2020 (1) TMI 611 - AT - Income Tax

Taxability of receipts towards sale of software products - 'sale of copyrighted article' OR 'transfer of copyright right' - whether nature of royalty under the provisions of section 9(l)(vi) of the Act as well as Article 12(3) of the Double Taxation Avoidance Agreement ( DTAA ) between India and USA? - HELD THAT - Tribunal in assessee own case 2017 (3) TMI 331 - ITAT MUMBAI have held that receipts from sale of Shrink-wrap software is not liable to tax in India accordingly, AO was directed to delete the addition so made on account of receipts for sale of Shrink-wrap software. Facts and circumstances in both the years under consideration are parimateria, therefore, respectfully following the order of the Tribunal in assessee s own case, we do not find any justification for taxing the receipt as taxable as royalty

Issues Involved:
1. Validity of the Assessing Officer's order.
2. Taxability of receipts from the sale of software products as royalty under Section 9(1)(vi) of the Income Tax Act and Article 12(3) of the DTAA between India and USA.
3. Classification of payments for software as 'sale of copyrighted article' versus 'transfer of copyright right'.
4. Applicability of the retrospective amendment to Section 9(1)(vi) of the Act to the definition of "Royalty" under Article 12 of the DTAA.
5. Correct tax rate on royalty income under Section 115A of the Act.

Detailed Analysis:

1. Validity of the Assessing Officer's Order:
The assessee contended that the Assessing Officer's (AO) order was contrary to equity, natural justice, and mandatory provisions of the Income-tax Act, 1961, and thus lacked jurisdiction. The AO computed the total income of the assessee at INR 45,12,52,910, which the assessee challenged as erroneous both in law and on facts.

2. Taxability of Receipts from Sale of Software Products:
The primary issue was whether the income from the sale of shrink-wrapped software products was taxable in India as royalty under Section 9(1)(vi) of the Act and Article 12(3) of the DTAA between India and USA. The Dispute Resolution Panel (DRP) upheld the draft assessment order, rejecting the appellant's objections based on previous unfavorable decisions by the DRP, despite favorable decisions by the jurisdictional Mumbai Bench of the ITAT in the assessee's own case for earlier assessment years.

3. Classification of Payments for Software:
The assessee argued that payments received from the sale of shrink-wrapped software should be classified as 'sale of copyrighted article' rather than 'transfer of copyright right', as the end users in India obtained only a right to use the software products and not any copyright right. The AO and DRP, however, treated the software as a process or property similar to patents, inventions, designs, secret formulas, etc., as defined under Explanation 2 to Section 9(1)(vi) of the Act.

4. Retrospective Amendment to Section 9(1)(vi):
The AO stated that the retrospective amendment to Section 9(1)(vi) of the Act by the Finance Act 2012, which inserted Explanation 4 to the said section, was applicable to the definition of "Royalty" under Article 12 of the DTAA. The assessee contested this interpretation.

5. Correct Tax Rate on Royalty Income:
The assessee also contended that even if the income was recognized as royalty income, the AO and DRP erred in computing the tax at 15 percent, whereas Section 115A of the Act prescribes a rate of 10 percent on royalty income.

Tribunal's Findings:

Taxability of Receipts from Sale of Software Products:
The Tribunal noted that the issue of taxability of receipts from the sale of software products had been consistently decided in favor of the assessee in its own case for previous years. The Tribunal cited several orders, including those for the assessment years 2003-04, 2005-06, 2006-07, 2007-08, 2009-10, and 2011-12, where it was held that receipts from the sale of software products were not liable to tax as royalty. The Tribunal reiterated that the receipts were not in the nature of royalty, as no patent rights were sold, only computer programs.

Classification of Payments for Software:
The Tribunal upheld the assessee's contention that the payments were for the sale of copyrighted articles and not for the transfer of copyright rights, aligning with previous Tribunal decisions and the Hon'ble Delhi High Court's judgment in the case of Ericsson AV (343 ITR 470) (Del.).

Retrospective Amendment to Section 9(1)(vi):
The Tribunal did not find merit in the AO's application of the retrospective amendment to the DTAA definition of royalty, aligning with the principle that in cases of conflicting views, the interpretation favoring the assessee must be adopted, as upheld by the Hon'ble Supreme Court in CIT Vs. Vegetable Products Ltd. (1973) 88 ITR 192 (SC).

Correct Tax Rate on Royalty Income:
The Tribunal did not specifically address the tax rate issue, as it concluded that the receipts were not taxable as royalty.

Conclusion:
The Tribunal allowed the appeal, directing the AO to delete the addition made on account of receipts from the sale of shrink-wrapped software, thereby ruling in favor of the assessee on all contested issues. The appeal was thus allowed in its entirety.

← Previous Next →