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2021 (7) TMI 1077 - AT - Income TaxIncome deemed to accrue or arise in India - receipts from sale of software products is taxable as royalty under Article 12(3) of the India- Sweden Double Taxation Avoidance Agreement (DTAA) and u/s 9(1)(vi) of the Income Tax Act, 1961 - HELD THAT - As relying on assessee's own case 2019 (10) TMI 858 - ITAT DELHI and 2020 (10) TMI 936 - ITAT DELHI hold that consideration received by the assessee for sale of software cannot be treated as royalty under the provision of section 9(1)(vi) of the Act as well as Article 12 of the India-Sweden DTAA and that the sale of software products by the assessee to its Indian distributors for further sale to end users is not in the nature of transfer of copyright and therefore not taxable in the hands of the assessee as royalty under the provision of section 9 (1)(vi) of the Act as well as Article 12 of the India-Sweden DTAA As rightly pointed out by the learned counsel for the assessee, those decisions of the Hon ble Karnataka High Court, now stand overruled by the decision of the Hon ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P) Ltd 2021 (3) TMI 138 - SUPREME COURT as held that copyright is an exclusive right that restricts others from doing certain acts. A copyright is an intangible right, in the nature of a privilege, entirely independent of any material substance Owning copyright in a work is different from owning the physical material in which the copyrighted work may be embodied. Computer programs are categorised as literary work under the Copyright Act. Section 14 of the Copyright Act states that a copyright is an exclusive right to do or authorise the doing of certain acts in respect of a work, including literary work. Hon ble Court took the view that a transfer of copyright would occur only when the owner of the copyright parts with the right to do any of the acts mentioned in section 14 of the Copyright Act, 1957(Copyright Act). The court said that by virtue of Article 12(3) of the DTAA, royalties are payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary work includes a computer program or software. It was held that regarding the expression use of or the right to use , the position would be the same under explanation 2(v) of section 9(1)(vi) because there must be, under the licence granted or sales made, a transfer of any rights contained in sections 14(a) or 14(b) of the Copyright Act. Since the end-user only gets the right to use computer software under a non-exclusive licence, ensuring the owner continues to retain ownership under section 14(b) of the Copyright Act read with sub-section 14(a) (i)-(vii), payments for computer software sold/licenced on a CD/other physical media cannot be classed as a royalty. The grounds raised by the assessee with regard to taxing receipts on sale of off-the-shelf software are allowed. Treatment of receipts from shared services in India to be in the nature of 'fess for technical services' and therefore liable to tax in India - HELD THAT - Going by the nature of services enumerated in the present case, we are of the view that the services were purely in the nature of back office services and nothing can be regarded as having been made available to the recipient of services. As per the terms of the Service Agreement, it is clear that the assessee only provides corporate back office services to QlikTech India and such services are not consultancy services and the same do not involve transfer of any technical knowledge or skill or experience to the recipient. The CIT(A) has erred in law and on facts in stating that, since the business model and the accounting and financial policies of the business remains the same, the consultancy services could be utilised by the Indian entity in its business year after year, thereby satisfying the 'make available' condition. On the contrary, the CIT(A) has failed to appreciate that the year on year rendition of services by the assessee to the Indian entity proves that technical knowledge is not transferred or made available to the Indian entity for independently function without the aid of the assessee. We therefore agree with the plea of the assessee and hold that the sum received towards shares services were not in the nature of FTS and cannot be brought to tax in India as FTS . The sum in question cannot be taxed as business profits also, as under Article 7(1) of DTAA, as the receipts in question cannot be attributed to the permanent establishment
Issues Involved:
1. Taxability of receipts from the sale of software products as "royalty." 2. Treatment of receipts from shared services as "fees for technical services." Issue-Wise Detailed Analysis: 1. Taxability of Receipts from Sale of Software Products as "Royalty": The assessee, a Swedish company, engaged in selling software products and rendering IT services, entered into an agreement with its subsidiary for the sale of software in India. The AO held that the receipts from the sale of software products were taxable as royalty under Article 12(3) of the India-Sweden DTAA and Section 9(1)(vi) of the Income Tax Act, 1961. The CIT(A) upheld this view, relying on decisions from the Karnataka High Court. The Tribunal noted that the issue had been previously decided in favor of the assessee for earlier assessment years (2012-13 and 2013-14), where it was held that the right transferred was limited to the use of copyrighted material and did not constitute a transfer of copyright, thus not giving rise to royalty income. The Tribunal observed that the software sold did not grant any rights to the source code or the intellectual property, which remained with the assessee. The Tribunal also considered the recent Supreme Court decision in Engineering Analysis Centre of Excellence, which clarified that payments for software sales do not constitute royalty as per the DTAA and the Act. The Supreme Court held that a copyright involves exclusive rights, and selling software does not transfer these rights. The Tribunal concluded that the receipts from the sale of software to Indian distributors were not in the nature of royalty and were not taxable under Section 9(1)(vi) or Article 12 of the DTAA. 2. Treatment of Receipts from Shared Services as "Fees for Technical Services": The assessee provided back-office support services to its Indian subsidiary, receiving a sum of ?98,93,448. The AO and CIT(A) held that these receipts were taxable as fees for technical services (FTS) under Section 9(1)(vii) of the Act and Article 12 of the India-Sweden DTAA. The assessee argued that the services were not technical or consultancy services, and even if they were, they did not "make available" technical knowledge or skills, a requirement under the MFN clause in the India-Sweden DTAA. The Tribunal referred to the Pune ITAT's decision in Sandvik AB, which supported the assessee's claim that the MFN clause required the services to "make available" technical knowledge to be taxable as FTS. The Tribunal analyzed the nature of the services provided, concluding that they were purely back-office support services and did not transfer any technical knowledge or skills to the recipient. The Tribunal held that the receipts from shared services were not in the nature of FTS and could not be taxed in India. The sum could not be taxed as business profits either, as it could not be attributed to the permanent establishment. Conclusion: The Tribunal allowed the appeal of the assessee, holding that: - The receipts from the sale of software products were not taxable as royalty under the provisions of the Act or the India-Sweden DTAA. - The receipts from shared services were not in the nature of FTS and were not taxable in India.
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