2020 (1) TMI 649 - AT - Income Tax

Royalty receipt - Receipts towards access to use software - India Netherlands DTAA - whether there is any use or right to use of copyright? - P.E. in India - business income taxed in India - HELD THAT - As decided in own case 2017 (4) TMI 763 - ITAT MUMBAI wherein the Tribunal held that the payments received by the assessee from Wipro/IBM in pursuance to the MSA cannot be treated as royalty under Article 12(4) of the India Netherlands DTAA None of the conditions mentioned in section 14 of the Copyright Act is applicable as held by the learned CIT(A); and is also is evident from the terms of MSA, because no such rights has been given by the assessee to the IT Service providers. Further by making use or having access to the computer programs embedded in the software, it cannot be held that either WIPRO/IBM are using the process that has gone into the software or that they have acquired any rights in relation to the process as such. The software continues to be owned by the assessee and what WIPRO/IBM is getting mere access to the software. The source code embedded in the software has not been imparted to them. Hence, there is no use or right to use of any process as held by the learned AO. Hence, the finding of the learned CIT(A) that the payment in question cannot be reckoned as royalty is factually and legally correct and the same is upheld. For all the years the payments received by the assessee from WIPRO/IBM in pursuance to the MSA cannot be treated as royalty under Article 12(4) of the India-Netherland DTAA. Thus, the matter is decided in favour of the assessee and against the revenue

Issues Involved:
1. Assessment of total income.
2. Classification of receipts towards access to use software and IT support services.
3. Determination of receipts as 'royalty' under the India-Netherlands DTAA.
4. Classification of IT support services as 'Fees for Technical Services' (FTS) under the Act and DTAA.
5. Levy of interest under Section 234B of the Act.
6. Adjustment of refund against demand for earlier years.
7. Recovery of interest under Section 244A of the Act.
8. Levy of interest under Section 234D of the Act.

Detailed Analysis:

1. Assessment of Total Income:
The Tribunal addressed the issue of assessing the total income at ?1,85,95,06,633 as against NIL total income offered in the return by the appellant. The appellant contended that the receipts were reimbursements in the nature of cost allocation without markup and hence do not constitute 'income' under section 2(24) of the Act.

2. Classification of Receipts Towards Access to Use Software:
The appellant argued that the payments received for access to use copyrighted software should not be classified as 'royalty' under the India-Netherlands DTAA. The Tribunal referred to previous judgments for the assessment years 2012-13 to 2014-15, where it was held that such payments do not constitute 'royalty' under Article 12 of the DTAA. The Tribunal reiterated that the limited rights granted for the use of software do not amount to the use of copyright or process, and thus, cannot be treated as 'royalty'.

3. Determination of Receipts as 'Royalty' under the India-Netherlands DTAA:
The Tribunal examined the terms of the Master Service Agreement (MSA) between the assessee and IT service providers like Wipro/IBM. It was concluded that the payments received for access to software do not grant any rights to the copyright itself but only to the copyrighted article. The Tribunal cited various high court decisions, including the Delhi High Court's ruling in DIT vs. Infrasoft Ltd., which supported the view that such payments are not 'royalty' under the DTAA.

4. Classification of IT Support Services as 'Fees for Technical Services' (FTS):
The Tribunal addressed the issue of whether the payments received for IT support services constitute FTS under the Act and the DTAA. It was noted that the Tribunal had previously ruled in favor of the assessee for the assessment years 2011-12 to 2014-15, stating that IT support services do not 'make available' any technical knowledge, skill, or know-how to the recipient, and thus, are not taxable as FTS under Article 12 of the DTAA.

5. Levy of Interest under Section 234B of the Act:
The appellant contested the levy of interest under Section 234B of the Act. The Tribunal did not provide a detailed analysis on this issue, indicating that it may be consequential to the main issues decided.

6. Adjustment of Refund Against Demand for Earlier Years:
The appellant argued against the adjustment of refunds against demands for earlier years, claiming that there was no outstanding demand due to favorable ITAT orders for those years. The Tribunal did not provide a detailed analysis on this issue, suggesting that it may be consequential.

7. Recovery of Interest under Section 244A of the Act:
The appellant contested the recovery of interest under Section 244A of the Act. The Tribunal did not provide a detailed analysis on this issue, indicating that it may be consequential.

8. Levy of Interest under Section 234D of the Act:
The appellant argued against the levy of interest under Section 234D of the Act. The Tribunal did not provide a detailed analysis on this issue, suggesting that it may be consequential.

Conclusion:
The Tribunal ruled in favor of the assessee on the key issues of classification of receipts towards access to use software and IT support services, determining that such receipts do not constitute 'royalty' or FTS under the India-Netherlands DTAA. The remaining grounds were either kept open or restored to the file of the Assessing Officer for adjudication in accordance with the law. The appeal was partly allowed.

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