2021 (7) TMI 1196 - AT - Income Tax

Income accrued in India - whether the supply of the software by the assessee company is taxable as royalty under the DTAA between the India and the Sweden or it should be a sale Simpliciter, which is taxable as business income if the assessee has a Permanent Establishment in India? - HELD THAT - We find that the Hon ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P) Ltd 2021 (3) TMI 138 - SUPREME COURT has held that the amounts paid by the resident Indian end-users/distributors to nonresident computer software manufacturer/suppliers as consideration for resale/use of the computer software to end-user license agreement (EULA)/distribution agreements is not for payment of the royalty for the use of copyright in the computer software and that same does not give rise to any income taxable in India. In the instant case before us also software license agreement between the assessee and the customer was for use of the software and therefore corresponding supply of the software is not in the nature of the royalty taxable in India as per DTAA between India and the Sweden. We note that the Ld. DR has also fairly conceded that the dispute is covered by the decision of the Hon ble Supreme Court in the case cited above. Accordingly, following the decision of the Hon ble Supreme Court (supra), we uphold the finding of the Ld. CIT(A) on the issue in dispute. The grounds raised by the revenue are accordingly dismissed.

Summary

Issues:
1. Whether the revenue received by the assessee from the supply of software is taxable in India as Royalty under the Income-Tax Act and the Double Tax Avoidance Agreement (DTAA) between India and Sweden.
2. Whether the payment received by the assessee for the transfer of rights and license to use the software falls under section 9(1)(vi) of the Income-tax Act, 1961 and Article 12(3) of the DTAA.
3. Whether the supply of software by the assessee should be treated as royalty taxable in India or as a sale Simpliciter, especially in the absence of a Permanent Establishment in India.

Analysis:
1. The Assessing Officer considered the revenue received by the assessee from the supply of software as royalty under the Income-Tax Act and the India-Sweden DTAA. However, the Ld. CIT(A) deleted the addition, stating that the customer had only a nonexclusive right and could not sublicense the software beyond internal business purposes. The Ld. CIT(A) relied on the principle of consistency and previous court decisions to rule in favor of the assessee, emphasizing the exclusive ownership of the software rights by the assessee.

2. The assessee argued that the payment received for the transfer of rights and license to use the software should not be considered as royalty under section 9(1)(vi) of the Income-tax Act and Article 12(3) of the DTAA. The Ld. CIT(A) upheld the assessee's position, citing the decision of the Hon’ble Supreme Court in a similar case. The Ld. CIT(A) concluded that the supply of software was not in the nature of royalty taxable in India under the DTAA.

3. The issue of whether the supply of software by the assessee should be treated as royalty taxable in India or as a sale Simpliciter was analyzed. The Assessing Officer treated the sale of software as royalty taxable in India. However, the ITAT referred to the decision of the Hon’ble Supreme Court, which held that payments for the use of computer software do not constitute royalty for the use of copyright. The ITAT found that the software license agreement was for the use of the software, not for the payment of royalty, and therefore upheld the Ld. CIT(A)'s decision.

In conclusion, the ITAT dismissed the revenue's appeal, affirming the decision of the Ld. CIT(A) based on the principles established by previous court decisions and the interpretation of the DTAA between India and Sweden.