2021 (7) TMI 829 - AT - Income Tax

Income taxable in India as royalty u/s 9(l)(vi) of the Income Tax Act, as well as Article 13(3) of the India - France - revenue received by the assessee from supply of software - HELD THAT - A similar quarrel was decided by this Tribunal in favour of the assessee and against the revenue 2014 (4) TMI 273 - ITAT DELHI confirmed by HC 2015 (5) TMI 431 - DELHI HIGH COURT as held that when the assessee supplies the software which is incorporated on a CD, it has supplied tangible property and the payment made by the cellular operator for acquiring such property cannot be regarded as a payment by way of royalty. This order of the Hon ble High Court of Delhi has been upheld by the Hon ble Supreme Court in a bunch of appeals in the case of Engineering Analysis Centre of Excellence Private Limited 2021 (3) TMI 138 - SUPREME COURT - Decided against revenue.

Summary

Issues Involved:
Taxability of revenue received from supply of software as royalty under Income Tax Act and India-France DTAA, applicability of Explanation 5 and G to section 9(1)(vi), adequacy of compensation, reliance on previous case, settled issues in favor of assessee.

Detailed Analysis:

1. Taxability of Revenue from Software Supply:
The appeal by the revenue challenged the deletion of addition made by the AO regarding the taxability of revenue received by the assessee from the supply of software as royalty under the Income Tax Act and India-France DTAA. The AO held that software supplied by the assessee is taxable as royalty, following the assessment order of Alcatel-Lucent France for A.Y. 2006-07. However, the Tribunal noted that a similar issue was decided in favor of the assessee in previous cases, where it was held that the supply of embedded software did not constitute royalty under Section 9(1)(vi) of the Income Tax Act and was not attracted under the DTAA as well.

2. Applicability of Explanation 5 and G to Section 9(1)(vi):
The revenue contended that the CIT(A) erred in deleting the addition without considering Explanation 5 and G to section 9(1)(vi), which were inserted by clarificatory amendments with retrospective effect. However, the counsel for the assessee argued that the issues raised by the revenue were settled in favor of the assessee by previous Tribunal orders confirmed by the High Court and Supreme Court, indicating that the retrospective amendments did not apply in this case.

3. Adequacy of Compensation and Reliance on Previous Case:
The revenue also raised concerns about the adequacy of compensation and the reliance on the ratio of a specific case while determining the income of the assessee. The Tribunal observed that the issues were settled in favor of the assessee based on previous judgments, where it was established that the consideration paid towards the supply of software did not amount to royalty, especially when the software was an integral part of the hardware supplied.

4. Settled Issues in Favor of Assessee:
The Tribunal emphasized that the issues raised by the revenue were now well settled in favor of the assessee by previous Tribunal orders, High Court decisions, and Supreme Court judgments. The courts had consistently held that the supply of embedded software did not constitute royalty under the Income Tax Act or DTAA, based on the nature of the transaction and the integral relationship between the software and hardware supplied.

In conclusion, the Tribunal dismissed the appeal by the revenue, considering the settled legal position established by previous judicial decisions. The judgment reaffirmed that the revenue received by the assessee from the supply of software was not taxable as royalty under the Income Tax Act and the relevant DTAA provisions, based on the specific nature of the transactions and the legal interpretations provided by the courts in earlier cases.