2018 (12) TMI 1202 - AT - Income Tax

Accrual of Income in India - assessee as a non-resident company which received licence fees in terms of Membership and Technology Transfer Agreement - claim of exemption from income tax - computation of income u/s 44BB - taxability as royalty u/s 9(1)(vi)- levy of surcharge and interest u/s 234B - Held that - If one goes by the definition as enshrined in the Treaty read with relevant provisions of Indian Copyright Act, 1957 and also the relevant Agreement amongst the parties, it is seen that the payment for CMG s membership by the ONGC is purely for non-exclusive, non-transferable licence to use the technology only for the internal purpose. There is neither sale nor licence of the copyright in any kind of software or technology. Thus, under the treaty, such a payment cannot be held to be reckoned as royalty. We hold that nature of payment as received by the assessee through ONGC in terms of the aforesaid agreement cannot be characterized as royalty and, therefore, the same is outside the purview of taxation in view of India-Canada DTAA. Accordingly, this issue is decided in favour of the assessee. In so far as whether amendment in section 9(1)(vi) can be read into the Treaty, this issue now stands at rest for the various judgments of the Hon ble Delhi High Court including that of DIT vs. Infrasoft Ltd. (2013 (11) TMI 1382 - DELHI HIGH COURT) wherein as held that the amendment in the domestic law cannot be read into the Treaty. In view of our finding given above, the issue of levy of surcharge and interest u/s 234B has become purely academic though as stated by the ld. counsel this issue now stands covered in favour of the assessee by the judgments referred and relied upon before us. From assessment year 2007-08 onwards there is a payment for purchase order of additional software for annual lease wherein certain addition has been made in the earlier membership and technology transfer agreement whereby certain technology executable has been given access to. The ONGC is paying annual lease charge with maintenance, which again, is not for purchase of any software and similar payment in assessment year 2005-06 has been held to be not royalty by the ld. CIT(A). From the perusal of the invoices raised, it is seen that the payment has been made for annual lease charges with maintenance and once in the earlier years it has been held not to be in the nature of royalty, then, same payment cannot be held to be royalty in this year. - Decided in favour of assessee.

Summary

Issues Involved:
1. Taxability of receipts of the non-resident assessee in India.
2. Applicability of Section 44BB of the Income Tax Act.
3. Chargeability of surcharge and education cess.
4. Deletion of interest levied under Section 234B.

Detailed Analysis:

1. Taxability of Receipts of the Non-Resident Assessee in India:
The primary issue was whether the license fees received by the non-resident assessee from ONGC were taxable as 'royalty' under Section 9(1)(vi) of the Income Tax Act and under Article 12(3) of the India-Canada DTAA. The assessee argued that the licenses granted were non-transferable and non-exclusive, with the title and ownership remaining with the assessee. The Tribunal noted that the payment was for a non-exclusive, non-transferable license to use the CMG technology solely for internal purposes, without any transfer of copyright. The Tribunal held that such payments could not be characterized as 'royalty' under the India-Canada DTAA, as there was no transfer of the right to use the copyright. The Tribunal relied on various judicial precedents, including DIT vs. Nokia Networks OY, DIT vs. Infrasoft Ltd., and CIT vs. Dynamic Vertical Software India (P) Ltd., which established that payments for the use of copyrighted software without transferring any copyright rights do not constitute 'royalty'.

2. Applicability of Section 44BB of the Income Tax Act:
The assessee's alternative plea that the receipts should be covered under Section 44BB was rejected by the CIT(A) on the grounds that the payments were covered under Section 115A. The Tribunal did not specifically address this issue in detail, as the primary issue of taxability under the DTAA was decided in favor of the assessee.

3. Chargeability of Surcharge and Education Cess:
The Tribunal noted that the rate prescribed under the DTAA cannot be increased by any surcharge levied under domestic law. However, the education cess would be covered within the scope of the DTAA. The Tribunal directed the Assessing Officer to examine the matter of surcharge and cess in accordance with the law.

4. Deletion of Interest Levied under Section 234B:
The Tribunal held that the levy of interest under Section 234B was consequential and dependent on the taxability of the receipts. Since the receipts were held not to be taxable as 'royalty', the issue of interest under Section 234B became academic. The Tribunal relied on the judgment of the Hon'ble Delhi High Court in DIT vs. GE Packaged Power Inc. and the assessee’s own case for the assessment year, which supported the deletion of interest under Section 234B for non-resident assessees.

Conclusion:
The Tribunal allowed all the appeals of the assessee, holding that the license fees received were not taxable as 'royalty' under the India-Canada DTAA. Consequently, the issues of surcharge, education cess, and interest under Section 234B were rendered academic. The Revenue’s appeal for the assessment year 2010-11 was dismissed. The judgment emphasized the importance of the DTAA provisions over domestic law amendments and reiterated that payments for the use of copyrighted software without transferring any copyright rights do not constitute 'royalty'.