2021 (6) TMI 513 - AT - Income Tax

Taxability as income from Royalty within the meaning of section 9(1)(vi) r.w. Article 12 of the Double Taxation Avoidance Agreement between India and USA - receipt as a consideration for sale of Software/License relating to Development of Software - A.Y. 2009-10 - HELD THAT - The disputed receipt from M/s. Honeywell Technology Solutions Lab Pvt. Ltd. is on account of sale of Software/license and not for parting with the copyright of the software. Since facts of the present case are similar to those considered and decided by the Hon ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd 2021 (3) TMI 138 - SUPREME COURT respectfully following the precedent, we hold that the amount cannot be brought within the ambit of Royalties under Article 12 of the DTAA. Case of the assessee before the authorities below has been that the receipt is not in the nature of Royalty , but Business Profits - In order to bring Business profits of a resident of the other country to tax in India within the ambit of Article 7, it is sine qua non that the foreign enterprise must have a Permanent Establishment (PE) in India in terms of Article 5 of the DTAA. In the absence of a PE, the taxability under Article 7 does not trigger. The assessee categorically submitted before the DRP that it did not have any PE in India. As the assessee did not have a PE in India during the relevant year, the mandate of Article 7 cannot activate. A fortiori , the receipt cannot be charged to tax in India as Business profits either. In view of the foregoing discussion, we are satisfied that the amount received by the assessee from sale of software/license to M/s. Honeywell Technology Solutions Lab Pvt. Ltd. ceases to chargeable to tax in India. This issue is, therefore, decided in assessee s favour. Income taxable in India - chargeability being, income from sale of software license which was held by the AO to be an income in the nature of Royalty - A.Y. 2014-15 - HELD THAT - We hold that receipt of Software license cannot be charged to tax as Royalties under the DTAA. In the same manner, the amount will escape taxation as Business profits under Article 7 also because of it not having any PE in India. Albeit Explanation 4 to section 9(1)(vi) is applicable to the year under consideration, but section 90(2) of Act states that where the Central Government has entered into an agreement with the Government of any country outside India under sub-section (1), then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee. In other words, the provisions of the Act or the DTAA, whichever are more beneficial to the assessee would apply. Coming back to the factual panorama, we find that the provision of the DTAA, being more beneficial than that of the Act would apply making the receipt from sale of software license as not chargeable to tax in India.

Summary

Issues:
1. Taxability of income as Royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 12 of the DTAA for A.Y. 2009-10.
2. Taxability of income from sale of software license as Royalty or Business Profits under DTAA for A.Y. 2014-15.

Analysis:

A.Y. 2009-10:
The primary issue in this appeal is the taxability of income amounting to ?2,42,02,485 as Royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 12 of the DTAA for the assessment year 2009-10. The Assessing Officer (AO) initiated re-assessment proceedings based on the receipt from a software sale transaction. The AO considered the receipt as Royalty chargeable to tax in India. The assessee contended that the amount was Business Profits covered under Article 7 of the DTAA. The Tribunal analyzed the definition of Royalties under Article 12 of the DTAA and referred to a Supreme Court judgment highlighting the distinction between ownership of copyright and physical material. The Tribunal held that the amount from the software sale did not fall under Royalties but Business Profits, as the assessee did not have a Permanent Establishment (PE) in India, as required under Article 7 of the DTAA. Consequently, the amount was not chargeable to tax in India.

A.Y. 2014-15:
The sole issue in this appeal pertains to the taxability of income from the sale of a software license amounting to ?86,05,13,407 as Royalty or Business Profits under the DTAA for the assessment year 2014-15. The arguments presented were similar to those in the earlier year. The Tribunal, following the decision on the previous issue, held that the income from the software license sale could not be taxed as Royalties under the DTAA. Additionally, due to the absence of a PE in India, the income was not chargeable as Business Profits under Article 7 of the DTAA. The Tribunal also noted the applicability of Explanation 4 to section 9(1)(vi) but highlighted that the DTAA provisions, being more beneficial to the assessee, would prevail. Thus, the income from the software license sale was not liable to tax in India. Other grounds related to interest chargeability were allowed accordingly.

In conclusion, the Tribunal partly allowed the appeal for A.Y. 2009-10 and fully allowed the appeal for A.Y. 2014-15, emphasizing the non-taxability of the income in question under both Royalty and Business Profits categories as per the DTAA provisions.