2020 (12) TMI 403 - HC - Income Tax

Income accrued in India - receipts of the assessee from sale of software - taxable as royalty under the India -UK DTAA or not? - Whether ITAT was right in holding that explanation 4 to section 9(1)(vi) of the I.T. Act, 1961, would not apply to India - UK DTAA ? - HELD THAT - ITAT has decided the appeals in favour of the Respondent-Assessee on the basis of the decision of this Court in the case of Principal CIT Vs. M. Tech India Pvt. Ltd. 2016 (1) TMI 812 - DELHI HIGH COURT wherein the Court relied upon the earlier decisions on the same issue including the judgment of this Court in Director of Income Tax v. Infrasoft Ltd. 2013 (11) TMI 1382 - DELHI HIGH COURT and inter alia held that payment made by the reseller for the purchase of software for sale in Indian market could not be considered as royalty. ITAT also dealt with the contention of the Appellant- Revenue regarding Explanation 4 to Section 9 (1)(vi) of the Act for interpreting the terms used in Article 13 of the DTAA and observed in para 6 of the impugned order that In view of Section 90(2) of the Income Tax Act, the assessee opts for Double Taxation Avoidance Agreement between India and UK to override the provisions of the Act as there is no corresponding amendment to the definition of the term royalty in Article 13(3) of the aforesaid DTAA as carried out in the definition of royalty u/s 9 (1)(6) of the Act. The learned ITAT then rejected the contention of the Appellant-Revenue by relying upon the judgment of this Court in Director of Income Tax v. New Skies Satellite BV Ors. 2016 (2) TMI 415 - DELHI HIGH COURT which deals with the question of retrospective effect of the amendment - No substantial question of law.

Summary

Issues:
1. Interpretation of whether receipts from the sale of software are taxable as royalty under the India-UK Double Taxation Avoidance Agreement (DTAA).
2. Application of Explanation 4 to Section 9(1)(vi) of the Income Tax Act in the context of the DTAA.
3. Determining if the receipts of the assessee qualify as royalty under Section 14(b)(ii) of the Indian Copyright Act.
4. Assessment of whether the end users' use of software as licensees impacts the characterization of the receipts.

Analysis:
1. The case involved appeals under Section 260A of the Income Tax Act challenging the ITAT's order regarding the taxability of receipts from software sales as royalty under the India-UK DTAA. The Appellant-Revenue argued that the ITAT erred in its interpretation. The Respondent-Assessee contended that the consideration received did not constitute royalty under the DTAA, citing the definition of royalty in distributor and end-user agreements.

2. The Appellant-Revenue raised concerns about the applicability of Explanation 4 to Section 9(1)(vi) of the Act in the context of the DTAA. They argued that the ITAT failed to consider the legislative view expressed in circulars predating the DTAA. However, the ITAT rejected this argument, emphasizing the need to interpret the DTAA provisions in line with the treaty.

3. The issue of whether the receipts qualified as royalty under Section 14(b)(ii) of the Indian Copyright Act was also examined. The Respondent-Assessee contended that the payments were for the purchase of software as a product, not for the right to use the software, citing relevant case law and distinguishing between payments for products and payments for rights to use patents or copyrights.

4. The characterization of the receipts in relation to end users using the software as licensees was a key aspect of the assessment. The ITAT relied on precedents such as the M. Tech India Pvt. Ltd. case to support its decision that payments made by resellers for software purchases could not be considered as royalty. The ITAT also addressed the retrospective effect of amendments, citing the New Skies Satellite BV & Ors. case to support its conclusion that no retrospective effect applied to the DTAA definitions.

In conclusion, the High Court dismissed the appeals, finding that the issues raised by the Appellant-Revenue were adequately addressed by existing case law and did not present any substantial questions of law for consideration. The judgment highlighted the importance of interpreting DTAA provisions in alignment with the treaty and emphasized distinctions between payments for products and payments for rights to use patents or copyrights.