2021 (4) TMI 645 - AT - Income Tax

Income deemed to accrue or arise in India - Consideration from sale of software licenses taxed as royalty - PE in India - Whether AO and the Hon ble DRP has erred in treating the consideration received from sale of software license taxable as Royalty both under the provisions of the Act as well as Article 12 of the Double Taxation Avoidance Agreement ( DTAA ) between India and Singapore? - HELD THAT - The issue of software income is not a royalty income is settled by the Hon ble Apex Court in case of Engineering Analysis Centre of Excellence Pvt. Ltd. 2021 (3) TMI 138 - SUPREME COURT The Legal Principal and the factual matrix are identical in present Assessment year of the assessee to that of the issues discussed in case of Engineering Analysis Centre of Excellence Pvt. Ltd.. Besides this, the issue is covered in favour of assessee in previous year as well. Hence, the appeal of the assessee is allowed.

Summary

Issues:
1. Tax treatment of consideration from sale of software licenses as royalty.
2. Initiation of penalty proceedings under section 271(l)(c) of the Act.

Issue 1 - Tax treatment of consideration from sale of software licenses as royalty:
The appeal was filed against the order passed by the Income Tax Department, Singapore, for the assessment year 2014-15. The assessee argued that the consideration received from the sale of software licenses should not be taxed as royalty under the Income-tax Act and the Double Taxation Avoidance Agreement (DTAA) between India and Singapore. The assessee contended that the software licenses sold were goods, not services, and did not grant rights in the copyright of the software. The Assessing Officer treated the consideration as royalty income at 10% on a gross basis, as per the DTAA. The Tribunal referred to the decision of the Hon'ble Apex Court in a similar case, where it was held that payments made for the resale/use of computer software through agreements did not constitute royalty for the use of copyright. The Tribunal found the legal principle and factual matrix identical to the previous case, ruling in favor of the assessee and allowing the appeal.

Issue 2 - Initiation of penalty proceedings under section 271(l)(c) of the Act:
The assessee challenged the initiation of penalty proceedings under section 271(l)(c) of the Act. The Assessing Officer had initiated these proceedings, which the assessee considered erroneous. However, the Tribunal did not delve into this issue in detail in the judgment provided. It can be inferred that since the primary issue of tax treatment of software license sales as royalty was decided in favor of the assessee, the penalty proceedings under section 271(l)(c) were likely to be impacted by this decision. As a result, the appeal was allowed, and the penalty proceedings may have been set aside.

In conclusion, the Appellate Tribunal, ITAT Delhi, ruled in favor of the assessee, holding that the consideration from the sale of software licenses should not be treated as royalty income. The Tribunal relied on a previous decision of the Hon'ble Apex Court to support its decision. The appeal was allowed, indicating that the tax treatment issue was resolved in favor of the assessee. The judgment did not provide detailed analysis of the penalty proceedings under section 271(l)(c) of the Act, but it can be inferred that the decision on the primary issue impacted the penalty proceedings as well.