decision in accordance with the law.

Conclusion:
- The appeals of both the Revenue and the assessee for the assessment year 2007-08 were dismissed.
- The appeal of the Revenue for the assessment year 2009-10 was partly allowed for statistical purposes, with the issue of interest under section 234B restored to the AO for reconsideration.