2021 (7) TMI 608 - AT - Income Tax

Income chargeable to tax in India - taxation on sale of software as royalty income - HELD THAT - As decided in own case 2021 (5) TMI 877 - KARNATAKA HIGH COURT relying on ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PRIVATE LIMITED case 2021 (3) TMI 138 - SUPREME COURT amounts paid by resident Indian end-users/distributors to non-resident computer software manufacture/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India, as a result of which the persons referred to in Section 195 of the Income Tax Act were not liable to deduct any TDS under Section 195 - Decided in favour of assessee.

Issues Involved:
1. Reassessment Proceedings Initiation
2. Taxation of Software Sale Receipts as Royalty Income

Detailed Analysis:

1. Reassessment Proceedings Initiation:
The appellant challenged the initiation of reassessment proceedings under section 147 of the Income Tax Act, contending that it was a "mere backdoor mode of assessing the income of the Appellant to circumvent the time-barred assessment proceedings." However, during the hearing, the appellant did not press these grounds. Consequently, these grounds were dismissed as not pressed.

2. Taxation of Software Sale Receipts as Royalty Income:
The core issue was whether the receipts from the sale of software to Indian customers should be taxed as royalty income. The Assessing Officer (AO) treated the payments received by the appellant for the sale of software as royalty and charged tax under both the Income-tax Act and the Double Taxation Avoidance Agreement (DTAA). This decision was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)] based on the Karnataka High Court's judgment in the case of CIT v. Samsung Electronics, which held that payments for the use of software amounted to royalty.

The appellant argued that the payments did not constitute royalty but were rather income from business, and in the absence of a permanent establishment in India, there was no obligation to deduct tax at source under section 195. The CIT(A) followed the judgment in Samsung Electronics, which stated that the payment for software use constituted royalty under the DTAA and the Income-tax Act. The judgment emphasized the definition of 'royalty' under the DTAA, which is more restrictive and beneficial to the assessee compared to the broader definition under the Income-tax Act.

However, the appellant's case for the assessment year 2011-12 was subsequently considered by the Hon’ble High Court of Karnataka, which referred to the Supreme Court's judgment in Engineering Analysis Centre for Excellence Private Limited v. CIT & Anr. The Supreme Court held that payments made by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers for the resale/use of software through End User License Agreements (EULAs) or distribution agreements do not constitute royalty. The court clarified that such payments do not give rise to income taxable in India, and therefore, there is no obligation to deduct tax at source under section 195.

The Supreme Court's judgment overturned the earlier decision in Samsung Electronics. The Tribunal noted that the issue was already settled by the Supreme Court in favor of the assessee. Consequently, the ground of appeal regarding the taxation of software sale receipts as royalty income was allowed in favor of the assessee for both assessment years 2012-13 and 2014-15.

Conclusion:
The appeals were resolved with ITA No.287/Bang/2018 being partly allowed and ITA No.289/Bang/2018 being fully allowed, based on the Supreme Court's ruling that payments for software use do not constitute royalty and are not taxable in India. The reassessment grounds were dismissed as not pressed. The judgment was pronounced in the open court on June 22, 2021.

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