2019 (12) TMI 1029 - AT - Income Tax

Royalty u/s. 91 (vi) OR Business income - amount received by the assessee company from its customers as per Article 12 (3) of the Indo US DTAA - PE in India - whether software with restriction of copying etc is a copy right or a copy righted product ? - HELD THAT - Mumbai Bench of the Tribunal in the case of ADIT (IT) Mumbai Vs. First Advantage Private Limited 2017 (1) TMI 984 - ITAT MUMBAI has held that Payment made by assessee to US company for use of software owned by US company, when assessee would use software only for internal business operations and would not sub-license or modify same, could not be considered as royalty within meaning of article 12(4) of DTAA. Coordinate Bench of the Tribunal in the case of ACIT Vs. Landmarks Graphics Corporation 2017 (7) TMI 1269 - ITAT DELHI has held that where assessee, a US based company, did not have PE in India and its activities were not covered by deeming fiction of article 5(2) of India - USA DTAA, income earned by it from sale of software to Indian companies which was 'off the shelf software, was not taxable In India. Tribunal in the case of Black Duck Software Inc Vs. DCIT 2017 (7) TMI 1269 - ITAT DELHI has held that where assessee, a US based company, granted a non-exclusive, non-transferable software license to Indian customer for a specific time period, since copyright in said software programme was retained by assessee, payment received by it was not liable to tax in India as royalty. In the case of Aspect Software Inc Vs. ADIT 2015 (5) TMI 726 - ITAT DELHI held that consideration received by assessee for supply of 'contact solutions' used for better management, customer interaction, comprising of sale of hardware alongwith license of embedded software to end user is not royalty under article 12 of DTAA between India and USA. Provision of implementation and maintenance services are inextricably and essentially linked to supply of software; where supply of software is itself not taxable as 'royalty', these services are also not royalty. Respectfully following all we hold that the payment received by the assessee from its customers from sale of software products/ licenses is not in the nature of the royalty u/s. 9(1)(vi) of the IT Act, 1961 and also as per article 12 (3) (a) and article 12(3) (b) of the Indo US DTAA. In our opinion the said amount received by the assessee is normal business income of the assessee on account of sale of copy righted products (licenses) and not taxable in India in the absence of permanent establishment. - Decided in favour of assessee.

Summary

Issues Involved:
1. Characterization of Payments as Royalty or Business Income
2. Condonation of Delay in Filing Appeals
3. Grant of TDS Credit

Detailed Analysis:

1. Characterization of Payments as Royalty or Business Income:
The primary issue in these appeals was whether the amounts received by the assessee from its customers for the sale of software licenses should be characterized as "royalty" under Section 9(1)(vi) of the IT Act, 1961, and Article 12(3) of the Indo-US DTAA, or as business income.

The assessee argued that the payments received were for the sale of copyrighted software products (licenses) and not for the use of or right to use any copyright, thus should be treated as business income. The assessee retained ownership of intellectual property rights and only permitted customers to use the software for their business needs, with restrictions on copying or duplicating the software.

The Tribunal referred to multiple judicial precedents, including the landmark decision of the Delhi High Court in the case of Infrasoft Ltd., which distinguished between the transfer of a copyright and the sale of a copyrighted article. The Tribunal concluded that the payments received by the assessee were not for the use of or the right to use any copyright but were for the sale of copyrighted products, thus constituting business income and not royalty.

The Tribunal also considered the various clauses in the agreements between the assessee and its customers, which indicated that the transactions were for the sale of copyrighted products and not for the transfer of any copyright rights. The Tribunal held that the payments received by the assessee did not fall under the definition of "royalty" as per the IT Act and the DTAA and should be treated as business income not taxable in India in the absence of a Permanent Establishment (PE).

2. Condonation of Delay in Filing Appeals:
There was a delay in filing the appeals for the assessment years 2007-08 and 2009-10. The assessee explained that the delay was due to the confusion caused by retrospective amendments proposed in the Finance Bill 2012 and the logistical challenges of obtaining signatures from the USA.

The Tribunal, after considering the explanations provided by the assessee and relying on various judicial precedents, including the Supreme Court's decisions in Collector, Land Acquisition vs. MST Katiji and Vedabai Alias Vaijayanta Bai Baburao Patil vs. Shantaram Baburao Patil, condoned the delay. The Tribunal emphasized the principle of advancing substantial justice and held that the delay was not deliberate or due to culpable negligence.

3. Grant of TDS Credit:
In ITA No. 382/Del/2016 for A.Y. 2012-13, the assessee challenged the AO's order for not granting TDS credit of ?5,88,007/-. The Tribunal directed the AO to verify the records and grant appropriate TDS credit to the assessee, ensuring due opportunity of being heard.

Conclusion:
The Tribunal allowed the appeals, holding that the payments received by the assessee for the sale of software licenses were not in the nature of royalty but constituted business income. The delay in filing the appeals was condoned, and the issue of TDS credit was remanded to the AO for verification and appropriate action.