2021 (8) TMI 635 - AT - Income Tax

Taxation of income from sale of commercial off-the-shelf software - HELD THAT - There is no specific finding by the lower authorities with regard to the licence agreement through which the assessee granted to the parties to use the software to say whether it is just the sale of software or royalty. In our opinion, it is appropriate to remit the issue in the light of judgment in Engineering Analysis Centre For Excellence Private Limited 2021 (3) TMI 138 - SUPREME COURT . Accordingly, this issue is remitted back to the file of AO for fresh consideration and decision in accordance with law. Tax foreign exchange difference arising on account of reconciliation of total receipts of the Company with the receipts appearing in Form 26AS - HELD THAT - Assessee adopted the rate as on 31st March to quantify the receipts appearing in Form 26AS with regard to income received in foreign exchange. According to him, Rule 115 of the I.T. Rules is not applicable to royalty income. In our opinion, the argument of the ld. AR is totally misconceived. The last date in the balance sheet of 31st March is the date of preparation of balance sheet and not for quantifying the foreign exchange rate. In this case, the assessee actually received this amount and that date itself should be considered to determine the value of the amount of tax deducted at source on royalty and not the last date of balance sheet. Being so, we are not in agreement with the contention of the ld. AR. Accordingly, the order of the CIT(Appeals) is confirmed. These grounds are dismissed.

Issues Involved:
1. Validity of the order passed by the JCIT under section 143(3) read with section 144C of the Income-tax Act, 1961.
2. Taxation of receipts from the sale of software as royalty income.
3. Taxation of foreign exchange difference arising on account of reconciliation of total receipts with the receipts appearing in Form 26AS.

Detailed Analysis:

1. Validity of the Order Passed by JCIT:
At the time of hearing, the additional grounds challenging the validity of the order dated April 20, 2016, passed by the JCIT were not pressed by the assessee and were dismissed as such. Therefore, this issue was not adjudicated further.

2. Taxation of Receipts from Sale of Software as Royalty Income:
The assessee contested the action of the CIT(A) and AO in classifying the receipts from the sale of software as royalty income. The assessee argued that:
- The intellectual property rights of the software remain with the assessee and are not transferred to customers in India.
- The income would be considered as royalty only if the user is permitted commercial exploitation of the copyright in the software.
- The customers are only allowed to use the copyrighted article, not the copyright itself.
- The customers do not have the authority to reproduce the software in any material form.

The AO, relying on judgments from the Karnataka High Court, treated the income from the sale of software as royalty under both the Income-tax Act, 1961, and the DTAA, and brought it to tax. The CIT(A) upheld this view.

However, the assessee referred to the Supreme Court judgment in the case of Engineering Analysis Centre For Excellence Private Limited v. CIT, which held that payments for the resale/use of computer software through EULAs/distribution agreements do not constitute royalty and are not taxable in India. The Tribunal found that the lower authorities did not specifically examine the license agreements in light of this Supreme Court judgment. Therefore, the issue was remitted back to the AO for fresh consideration and decision in accordance with the law.

3. Taxation of Foreign Exchange Difference:
The assessee challenged the CIT(A) and AO's decision to tax the foreign exchange difference of ?9,41,630 arising from the reconciliation of total receipts with the receipts appearing in Form 26AS. The AO found discrepancies between the amounts received from Indian customers as per Form 26AS and the amounts reported in the return of income. The AO proposed to tax the foreign exchange difference, which the assessee explained as follows:
- Indian customers applied the FE rate prevailing on the date of remittance for TDS purposes.
- The assessee adopted the FE rate as on the last day of the previous year, resulting in a reduced income figure.
- The assessee argued that Rule 115 of the I.T. Rules, prescribing the conversion of receipts in foreign currency, does not apply to royalty income.

The AO rejected this explanation, stating that the assessee received the sums in USD at the rate prevailing on the date of remittance and should not adopt the year-end rate. The CIT(A) upheld the AO's decision, emphasizing that the rate on the date of remittance reflects the actual amount received and is not notional. The Tribunal agreed with the lower authorities, confirming that the foreign exchange rate on the date of receipt should be used to determine the value of the amount for tax purposes, not the year-end rate. Thus, the addition made by the AO was sustained.

Conclusion:
The appeal was partly allowed for statistical purposes. The issue regarding the classification of software sales as royalty income was remitted back to the AO for fresh consideration in light of the Supreme Court judgment. The decision to tax the foreign exchange difference was upheld.

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