2021 (9) TMI 462 - AT - Income Tax

Reopening of assessment u/s 147 - amount of consideration received by the assessee from sale of software licenses and support, maintenance services rendered in relation to such software licenses, as chargeable to tax as Royalty - reasons deciphers that the assessee sold software to Wipro Ltd., an Indian company as AO opined that the consideration received from sale of software license is in the nature of Royalty - HELD THAT - AO opined that the consideration received from sale of software license is in the nature of Royalty . For reaching this opinion, he relied solely on the judgment of Hon ble Karnataka High Court in Samsung Electronics Co. Ltd 2009 (9) TMI 526 - KARNATAKA HIGH COURT in which it has been held that the consideration received on sale of software license amounts to Royalty . This judgment of the Hon ble Karnataka High Court, along with a batch of others, came up for consideration before the Hon ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. CIT 2021 (3) TMI 138 - SUPREME COURT After carrying out a detailed analysis, the view taken by the Hon ble Karnataka High Court has been overturned by the Hon ble Supreme Court. Thus, it becomes overt that the sole reason taken by the AO at the time of initiation of reassessment for holding the amount as chargeable to tax, based on Samsung Electronics Co. Ltd. 2009 (9) TMI 526 - KARNATAKA HIGH COURT , now ceases to exist. The reversal of Samsung (supra) by the Hon ble Supreme Court has rendered the reasons for re-assessment as unfounded and invalid. There is no gainsaying that the Courts declare the law and do not legislate. With the advent of Engineering Analysis (SC) (supra), the law since inception has to be presumed as not treating the sale of software licenses as Royalty in terms of section 9(1)(vi) read with Article 12 of the DTAA insofar as the year under consideration is concerned. Thus, the re-assessment pursuant to such reasons is hereby set-aside. Appeal of assessee is allowed.

Summary

Issues:
1. Taxability of income from sale of software licenses and related services as Royalty under the Income-tax Act and Double Taxation Avoidance Agreement (DTAA).
2. Validity of re-assessment proceedings initiated by the Assessing Officer.

Analysis:

Issue 1: Taxability of income as Royalty under the Income-tax Act and DTAA

The case involved an appeal by the assessee against the final assessment order concerning the taxability of income earned from the sale of software licenses and related services. The Assessing Officer (AO) considered the receipts as Royalty under the Income-tax Act and DTAA, leading to the computation of total income at ?48,01,58,318. The Dispute Resolution Panel (DRP) upheld the AO's decision based on legal precedents. The Tribunal analyzed the nature of the receipts and the definition of Royalty under the DTAA. Referring to a Supreme Court judgment, it held that the income from the sale of software licenses and related services did not constitute Royalty under the DTAA, as the transaction did not involve parting with copyright. Consequently, the amount could not be taxed as Royalty under the Act or the DTAA.

Issue 2: Validity of re-assessment proceedings

The second issue raised by the assessee was the validity of the re-assessment proceedings initiated by the AO. The AO had relied on a judgment of the Karnataka High Court, considering the receipts as Royalty for initiating re-assessment. However, a subsequent Supreme Court judgment overturned the interpretation of the High Court, indicating that the sale of software licenses did not amount to Royalty. The Tribunal observed that the AO's reliance on the High Court judgment was unfounded post the Supreme Court ruling. As the legal position had changed, the reasons for re-assessment were deemed invalid, and the re-assessment was set aside. The Tribunal allowed the appeal in favor of the assessee, emphasizing the importance of legal precedent in determining tax liabilities.

This detailed analysis of the judgment highlights the critical legal issues surrounding the taxability of income from software licenses and the significance of judicial decisions in interpreting tax laws and agreements.