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2020 (7) TMI 97 - AT - Income TaxTreating the sale receipts of shrink-wrap software as royalty - '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 - As decided in own case 2020 (1) TMI 611 - ITAT MUMBAI we herein conclude that the addition made by the A.O by treating the sale receipts of shrink-wrap software as royalty cannot be sustained, and is hereby vacated. - Decided in favour of assessee.
Issues Involved:
1. General objections to the assessment order. 2. Taxability of receipts towards the sale of software products. Issue-wise Analysis: 1. General Objections to the Assessment Order: The assessee contended that the order passed by the Assessing Officer (AO) was contrary to the principles of equity and natural justice, not based on the facts and circumstances of the case, and lacked jurisdiction. The AO computed the total income of the assessee at INR 63,71,64,640/-, which the assessee argued was erroneous. 2. Taxability of Receipts towards Sale of Software Products: The primary dispute centered around whether the income from the sale of shrink-wrapped software should be treated as 'royalty' under the provisions of section 9(1)(vi) of the Income Tax Act, 1961, and Article 12(3) of the Double Taxation Avoidance Agreement (DTAA) between India and the USA. 2.1. Decision of the Dispute Resolution Panel (DRP): The DRP upheld the draft assessment order, rejecting the appellant's objections based on the fact that the issue had been decided against the appellant in earlier years. The DRP noted that the binding decisions of the jurisdictional Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) on identical issues in the appellant's own case for earlier assessment years were concluded in favor of the appellant. 2.2. Nature of Income from Sale of Shrink-wrapped Software: The AO and DRP held that the income from the sale of shrink-wrapped software was taxable in India as 'royalty' under section 9(1)(vi) of the Act and Article 12(3) of the DTAA. They argued that the payments received were for the 'sale of copyrighted article' and not a 'transfer of copyright right,' as the end-users in India only obtained a right to use the software products. 2.3. Definition of 'Royalty': The AO contended that software is a process or property similar to a patent, invention, design, secret formula, etc., as defined under Explanation 2 to section 9(1)(vi) of the Act. The retrospective amendment to section 9(1)(vi) by way of Explanation 4 was also considered applicable to the definition of 'royalty' under Article 12 of the DTAA. 2.4. Tribunal's Observation: The ITAT observed that the issue was squarely covered in favor of the assessee by its own orders for preceding years. The Tribunal consistently held that the sale receipts from the licensees of the software could not be treated as 'royalty' in the hands of the assessee. The Tribunal relied on its previous decisions, including those for A.Y 2003-04, 2005-06, 2006-07, 2007-08, 2009-10, 2011-12, 2013-14, 2014-15, and 2015-16, where it was held that such receipts were not liable to tax as royalty. 2.5. Final Decision: Respectfully following the view taken by the Tribunal in the assessee’s own case for A.Y 2015-16, the ITAT concluded that the addition made by the AO by treating the sale receipts of shrink-wrap software as 'royalty' could not be sustained and was vacated. The appeal filed by the assessee was allowed. Conclusion: The ITAT ruled in favor of the assessee, holding that the receipts from the sale of shrink-wrapped software were not taxable as 'royalty' in India, following the precedent set in the assessee's own cases for earlier years. The AO's order was set aside, and the appeal was allowed.
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