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2021 (9) TMI 15 - AT - Income TaxIncome deemed to accrue or arise in India - Royalty receipts - treatment of income from sale of off-the-shelf software - whether the payments made to non-resident software suppliers is royalty and hence TDS u/s.195 was required to be deducted on those payments or not? - HELD THAT - In the instant case neither the lower authorities nor the Tribunal in the AY 2016-17 have examined he relevant agreements entered into by the assessee with the concerned parties generate these receipts which relate to sale of shrink wrapped and off-the-shelf software. Even before us, no such document has been produced by the assessee - We remit the issue in dispute to the file of the Assessing Officer for deciding the comparability of these transactions in the light of the judgment of Engineering Analysis Centre of Excellence Private Limited 2021 (3) TMI 138 - SUPREME COURT - Accordingly, the issue in dispute is remitted to the Assessing Officer for fresh decision with the above directions. - Assessee appeal allowed for statistical purposes.
Issues Involved:
1. Treatment of income from the sale of off-the-shelf software as 'royalty'. 2. Initiation of penalty proceedings under Section 270A of the Income-tax Act. 3. Relief sought by the appellant. Detailed Analysis: 1. Treatment of Income from Sale of Off-the-Shelf Software as 'Royalty': The primary issue revolves around whether the income from the sale of shrink-wrapped and off-the-shelf software should be treated as 'royalty' under Section 9(1)(vi) of the Income-tax Act, 1961, and Article 12 of the India-Ireland Double Taxation Avoidance Agreement (DTAA). The appellant argued that: - The Assessing Officer (AO) and the Dispute Resolution Panel (DRP) erroneously treated the entire consideration received from Indian customers as 'royalty'. - The granting of a license to use the software does not amount to the transfer of rights in the copyright. - The income from the sale of such software products does not accrue or arise in India merely because the payers are situated in India. - There is no transfer of the underlying copyright in the software between the appellant and its customers. - The transaction should be regarded as the sale of a copyrighted article, not the transfer of copyright itself. - The provisions of Section 14(b)(ii) of the Copyright Act, 1957, do not apply to the appellant, a foreign company. - The sale of shrink-wrapped software does not provide 'exclusive use' or 'exclusive right to use' to customers. - The receipts represent the price for the sale of software and should be treated as business income, not taxable in India without a Permanent Establishment (PE) or business connection. - The AO and DRP erred in relying on the Karnataka High Court's decision in CIT v. Samsung Electronics Company Ltd., which is not applicable to the appellant's case. - The DRP relied on previous orders without independently appreciating the facts of the present case. - The retrospective amendment to Section 9(1)(vi) of the Act does not affect the definition of 'royalty' under the India-Ireland DTAA. The appellant's contention was supported by the judgment of the Hon'ble Supreme Court in Engineering Analysis Centre of Excellence Private Limited v. CIT, which clarified that payments made to non-resident software suppliers do not constitute 'royalty' and are not taxable in India. The Tribunal, in the appellant's own case for the AY 2016-17, followed this Supreme Court judgment, holding that the payments received by the appellant would not constitute royalty and cannot be taxed. However, the Tribunal observed that neither the lower authorities nor the Tribunal in the AY 2016-17 examined the relevant agreements entered into by the appellant with the concerned parties. Therefore, the issue was remitted to the AO to examine the agreements and decide in light of the Supreme Court judgment in Engineering Analysis Centre of Excellence Private Limited. 2. Initiation of Penalty Proceedings: The appellant contended that the AO erred in initiating penalty proceedings under Section 270A of the Act. This issue was not elaborately discussed in the judgment, as the primary focus was on the treatment of income as 'royalty'. 3. Relief Sought: The appellant sought relief by requesting the appeal to be allowed and the impugned final assessment order to be set aside. The Tribunal partly allowed the appeal for statistical purposes, remitting the issue of 'royalty' treatment to the AO for fresh examination in line with the Supreme Court judgment. Conclusion: The Tribunal directed the AO to re-examine the relevant agreements to determine whether the payments for software sales constitute 'royalty' under the Income-tax Act and DTAA, following the principles laid down by the Supreme Court. The appeal was partly allowed for statistical purposes, and the issue was remitted for fresh decision.
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