2021 (9) TMI 27 - AT - Income Tax

Income deemed to accrue or arise in India - Royalty receipts - amounts received by the assessee on account of sale of software and other incidental receipts - whether it would constitute royalty within the meaning of section 9(1)(vi) and Article 12 of the DTAA between India and Australia - HELD THAT - Hon'ble Supreme Court in ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PRIVATE LIMITED 2021 (3) TMI 138 - SUPREME COURT after considering the end-users agreement, categorically held that in all the above four situations that sale of software would not constitute royalty within the provisions of section 9(1)(vi) of the I.T. Act and Article 12 of the treaty. In the instant case, the assessee is a foreign company, which sells software licences to the end- users in India. Therefore, this case falls within the first category grouped by the Hon'ble Apex Court. On perusal of the end-users licence agreement, it is seen that the end-users licence agreement considered by the Hon'ble Apex Court in the case of Engineering Analysis Centre of Excellence P. Ltd. (supra) is identical to the end users licence agreement in the instant case. On perusal of the end-users licence agreement, it is clear even in cases where some element of source code were made available to the end-users i.e. the Indian customers, it is only for the purpose of fixing the bugs, customizations etc. Under no circumstances we noticed there is a transfer of copy right in the software. In the facts of the instant case, it is clear the amounts received by the assessee is on account of sale of copyrighted software and not transfer of copyright in a software. Receipts on account of sale of software licences and other incidental receipts such as provision for software maintenance and related training services would not constitute royalty within the meaning of DTAA between India and Australia and provisions of section 9(1)(vi) - Decided in favour of assessee.

Summary

Issues:
Whether amounts received by the assessee for sale of software and other incidental receipts constitute royalty under section 9(1)(vi) of the I.T. Act and Article 12 of the DTAA between India and Australia?

Analysis:
The case involved a foreign company engaged in selling software products to Indian customers during the assessment year 2010-2011. The Assessing Officer (AO) contended that the amounts received by the assessee constituted royalty as per section 9(1)(vi) of the I.T. Act and the India-Australia DTAA, based on a judgment of the jurisdictional High Court. The assessee argued against this classification, stating that the payments were for the use of copyrighted software, not the copyright itself, and did not involve transfer of intellectual property rights (IPR) to the customers. The AO, however, rejected these contentions and assessed the amount as royalty income.

The Dispute Resolution Panel (DRP) upheld the AO's decision, leading to a final assessment order against which the assessee appealed to the Tribunal. The assessee relied on a Supreme Court judgment to support their case, emphasizing that the sale of software in their situation did not amount to royalty. The Departmental Representative supported the Income Tax Authorities' stance.

The Tribunal analyzed the Supreme Court judgment categorizing software sale scenarios into four groups. It found the assessee's case falling under the first category, where the sale of software to end-users in India did not constitute royalty. The Tribunal noted that the end-user license agreement in this case was similar to the one considered by the Supreme Court, emphasizing that the payments were for copyrighted software and not for copyright transfer. Consequently, the Tribunal ruled in favor of the assessee, holding that the receipts from software sales and related services did not qualify as royalty under the DTAA and section 9(1)(vi) of the I.T. Act.

In conclusion, the Tribunal allowed the appeal filed by the assessee, emphasizing that the amounts received for software sales and related services were not to be treated as royalty income.