2018 (5) TMI 1318 - AT - Income Tax

Consideration received on account of sale on software - Whether royalty within the meaning of Article 13 of the Indian UK DTAA? - business income - Held that - The license granted by the Infrasoft is limited to those necessary to enable the licensee to operate the program. The rights transferred are specific to the nature of computer programs. Copying the program onto the computer s hard drive or random access memory or making archival copy is an essential step in utilizing program. Therefore, rights in relation to these acts of copying, where they do no more than enable the effective operation of the program by the user, should be disregarded in analyzing the character of the transaction for tax purposes. Payments in these types of transactions would be dealt with as business income in accordance with Article 7 of India-UK DTAA. Thus, the issue relating to the consideration received by the assessee from various entities on account of sale of software is not royalty within the meaning of Article 13 of the India UK DTAA, the effect of Article 3(2) of DTAA clearly set out the definition of royalty as per the distributor agreement and the end user license agreement which was produced before the Assessing Officer as well as before the CIT(A). The DRP has not taken into account the correct and true meaning of the royalty and the services do not come under the purview of royalty. As in case of Principal CIT Vs. M. Tech India Pvt. Ltd. 2016 (1) TMI 812 - DELHI HIGH COURT has held that payment made by reseller for the purchase of software for sale in Indian market could not be considered as royalty - Decided in favour of assessee.

Issues Involved:
1. Classification of income from the sale of software as "royalty" under Article 13 of the India-UK DTAA.
2. Interpretation of Article 3(2) of the DTAA regarding terms not defined within the DTAA.
3. Applicability of amendments to Section 9(1)(vi) of the Income Tax Act, 1961.
4. Assessment procedures under Sections 144C(1), 147, and 143(3) of the Income Tax Act, 1961.
5. Charging of interest under Section 234B of the Income Tax Act, 1961.

Detailed Analysis:

1. Classification of Income from Sale of Software as "Royalty":
The primary issue was whether the consideration received by the assessee from the sale of software constituted "royalty" under Article 13 of the India-UK DTAA. The CIT(A) held that the income from software sales was not royalty. The Revenue argued that the consideration should be treated as royalty based on the domestic law and the DTAA. The Tribunal upheld the CIT(A)'s decision, referencing the Delhi High Court's decision in Infra Soft Ltd., which clarified that payments for the use of copyrighted software do not constitute royalty but rather business income. The Tribunal concluded that in the absence of a permanent establishment in India, such income could not be taxed in India.

2. Interpretation of Article 3(2) of the DTAA:
The Revenue contended that Article 3(2) of the DTAA should be applied, which states that any term not defined in the DTAA would have the same meaning as under the domestic law. They argued that the clarification provided in Explanation 4 to Section 9(1)(vi) of the Act should be used to interpret "royalty" under the DTAA. However, the Tribunal found that the definition of royalty under the DTAA was not affected by the domestic law amendments, as established in the case of Infra Soft Ltd. and M. Tech India Pvt. Ltd.

3. Applicability of Amendments to Section 9(1)(vi):
The Revenue argued that the amendments to Section 9(1)(vi) of the Act should be considered when interpreting the term "royalty." The Tribunal rejected this argument, noting that the amendments to domestic law could not override the provisions of the DTAA unless both countries amended the treaty. This position was supported by the Delhi High Court's decision in New Sky Satellite, which held that the Finance Act, 2012, did not affect the DTAA unless jointly amended by both parties.

4. Assessment Procedures:
For the assessment years 2009-10 and 2010-11, the assessee challenged the assessment orders passed under Sections 144C(1), 147, and 143(3) of the Act, arguing procedural lapses such as the absence of a speaking order and insufficient opportunity to be heard. The Tribunal found that the facts were similar to those of the assessment year 2008-09 and allowed the appeals of the assessee, dismissing the Revenue's appeals.

5. Charging of Interest under Section 234B:
The assessee argued against the charging of interest under Section 234B of the Act. The Tribunal did not specifically address this issue in detail but allowed the appeals of the assessee based on the primary findings regarding the classification of income and procedural fairness.

Conclusion:
The Tribunal dismissed the appeals filed by the Revenue and allowed the appeals filed by the assessee for the assessment years 2008-09, 2009-10, 2010-11, and 2013-14. The Tribunal upheld that the income from the sale of software was not royalty under the India-UK DTAA and should be treated as business income, not taxable in India in the absence of a permanent establishment. The amendments to Section 9(1)(vi) of the Act were not applicable to the DTAA, and procedural lapses in the assessment process were acknowledged. The order was pronounced in the open court on 17th May 2018.

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